Key topics in M&A
February 2016
Drivers for simplification
• Complex non-integrated structures
post-acquisition increase the
cost of compliance, as reporting
requirements are expanding
• Existing beneficial tax regimes
may change, be reduced or even
disappear
• A lot of non-trading and dormant
entities leading to non-transparency
• As a result of the consolidation of
suppliers and customers preparing
for a globalised digital world, there’s
a need for a more centralised, one
face to the client approach.
Simplify your business by reducing
costs, complexity and tax risks
Executive summary
Several studies have demonstrated
that expected synergies from an
acquisition are only realised when the
acquired business has been successfully
integrated.
However, in a booming M&A market,
groups tend to use their resources
to realise successive acquisitions
and integrating acquired businesses
becomes less of a priority.
• There’s a tendency towards lowering
the permanent establishment (PE)
threshold, making it necessary to
restructure business operations
The changing business environment makes
it necessary to move to a cost‑efficient,
sustainable and simplified structure!
That’s why many multinationals find
themselves stuck with a huge number of
legal entities located around the globe,
a business model that’s not aligned to
their current way of doing business,
overlapping management structures
and duplication of functions.
In addition to the above, transparency,
substance requirements and increasing
reporting requirements are forcing
groups to rethink their structures
and business practices. A simplified,
substance-based and cost-efficient
structure becomes more and more
appealing, and possibly crucial to
business success!
Simplification provides a number of
concrete benefits:
• Streamlined organisations with
leaner back-office structures and
fewer statutory filings, which means
substantial cost savings.
• Clear reporting channels and
consistent information which also
reduce risk and make the task of
compliance simpler, less costly and
more effective, fully in line with the
objectives of the OECD’s intentions
and proposed actions.
• Perhaps even more important
are the intangible benefits;
simplification projects enhance a
group’s flexibility and agility, better
positioning it to successfully achieve
its goals!
Simplify your business by reducing costs, complexity and tax risks
1. Setting the scene
During recent years of successive M&A transactions
and lack of dedicated resources, acquisitions have not
been fully integrated; entities were simply added to
the organisational chart. This lack of integration led
to overlapping management structures, duplication of
back-office functions and the creation of many ‘little
kingdoms’, which are difficult to manage in a global
environment where centralisation of certain functions
and having one face to the client is increasingly
important.
Such complicated group structures often lead to huge
compliance costs, complex intercompany transactions
and complex transfer pricing and reduced efficiency,
thereby increasing risk.
Key topics in M&A
All of which have a huge impact on investors’
confidence and increase the desire for a more agile
and simple structure.
Groups are also confronted with changing businesses
as a result of difficulties in attracting and retaining
talent, increased focus on emerging markets and
evolving sales channels, as a result of the booming
digitalisation and globalisation of our economy.
Competition from operators in lower-cost locations
and consolidation of both customers and suppliers
increase the demand for a simple structure aligned
with an efficient business model.
The OECD intends to reform international tax rules
with a clear goal: to establish a set of coordinated
international tax rules that facilitate global trade and
lead to more transparency.
The OECD’s goal will be implemented through three key
topics:
Coherence – close loopholes by harmonising tax rules
Substance – tax people where they are located
Transparency – disclosure and exchange of information.
Today, the OECD’s base erosion and profit shifting
(BEPS) project is likely to bring the most significant
changes to the taxation of international business
for decades.
-2-
February 2016
Simplify your business by reducing costs, complexity and tax risks
2. Why now?
This changing tax environment impacts business
operations in a number of ways. Think about:
• new reporting requirements that will grow the
compliance burden
• the increased focus on sufficient relevant substance
• the many existing beneficial tax regimes applicable
in different countries, including manufacturing
incentives, beneficial holding regimes, R&D and IP
incentives which may disappear partly or in full
• the BEPS action 7 report on preventing artificial
avoidance of Permanent Establishment (PE) status
which will lead to a material lowering of the PE
threshold
Many companies operate globally through various
legal entities located in multiple jurisdictions and with
different functions in their value chain. Together,
the increasing use of technology in today’s world
and the proposed changes to international taxation
mean multinational groups will have to reconsider
where to invest, how to structure their global business
operations and their legal structure going forward
The changing environment makes it necessary for
groups to rethink their existing legal structures and
business operations.
All this creates additional complexity and even
increases the potential for double taxation.
Key topics in M&A
-3-
February 2016
Simplify your business by reducing costs, complexity and tax risks
3. Simplification of your business model on three levels
Key topics in M&A
-4-
February 2016
Simplify your business by reducing costs, complexity and tax risks
4. Simplification at management level
Simplification of the management model mainly focuses on aligning the
management structure with the business model, including talent management and
governance. This level of a corporate simplification project also includes advice on
which decisions should be taken centrally versus local operational activities and
advice on where activities should be executed.
Within the framework of the BEPS action plan on substance, where taxation is
meant to follow executed functions, this part of corporate simplification increases in
importance.
When properly implemented, corporate simplification at the level of management
structures should help improve decision making, reduce duplication of activities
(thanks to centralisation) and optimise reporting (thanks to systems integration).
In other words, it’s fully in line with the BEPS fundamentals:
Transparency: clearer alignment of management responsibilities within the
corporate structure; centralisation and optimised reporting systems.
Coherence: centralisation of functions and decision-making processes, enabling the
application of a coherent set of taxation rules
Substance: the centralisation of decision-making processes clearly indicates where
substance sits and allows allocation and taxation of profits in those locations.
Key topics in M&A
-5-
February 2016
Simplify your business by reducing costs, complexity and tax risks
5. Simplification at operational level
Simplification of the operational model is another
level of the corporate simplification process. It’s all
about centralising complexity, the strategic decisionmaking process and standardisation.
Such an exercise is a proven way to reduce operational
costs and increase profits. To be effective and bring
about expected increases in shareholder value, it
should cover all aspects of the value chain, from
planning through procurement and manufacturing to
logistics and distribution.
Given that organisations have different maturity
levels, a phased approach can be planned.
When well structured, simplification of the operational
model should lead to supply chain rationalisation,
improved business control and a substantial reduction
in intragroup transactions. A correct Transfer Pricing
model and documentation is key. BEPS action plans
will have a huge impact on the process and the
changed tax environment will have to be taken even
more into account going forward.
Where previously some models were mainly based on
legal agreements, the actual activities and decision
power (substance) will now be central. Where do
operations take place? Who takes decisions? Who has
supervisory power? Which entity effectively bears
the risk and who has the power to manage that risk?
These will be the key questions from now on.
Key topics in M&A
This means that to set up a tax-efficient structure, you
may need to move people and centralise functions
around the globe. Exit charges when moving functions
or activities will also become more important as part
of a coherent international taxing system.
-6-
An integrated, substance-based approach, whereby the
after-tax benefits of the structure are considered, will
drive successful operational models going forward.
More challenging transfer pricing methodologies, such
as profit split methods, may also come into play.
February 2016
Simplify your business by reducing costs, complexity and tax risks
6. Simplification at entity structure level
Simplification of the legal structure brings us to legal
entity reduction and, in the most far-reaching format,
to a single entity structure.
Reshaping the conventional business model into a
flexible international branch structure may provide
the following benefits:
• Improved business control e.g. reduced corporate
governance requirements
• Simplification of intragroup arrangements e.g.
less accounting complexity, more efficient cash
management
• Efficient up-streaming of cash and reserves,
leading to fewer legal requirements and no cash
traps
• Realisation of both internal and external cost
efficiencies e.g. reduction of internal functionalities
(accounts, administration), fewer audit mandates
required
• VAT and tax management benefits
• Elimination of PE risks and related double taxation
risks
Reducing the number of legal entities or moving to a
single entity structure may allow you to manage some
of the additional risks brought by the BEPS actions.
Key topics in M&A
-7-
February 2016
Simplify your business
by reducing costs, complexity
and tax risks
The five critical success factors
of corporate simplification projects
Case study
Corporate simplification is as much about
culture and governance as it is about processes
and systems. Projects need careful preparation,
buy-in from all internal and external
stakeholders and a systematic approach. The
reward is a legal entity structure with processes
that are fully integrated into financial, legal
and management reporting systems, cost
effective, risk compliant and flexible enough to
meet future business needs.
Key topics in M&A
-8-
February 2016
We’re here to listen
This contribution was written by Nancy De Beule and Nancy Van de Voorde, please feel free to contact us.
Nancy De Beule
Partner
Nancy Van de Voorde
Director
Tel: + 32 3 259 31 25
Tel: +32 9 268 83 06
[email protected]
[email protected]
Do you want to stay up to date with the latest developments in M&A?
Visit our website www.pwc.be/transactions
To subscribe to our next publications, visit our newshub page
About PwC
At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are
committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.
PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity.
Please see www.pwc.com/structure for further details.
© 2016 PwC. All rights reserved