Tax implications in M&A transactions: Risks, opportunities, and best practices

Tax risks

1. Tax liabilities. Undisclosed tax liabilities pose significant risks in M&A transactions. It is imperative to conduct exhaustive tax due diligence to identify potential fiscal obligations, unresolved disputes with tax authorities, and compliance with prevailing tax regulations. A failure to detect such liabilities may result in substantial financial exposure post-transaction.
2. Transaction structure and tax regime selection. The choice between asset/share acquisition has great tax implications. Asset acquisitions provide greater protection from historical tax liabilities but may entail higher immediate tax burdens. Share acquisitions often benefit from tax exemptions on capital gains but expose the acquirer to pre-existing tax contingencies of the target entity.
3. Risk of tax avoidance allegations. Tax authorities scrutinise M&A transactions to prevent abusive tax planning. Deals which lack economic substance or are structured primarily to achieve tax advantages may be recharacterised, leading to tax reassessments, penalties, and reputational damage.

Tax opportunities

1. Tax-efficient structuring. Optimised structuring can enhance the fiscal efficiency of an M&A transaction. Participation exemption regimes, tax-neutral reorganisations, and consolidated tax filings can generate substantial tax savings and ensure regulatory compliance.
2. Tax credits and carryforward losses. Some jurisdictions permit the transfer of tax credits and carry forward losses to the post-merger entity. However, regulatory restrictions on the utilisation of such benefits must be carefully evaluated to ensure eligibility. 
3. Financing strategies. Tax-efficient financing, including leveraged buyouts (LBOs) with deductible interest expenses, can contribute to overall transaction efficiency. The strategic use of debt financing can facilitate tax shields, thereby enhancing net transaction value.

Best practices

1. Tax due diligence. A rigorous assessment of the target’s tax position mitigates post-acquisition financial risk. This process should encompass a review of historical tax filings, compliance records, and the identification of potential fiscal exposures.
2. Tax planning in deal structuring.  Engaging tax professionals early ensures that tax implications are systematically addressed. A well-integrated tax strategy maximises potential tax benefits while reducing legal and financial risks.
3. Post-transaction compliance and regulatory alignment. Maintaining compliance through robust internal controls and aligning corporate tax policies with statutory requirements can prevent legal issues and financial penalties.
4. Engagement with tax authorities. Advance rulings and proactive engagement with tax authorities provide greater certainty regarding the tax treatment of an M&A transaction. Such engagement can reduce future disputes and facilitate smoother regulatory approvals.

Conclusion

Tax implications are crucial for the success of M&A. A strategic approach, a meticulously designed tax strategy, comprehensive due diligence, and expert guidance mitigate tax risks and maximise opportunities. Implementing best practices ensures a tax-efficient and compliant transaction outcome.

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Roberto M. Cagnazzo, Founding Partner, is a chartered accountant and statutory auditor with considerable experience in domestic and international taxation acquired as Head of Tax in some of Italy’s leading multinational groups, and as Professor of Comparative Tax Systems and of Tax Law at the University of Turin.