Add-On Acquisitions: Domestic and International Insights
This insight was developed following a recent BDO Tax Strategist Private Equity webcast about the intricacies of add-on acquisitions and cross-border transactions. Read on to deepen your understanding of these complex transactions and learn how to navigate associated tax implications effectively.
The Importance of Tax Due Diligence
78% of participants typically perform due diligence to manage the risk of unknown tax exposures in connection with their deals, according to BDO’s webcast responses.
Tax Due Diligence Helps Detect Material Exposure and Should:
| Identify | Inform |
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Tax Considerations for Structuring and Add-on Acquisitions
Debt structuring is crucial in add-on acquisitions because companies often borrow significantly to finance the deal.
As a result, consider increasing potential deductions related to financing and other transaction expenses, which can lower the overall deal cost.
In addition to structuring debt for tax efficiency, selecting an appropriate legal entity structure is also key. Without it, companies may find themselves in inefficient structures that make intercompany transactions and profit improvements challenging.
Tax Considerations for Add-On Acquisitions Include:
- Legal entity structure
- Tax basis step-up
- Sponsor holding period
- Management rollover
- General debt and lending considerations
- Cross-border collateralization of U.S. Debt
- Foreign repatriation and withholding tax
60% of participants cited legal entity structure optimization as the tax issue they are most concerned about regarding the structuring of add-on acquisitions.
Transfer Pricing
When asked to identify the most significant challenge their organization faces related to transfer pricing, participants cited the following:
| 16% | 20% | 39% | 25% |
|
Our organization is not as focused on transfer pricing as it should be
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Addressing impact of business changes or changes in international tax law on the organization’s transfer pricing structure | Managing and documenting intercompany transactions in compliance with transfer pricing rules | Responding to transfer pricing tax audits and managing disputes with tax authorities |
Arm’s Length Standard
A controlled transaction meets the arm’s length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances.
Transfer pricing plays a critical role in deals, as any overlooked issues become the responsibility of the buyer. If the target company has not properly managed its transfer pricing, the buyer’s risk of adjustments in open audit years may increase, and highlight potential challenges in integrating the tax structures of the combined business. For example, taxpayers are restricted from amending or filing late U.S. tax returns that reduce U.S. taxable income as a result of transfer pricing. This can potentially lead the buyer to face costly adjustments or even double taxation.
Types of Intercompany Transactions
The Four Main Intercompany Transactions and Examples of Each
| Tangible Property | Intangible Property | Services | Financing |
| Purchase or sale of tangible goods
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Licensing of intellectual property (IP), IP migration, cost sharing | Contract research & development (R&D), management & administration | Loans, guarantee fees, and cash pooling
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Transfer Pricing in Practice
Transfer Pricing in connection with acquisitions can create challenges and unique opportunities for tax planning.
| Challenges | Opportunities |
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Responses from participants in BDO’s Tax Strategist Private Equity Webcast: Enhancing Value in Add- On Acquisitions: Domestic and International Insights
