In the context of mergers and acquisitions (M&A), Tax is often under the spotlight during the period leading up to a deal signing. During this time, due diligence is conducted, a step plan is developed outlining steps required to complete the transaction, their respective tax implications are assessed, and tax indemnities, warranties, covenants, and purchase price allocation terms are negotiated and layered into the purchase agreement. But once a decision to sign the deal has been made, what remains to be done in relation to Tax?

Transaction Implementation

Transaction implementation typically entails a multitude of actions that inevitably have tax implications and require careful consideration by the tax team. These actions may be divided into two categories: Day 1 Readiness and Post-Closing. Day 1 Readiness items are critical for the immediate commercial operation of the business upon closing and therefore have high priority, requiring immediate focus upon signing the deal. Post-Closing action items focus on post-deal integration to achieve efficiencies and synergies, as well as Post-Closing tax reporting and compliance. Post-Closing items, typically, have a longer runway for planning and execution.

Day 1 Readiness

In any M&A scenario, the tax department should develop a thoughtful and comprehensive Tax Day 1 workplan, setting out a schedule for all of the relevant action items to be completed by Day 1 and shortly thereafter. In-house tax teams that do not regularly handle M&A transactions will benefit from the support of highly experienced tax advisors who can assist in identifying and prioritizing all necessary Day 1 action items and establishing an appropriate timeline. Below are some examples of Day 1 tax focus areas.

Legal Entity Operationalization – When new legal entities are formed pursuant to the transaction step plan, the tax team should be involved in their operationalization for tax purposes. This means timely obtaining applicable tax (e.g., income tax, sales and use tax, VAT/GST) registrations and partnering with other functions in the business. For instance, Tax will need Treasury to ensure bank accounts are set up and a process is established to make tax payments. Some jurisdictions prohibit an entity from conducting any business until tax registrations are complete, so it is critical that these are obtained well in advance of closing. Even something as elementary as obtaining a tax ID in the US (known as an Employer Identification Number or EIN) can be fraught with bureaucratic requirements and unavoidable time lags. The disruption resulting from failing to timely obtain an EIN cannot be underestimated, given the connection between EIN and employee compensation and payroll.

Transition Services Agreement (TSA) – The tax team should be involved in negotiating the specifics of the TSA. Depending on deal structure, business needs, and buyer and seller's capabilities and knowledge, one of the parties will typically provide tax-related services to the other for some time under the terms of a TSA. The tax teams on both sides must conduct a thorough review of the scope, duration, and charges for transition services to ensure seamless tax function operations upon closing and to avoid misunderstandings thereafter.

Transfer and Withholding Taxes – Transaction steps may trigger various transfer taxes and/or filings, such as stamp duty and real estate transfer taxes, regardless of whether assets or equity are transferred. Depending on the tax residence of the parties, withholding taxes may also be implicated by closing. The buyer will need to fully understand when such taxes are triggered, their estimated amounts, timing, and method for collection, as well as their reporting requirements, to achieve complete and timely compliance. 

Tax Calendar – In addition to taxes triggered by the transaction, the buyer should have a full grasp of the target’s tax obligations and their timing, so an integrated tax filing and payment calendar for the combined organization can be developed. Moreover, the process for tax filings and tax payments may need to be reevaluated for the combined organization, and appropriate powers of attorney (PoA) and delegations of authority (DoA) updated.

Tax Data and Knowledge – Preserving essential legacy tax data and knowledge can be challenging in most transactions, especially those anticipating significant personnel reductions. The buyer must capture as much of this data and information as possible during the due diligence phase and before closing, as the seller may become less cooperative and/or less knowledgeable Post-Closing. The buyer must gather, in addition to the legacy tax information, all relevant legal, accounting, and tax documentation related to the transaction and its various steps. This ensures the buyer can fully and seamlessly comply with the tax obligations, including computations, disclosures, and filings, and effectively address any financial or statutory audit inquiries related to the transaction.

Post-Closing Considerations

Once the transaction closes, the parties and advisors will likely breathe a sigh of relief and celebrate—but only briefly. The bulk of the tax work truly begins at this point. To get started, both the buyer and the acquired business should have a comprehensive Post-Closing tax workplan in place to ensure that tax obligations of the combined business are being appropriately assessed and managed. Additionally, this Post-Closing workplan should include integration action items related to tax systems, processes, data, and personnel, outlining steps, timeline, and resources needed. Below are some examples of key Post-Closing tax considerations.

Tax Elections – To mitigate the potential tax compliance burden associated with the transaction, tax elections may be incorporated into the transaction step plan. It is essential for the tax team to know which elections are contemplated so that they can be accurately prepared, executed, and filed on time. Notably, most tax elections, such as check-the-box elections in the US, require the inclusion of tax IDs. Therefore, careful planning and allocation of time and resources to obtain these tax IDs are key to making these elections.

Tax Operating Model – A robust Post-Closing workplan should encompass the development of a future state tax operating model for the combined business, including an expeditious TSA exit strategy (if a TSA is in place) and action items to integrate the acquired tax function (if applicable) into the buyer’s organization. Expert guidance on integrating tax teams, systems, processes, and data can be invaluable in creating a cohesive and efficient tax function for the combined business, while also minimizing employee turnover and information loss. Additionally, many buyers' VPs of Tax view mergers and acquisitions as an opportunity to transform and upgrade the tax function, especially if part of or all of the costs can be allocated to the acquisition/integration rather than the tax budget.

Tax Provision and Compliance – Whereas the buyer will typically wish for the acquired company’s systems and processes to be integrated within its group as soon as possible to streamline and unify data flows, that may not be practical immediately upon closing. In the meantime, a plan needs to be established to ensure timely tax compliance, reporting, and payments across the jurisdictions where the acquired business is conducted, using their legacy systems and processes. Particularly with respect to financial reporting, the tax team must ensure it can timely obtain the relevant financial information of the acquired company needed for tax provision and appropriately consolidate it with the rest of the group. It’s not uncommon that the acquired company deploys information systems that differ from the buyer’s or that its systems are not operating at closing, so collating its financial details and aggregating them with the buyer’s may prove to be a challenging and complex process. Capturing and preserving inside/outside basis differences in a stock acquisition can be quite natural and easy in this process—which can simplify otherwise complicated calculations in the future.

IT Systems Integration – When it’s time to integrate the IT systems, it is crucial for the tax team to be actively involved. Such participation ensures that tax requirements, including legal entity accounting and the granularity of data at the needed levels for tax purposes, are incorporated into the IT systems’ design and data flows. This up-front involvement ensures tax function efficiency from the start, minimizing in future time and valuable resources spent on data manipulations required for tax computations, reporting, and planning. 

Tax Obligations Under the Purchase Agreement – Integration considerations aside, upon closing, the target’s tax obligations will fall primarily on the buyer in an equity deal. The buyer’s tax department and its advisors must be fluent in the provisions of the purchase agreement with respect to transfer tax obligations, straddle period, and cooperation obligations, etc., to make sure all statutory and contractual obligations are met and, in the event of an audit or adjustment, proper notices are given so that communication, control, and indemnities in the situation are properly undertaken within the contractual time limits—a foot fault here could leave millions on the table for a party.

Tax Forms – The transaction may trigger a need to update relevant tax forms to permit proper withholdings and communicate changes of responsible party or address to relevant tax authorities. Such forms may have specific deadlines that should be observed to ensure compliance.

Historical Tax Risks Remediation – Proper Post-Closing tax hygiene will ensure material tax risks flagged during due diligence are revisited and remediated to the extent possible, both to protect the buyer against potential liabilities and to maximize value in the event of a future business sale.

Purchase Price Allocation/Opening Balance Sheet – The purchase agreement will often require the completion of a purchase price allocation to the target’s various assets for opening balance sheet purposes. Depending on the acquisition type, a tax purchase price allocation may be required and/or existing deferred tax balances may need to be remeasured as of the opening balance sheet date. For such purposes, the tax team must rely on a valuation report, which is typically commissioned by the buyer’s FP&A department from a third-party valuation provider. As this report is often tailored to meet the accounting team’s needs and may not take into account tax sensitivities—or even economic realities between acquired group members—the tax team must have a seat at the table to ensure that the valuation produces a correct result and has the granularity of data required for tax purposes.

Transfer Pricing – An acquisition can significantly alter the buyer's operations and geographical reach. Consequently, buyers should reevaluate their transfer pricing methodology and benchmarks and identify which (if any) changes are needed in pricing intercompany transactions, how these would best be implemented, and what supporting documentation is needed to adopt the changes.

How A&M Can Help

Mergers and acquisitions are transitory events in a company’s lifecycle, often leading to a temporary surge in specialized activities. While it is often sensible to increase permanent tax resources to handle the increase in activity of the newly combined organization, internal teams commonly lack the specialized expertise required to navigate the complexities of such transactions effectively and efficiently, and the organization only requires such expertise during the M&A and integration periods. A&M can swiftly bridge this gap by introducing experienced professionals who regularly deal with complex M&A and cross-border transactions and have a deep understanding of US and global tax laws and regulations.[1] Our team is best positioned to map and address all the items to be accomplished prior to Day 1 and is well-versed in market best practices in relation to Post-Closing tax integration. We can provide support tailored to your needs, from offering advice that complements your existing tax team and advisors all the way to interim management of your tax function throughout the M&A and integration periods.

As A&M is not an audit firm, we operate without conflicts of interest and can assist your company with transaction support and integration needs holistically, including Tax, valuation, operational advisory, Finance, HR, and IT. Our business-centered approach and extensive experience with C-suite communication and decision-making drive our practical, results-oriented solutions, delivering long-term value for our clients. With A&M’s expertise, customized solutions, and global reach, we are well-equipped to support your company through every step of the transaction implementation process, unlocking synergies and ensuring seamless business transitions. Please feel free to reach out to any of us to discuss your specific needs and how we can best serve you.

[1] https://www.alvarezandmarsal.com/expertise/tax/tax_day_1_readiness_ma_integration