Tax insights

Tax insights Tax considerations in an economic downturn October 2008 Pressures in an economic downturn C-suite Planning • • • • • • • Cash Tax Acquisitions Refinancing Repatriation Structures Supply chain Loss management Provision • • • • • • Valuations Write downs Shares Financial investments IFRS Tax function awareness Shareholders • • • • • Effective tax rate versus cash impact Enterprise risk profile Corporate tax strategy Tax function performance Cost reduction Regulators Tax Director • • • • • Executive incentivization Pensions and stock options Mobility Employment taxes Post-merger integration Controversy • Tax exposures • Valuations • Tax authority pressures • Audit readiness Compliance • • • • Tax operating model Accuracy Tax attribute protection Timing People Page 2 October 2008 Tax considerations in an economic downturn An approach centered on your needs: the Tax Life Cycle Cash Acquisitions Divestments Planning Fund raising / financing Structures Controversy Needs Provision Tax Function Compliance Accounting for Tax Page 3 October 2008 Tax considerations in an economic downturn Possible areas of concern [click for detail] Tax function Cash Accounting for tax Acquisitions Fund raising/ financing Structures Divestments Page 4 October 2008 Tax considerations in an economic downturn Cash ► ► ► [click to return] Converting deferred tax assets to cash ► E.g., utilization of losses which may require tax planning / restructuring E.g., carry back of losses, terminal loss relief where trading has ceased Tax efficient repatriation of cash (ensuring no WHT leakage) and restructuring required to free trapped cash due to lack of distributable reserves Apply a variety of strategies to improve VAT cash flow - In and out flows of VAT can equate up to 30% of revenues Raising finance by selling debts tax efficiently Obtaining cash for assets and securing ongoing tax relief for leases E.g.,crystallizing losses when required and preserving losses in a restructure Ensure tax assumptions reflect business expectations in a downturn – can tax payments be deferred? Realizing tax refunds ► Repatriation ► ► VAT ► ► ► ► ► Debt factoring ► Sale and lease back ► Loss planning ► Accuracy of forecasts ► Page 5 October 2008 Tax considerations in an economic downturn Fund raising/financing ► [click to return] Refinancing ► ► ► Debt/equity swaps – ensuring debt is not inadvertently released and taxed Thin capitalization – determine how the position will change subsequent to refinancing and changes in the balance sheet Is a VDD / modelling required to support the refinancing (as banks are lending more cautiously) ► Acquisition of debt at a discount ► Ensure undertaken in most tax efficient manner ► Withholding tax ► Minimizing tax leakage on interest payments based on new financing or refinancing ► Low cost financing ideas ► Leverage any arbitrage in interest rates (non-sterling debt) Page 6 October 2008 Tax considerations in an economic downturn Review of current structure ► [click to return] Is the current group / tax structure optimal for the current downturn? ► ► ► ► ► E.g., restructuring may be required where there is now a mismatch of profits and losses in the group Tax driven structures which are now inefficient may need to be unwound in a tax efficient manner Key suppliers – consider options to secure supply Cross-border supply chains – are these optimised for VAT/customs, and related compliance? Groups; cross border VAT registrations and supplies – unnecessarily complicated compliance ► Transfer pricing – is methodology consistently applied? ► ► E.g., determine if intercompany transactions are being created to deal with cash shortages and to crystallize losses in certain jurisdictions Review current practice to ensure compliance with transfer pricing rules ► Use of insolvency techniques to streamline structure ► Elimination of superfluous entities Page 7 October 2008 Tax considerations in an economic downturn Tax function ► [click to return] Tax strategy ► Performance measures for the department will be key in understanding how the client’s tax strategy will change / develop ► Tax department operating costs ► ► E.g., compliance costs, use of internal resources and tax advisors’ fees may be significant. Determine how they can be reduced e.g., through reduction in legal entities, benefits of insourcing vs outsourcing of tax functions VAT implications – management charges; inter company charges ► Relationship with tax authorities ► ► ► Developing strong relationships with tax authorities to agree outstanding enquiries and obtain clearance on transactions / restructuring, particularly in light of the changing attitude of tax authorities facing budget deficits Recovery of VAT on professional fees often challenged Deferral of VAT – consider implications and communicate promptly Page 8 October 2008 Tax considerations in an economic downturn Divestments ► [click to return] Preparation for exit ► ► ► ► ► Tax efficient restructuring to package assets/companies for sale, including elimination of intercompany debts Planning opportunities to use debt to depress purchase price Maximising value when selling companies with losses Vendor due diligence Minimize VAT costs on disposal ► Using an insolvency process to effect the sale of assets ► ► Specific tax opportunities arise in this situation e.g., tax efficient elimination of debt Specific tax risks arise which need to be considered in negotiations with purchaser e.g., secondary liabilities which attach to companies being sold ► Tax planning to ensure divestments are tax efficient e.g., creation of losses to offset gains on disposal ► ► Consider VAT implications when selling material assets. Ensure appropriate clauses contained in all relevant agreements Realizing cash flow benefits e.g., transfer of a going concern; timing of raising a VAT charge October 2008 Tax considerations in an economic downturn Page 9 Closures ► [click to return] Closure costs ► Maximize tax relief for costs e.g., which entity should incur the costs, when costs are incurred ► Redundancies ► Maximize tax relief for costs and consider impact on share schemes etc. ► Losses ► Efficient utilization of losses and potential creation of losses as a result of closures ► Pensions ► ► Maximize tax relief for contributions. Issues may arise where contributions are paid by parent companies on behalf of distressed subsidiaries Consider ongoing VAT recovery of fund administration costs ► ► Liquidation of underperforming / dormant entities Elimination of intercompany debt in a tax efficient manner October 2008 Tax considerations in an economic downturn Page 10 Acquisitions ► [click to return] Acquisition of companies in distressed circumstances ► ► ► ► We can assist in the negotiation process, and there are planning ideas to optimize the purchase price from the purchaser’s perspective. Increased level of due diligence potentially required? If acquiring out of an Insolvency there are specific rules which need to be considered Typical acquisition considerations e.g. deductibility for debt costs ► Post acquisition restructuring ► E.g., using an insolvency process for elimination of unwanted entities Page 11 October 2008 Tax considerations in an economic downturn Accounting for tax ► [click to return] Tax provisions – accuracy; review ► Review provision and release unnecessary (e.g., old or general) balances to bolster the balance sheet. ► Impairments – how are they treated for tax? ► Investments in subsidiaries may be more likely to be impaired in the accounts. Need to consider whether the write down is tax deductible. ► Deferred Tax Assets – should they continue to be recognized? ► DTAs can only be recognised under IFRS and most local GAAPs if future taxable profits are anticipated. Need to consider whether forecasts remain accurate. Page 12 October 2008 Tax considerations in an economic downturn Thank you October 2008