Leveraging tax planning for global M&A value creation

Global merger and acquisition (M&A) activity is heating up for private equity (PE) portfolio companies focused on driving long-term value for investors. Once a transaction is completed, portfolio companies should quickly turn their focus to executing the recommended items on their 100-day plans, which outline post-deal action items that will drive value creation. By proactively addressing these items, companies can reduce costs, increase productivity and improve efficiency, all while ensuring alignment between their current and future strategic goals.

One major consideration that shouldn’t be overlooked is the critical role of effective tax planning in post-close value creation. With the guidance of a knowledgeable global tax advisor, portfolio companies can effectively implement tax positions and strategies to attain both immediate and long-term tax benefits.

Here are several approaches that portfolio companies can use to jump-start value creation in cross-border deals.

Optimize global operational processes

Enhance global supply chain efficiency by assessing global trade activities

Portfolio companies can enhance their operational efficiency, manage risks and reduce costs by strategically assessing their supply chain networks. Specifically, focusing on cross-border customs and international trade operations—often overlooked during pre-deal diligence—can yield significant benefits. By evaluating a global supplier base for factors like performance reliability, cost-effectiveness and agility, companies can achieve substantial savings and build resilience. Additionally, integrating advanced technologies to analyze data, enhance visibility and streamline processes within the supply chain network can improve accountability and elevate overall performance.

Identify international indirect tax opportunities

Examining a company’s existing value-added tax (VAT) registration footprint can help pinpoint improvements that could alleviate the administrative burden of compliance requirements while simultaneously cutting costs and mitigating associated risks. Improvements in this space could include outsourcing VAT compliance work or automating specific VAT functions. Moreover, portfolio companies should continue to monitor international VAT regulatory revisions that could affect their existing obligations, such as the ongoing implementation of e-invoicing mandates worldwide.

Rationalize redundant or unnecessary entities within a global structure

Legal entity rationalization can be transformative for portfolio companies by streamlining operations and optimizing resource allocations, leading to enhanced financial performance. Legal entity rationalization is about making sure the global structure reflects the global strategy; by focusing on core competencies and minimizing unnecessary legal complexities, portfolio companies can better navigate the global market and pursue strategic growth opportunities with greater agility and clarity.

Analyze permanent establishment risk globally

By understanding the potential permanent establishment considerations, portfolio companies can make informed decisions regarding market entry, expansion plans, acquisitions and other strategic initiatives. In addition, portfolio companies can reduce their exposure to income tax filings and costs and build stakeholder confidence by demonstrating proactive management of permanent establishment risks globally.

Apply global tax strategies

Deal structuring in cross-border transactions

A proactive approach to deal structuring enables companies to strengthen their negotiating position, safeguard against regulatory risk and enhance financial flexibility—while ensuring any cross-border transactions are aligned with their overall strategic business goals and needs. This strategic alignment is essential for sustaining growth and a competitive advantage in an increasingly interconnected world.

Ensure various tax elections have been considered and timely filed

By carefully assessing the tax consequences of various tax elections, portfolio companies can minimize cash tax liabilities and maximize tax benefits. Meticulous attention to tax strategies contributes to overall financial health, creating a position for long-term success in a competitive marketplace.

Income tax treaty evaluation and withholding tax assessment

Cross-border tax treaties play a crucial role in international business by offering mechanisms that avoid double taxation and reduce withholding taxes on dividends, interest and royalties. By understanding the nuances of these treaties, portfolio companies can uncover strategic opportunities to optimize their tax positions.

Assess intercompany transactions

Transfer pricing

An in-depth analysis of transfer pricing policies enables portfolio companies to ensure their intercompany transactions comply with arm’s length principles and local country regulations; in addition, proper transfer pricing allows for optimization of the global tax footprint and prioritizes cash mobility needs.

Debt/equity analysis

Conducting a global and intercompany debt/equity analysis provides valuable insights for strategic decision making. By assessing the impact of various financing options on financial flexibility, liquidity and shareholder value, portfolio companies can make informed decisions regarding capital allocation, dividend policies and investment priorities. A proactive approach to capital management allows for an increased ability to seize opportunities and navigate challenges quickly.

Intellectual property (IP) planning

Ensuring that the global IP aligns with a portfolio company’s strategic initiatives is crucial in enhancing market position, improving brand value and driving revenue growth. In addition, proactive IP planning facilitates strategic decision making by guiding resource allocation, investment prioritization and innovation strategies. An effective IP strategy is a cornerstone of sustainable business development and market leadership.

The takeaway

Effectively navigating global tax planning is an essential consideration for PE portfolio companies making cross-border deals. By working with a knowledgeable tax advisor, PE acquirers can leverage the right tax strategies to maximize post-close value creation. Choose a firm with deep M&A experience across the PE life cycle and a track record of advising portfolio companies on ensuring a smooth transaction and optimizing the financial outcomes of each deal. Such strategic partnerships are instrumental in navigating the complex tax landscapes and regulatory changes that can significantly affect the bottom line.

This article was written by Crystal Golob Lindholm , Mark Strimber, Anna Yegorov and originally appeared on 2024-05-16.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/industries/private-equity/leveraging-tax-planning-for-global-m-and-a-value-creation.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.