United States

Structuring deals in the era of TCJA and BEPS


In 2015, Seattle-based Starbucks paid nearly as much corporation tax in 2015 as they did during their first 14 years in the UK. The tax settlement of £8.1m was a result of enhanced scrutiny of a complex tax strategy which Starbucks employed. As a result of the Starbucks tax investigation, and reports of tax avoidance schemes by other multinational corporations, the OECD, under instructions from the United Nations, published the Base Erosion and Profit Shifting (BEPS) Action Items in October 2015.

The OECD BEPS Action Items are designed to avoid multinational companies gaming one jurisdiction against another. Following the issuance of the BEPS guidance, various taxing authorities adopted some or all of the Action Items. As a result, it became more difficult for multinational entities to employ tax avoidance techniques.

Strategic and financial buyers have generally completed tax due diligence prior to acquisition. It’s common for buyers to employ advisors such as RSM to kick the tires of a company before a purchase. The purpose of due diligence is to advise potential buyers of any significant historic tax issues relating to a potential acquisition target. Legislation relating to the BEP Action Items has resulted in expanded tax due diligence engagements.

At the end of 2017, the Tax Cut Jobs Act (TCJA) was enacted. As part of TCJA, the taxation of U.S. multinationals generating earnings overseas was changed significantly. The TCJA implemented a transition tax on non-US earnings accumulated prior to the effective date of the TCJA provisions. The transition tax resulted in tax being paid on previously untaxed non-US earnings at a reduced rate of 15.5 percent on cash and cash equivalents and eight percent on other assets. Prior to 2018, these non-US earning were generally not subject to U.S. taxes until distributed to the U.S.

Currently, US multinational entities are seeing a significant portion their non-US earnings being subject to US taxation under the Global Intangible Low Taxed Income (GILTI) Provisions. These provisions were enacted as part of the TCJA.

The changes in U.S. tax law, combined with the BEPS provisions, have resulted in many multinational entities struggling to determine a tax advantageous acquisition structure and strategy.

Deal structuring has now become even more paramount. Multinationals often seek guidance regarding structuring before tax due diligence has begun. Among the issues which need to be addressed are: opportunities to step-up the basis of assets acquired; allocating acquisition debt to various jurisdictions; the transfer pricing methodology to employ; and, how to adequately remit and redeploy available cash. In addition, a financial buyer needs to consider how to ultimately sell the target in a tax advantageous manner.

While BEPS and TCJA do not necessarily conflict, buyers need to be mindful of the requirements in various taxing jurisdictions.

Previously, U.S. financial buyers often structured transactions to avoid the US controlled foreign corporation provisions. However, post TCJA, the enhanced attribution provisions have resulted in many more non-US corporations being subject to the controlled foreign corporation provisions. As a result, more U.S. financial buyers are utilizing blocked structures where both the US and non-US operations are conducted through corporate entities. This is due in part to the ability of US Corporations to receive a 50 percent deduction under the GILTI provisions. In addition, US corporations may be able to reduce or eliminate the GITI tax through utilization of foreign tax credits. However, there is no cookie cutter approach to tax structuring and many factors need to be considered.

Potential buyers need to be mindful of the challenging global tax environment in which competing taxing authorities are seeking enhanced tax revenue. Delays in addressing the tax implications of a potential transaction can lead to unacceptable tax leakage. Potential buyers should have both their financial and tax structuring and due diligence teams at the table at the start of an engagement rather than waiting to consider the tax implications of a proposed transaction.

For more information, visit the RSM tax reform resource center.

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