You cannot throw a rock these days without hitting a financial executive at a multinational corporation who’s stressed-out about a merger. Calendar year 2015 saw an all-time record volume of M&A transactions, with a total of $4.7 trillion in global deals announced during the 12-month period. That’s a 41% increase over the previous year, driven by a combination of ultra-low interest rates that make financing deals very attractive, a relentless drive among shareholders to keep showing quarterly growth, and — in some cases — more favorable tax positions.
What often gets lost in the headlines of big merger announcements, however, is the massive integration challenge involved with putting two companies – each with different enterprise resource planning (ERP), tax software, and operational teams — together as one streamlined new entity. It’s a beast to be sure, but fortunately, with so much M&A activity transpiring around the world, companies are getting better at it. They are establishing best practices, teaming with specialist partners who’ve done this before, and doing a fair amount of diligence before the acquisition takes place so they know what they are in for.
When it comes to my area of expertise – multinational tax departments – I’ve seen a lot of these challenges unfold first-hand over the past several years. I’ve also picked up a few rules of the road to help ease the process. The following represent some of the most critical steps to consider when tackling the integration of multinational tax departments.
Audit Before You Close. Tax is one of those functions in a multinational corporation that — despite incredible levels of complexity and finite tailoring in each specific company — many executives expect to be a plug-and-play function. After all, tax laws vary widely, but the process of determination and compliance is a fairly standardized exercise. However, the inner workings of every company’s tax function are fairly unique. Time spent up front auditing the tax functions of an acquisition target and planning for the integration challenge ahead will go a long way to streamlining the process once the deal is closed.
There Will Be Turf Wars — Set Up a Clear Hierarchy and Mediation Process Up Front. The nuances that exist within each company’s tax department are probably there for good reason. Whether the result of legacy business lines or due simply to different interpretations of tax law, companies all put a unique spin on their tax operations. It is critical in a merger scenario to facilitate clear lines of communication to air the logic behind each process and decision, and to ultimately make the call on which approach to adopt going forward as a combined entity.
Keep All Records: The tax compliance clock does not start over when you become a new company. Oftentimes, the biggest headaches that surface for post-merger tax departments are those that involve an audit on an item that occurred upwards of two to three years before the merger ever happened. In that scenario, it’s common for tax authorities to ask for information that no one in the current, post-merger tax department has ever seen before. Yesterday’s data will need to be future-proofed for tomorrow’s potential audits.
Sweat the Tech Details. The modern-day tax department of a large corporation has a deep codependence on ERP technology. The automated systems used to track and collect indirect taxes across hundreds of different tax jurisdictions around the world; the determination software that gathers data from every different link in the global supply chain; tax planning tools — these are all deeply embedded into the inner workings of a company’s technology and finance infrastructure. Both tax and tech teams need a seat at the table early to ensure a smooth transition.
The pace of global M&A shows no signs of slowing anytime soon. Couple this massive volume of capital markets transactions with the increasing compliance demands being put on tax departments to comply with ever-changing tax laws around the world and you start to see the potential for administrative chaos. Just as the financials of each company, its business relationships, and leadership need to be scrutinized in the due diligence process, the operational side of the tax department must also be a focal point as early as possible.
Brian Peccarelli is president of Thomson Reuters Tax & Accounting.