Merger Integration: Include a Tax Strategy to Make a Good Deal Better

Putting together the best possible merger depends not only on finding the right target company, but also on successfully integrating the target and acquirer’s businesses after the deal closes. For a deal to succeed—so the new entity is worth more than the sum of its parts—participants must capture value at each stage: developing the overall strategic plan, negotiating and structuring the deal and executing the business integration plan.

A company completing a merger, acquisition or joint venture must be aware taxes are a key component of integration activities. Taxes invariably will contribute to, or detract from, the benefits promised to shareholders and Wall Street analysts. Because certain tax issues are better addressed before the transaction closes, merger-intergration tax planning should actually begin before, not after, the transaction.

Here are some tax considerations that typically can contribute to a transaction’s announced goals and aid in delivering the promised financial benefits. CPAs who consult with companies on merger activities should help them to

Understand the business dynamics and financial issues facing the combined entity.

Coordinate the development of a tax integration plan with the business integration plan.

Determine the legal operating structure that will result in the most advantageous tax position by reviewing each group’s organization charts.

Anticipate the impact a regulatory body’s review might have on asset dispositions to see if they can be done in a more tax-efficient manner.

Negotiate tax incentives from state and local authorities as part of the consolidation of facilities, functions and personnel.

Determine the amount and deductibility of acquisition-related costs. The company may not have to permanently capitalize all such costs.

Consider the transaction’s international aspects, including strategic cross-border debt placement opportunities, foreign currency exposure, rationalization of any expatriate programs, additional exposure for indirect taxes (VAT or real property transfer taxes) and effective foreign tax credit planning by the new group.

Reconcile and revise compensation and benefits programs of the combined entity as needed. (Inconsistent benefits packages may cause a company to lose what it sought to acquire: talent.)

Interview the target company’s tax personnel and document the findings. (If tax personnel leave, the rationale for the target’s tax treatment of prior positions and issues may be lost.)

Identify and address conflicting tax positions the combined entities may have taken on the same or a similar issue—before the IRS resolves them for you.

Review the target company’s tax returns and provision for taxes for inconsistencies that may affect the combined entity’s overall tax reserves. Also investigate the target company’s reporting of prior transactions and the current acquisition’s impact on these transactions.

Investigate whether the now combined group has inconsistent transfer-pricing practices or incompatible consolidated tax return elections as a result of the transaction. Resolve any differences.

Address the additional tax compliance burdens arising because of the transaction that will remain after the businesses are integrated.

Source: Bernard Cates,CPA, partner in charge of post-transaction integration-services practice, KPMG, LLP, .


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