Tax insights
Tax considerations in an economic downturn
October 2008
Pressures in an economic downturn
C-suite
Planning
• Cash Tax
Provision
• Valuations
• Acquisitions
• Write downs
• Refinancing
• Shares
• Repatriation
• Effective tax rate versus cash impact • Financial investments
• Structures
• Enterprise risk profile • IFRS
• Supply chain
• Corporate tax strategy • Tax function awareness
• Loss management
Shareholders
• Tax function performance
• Cost reduction
Regulators
Tax Director
• Executive incentivization
• Pensions and stock options
• Mobility
• Employment taxes
Controversy • Post-merger integration Compliance
• Tax exposures • Tax operating model
• Valuations • Accuracy
• Tax authority pressures • Tax attribute protection
• Audit readiness • Timing
People
Page 2 October 2008 Tax considerations in an economic downturn
An approach centered on your needs:
the Tax Life Cycle
Fund raising /
Cash Planning financing
Acquisitions
Divestments
Controversy Needs Provision
Structures
Tax Function
Compliance Accounting
for Tax
Page 3 October 2008 Tax considerations in an economic downturn
Possible areas of concern [click for detail]
Tax
Cash
function
Accounting
Acquisitions
for tax
Fund
raising/ Divestments
financing
Structures
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
► Realizing tax refunds
► E.g., carry back of losses, terminal loss relief where trading has ceased
► Repatriation
► Tax efficient repatriation of cash (ensuring no WHT leakage) and
restructuring required to free trapped cash due to lack of distributable
reserves
► VAT
► Apply a variety of strategies to improve VAT cash flow - In and out flows of
VAT can equate up to 30% of revenues
► Debt factoring
► Raising finance by selling debts tax efficiently
► Sale and lease back
► Obtaining cash for assets and securing ongoing tax relief for leases
► Loss planning
► E.g.,crystallizing losses when required and preserving losses in a restructure
► Accuracy of forecasts
► Ensure tax assumptions reflect business expectations in a downturn – can
tax payments be deferred?
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
Page 9 October 2008 Tax considerations in an economic downturn
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
Page 10 October 2008 Tax considerations in an economic downturn
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