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A relevant indirect tax strategy—correctly implemented—will allow the new business to function effectively from go-live, from both a tax and commercial perspective, so that it can move inventory, generate sales and invoices, face fewer disputes with non-paying customers, remain tax compliant, and integrate the business on time and on budget.
With indirect taxes intertwining through the day- to-day operations of a company—raising sales invoices, moving inventory, paying suppliers, collecting cash—indirect tax risk can have a distinct and domino-like effect on the commerciality of an organization. The impact can increase exponentially in the event of a merger or acquisition. But do these taxes and tax planning opportunities get the attention they need, especially in light of increasingly complicated and globalized business models?
In a simpler time, due diligence for the purchaser typically focused on identifying, assessing, and quantifying historical indirect risks. The aim was to provide insight into these risks and build into the contract adequate coverage in case (risk) history repeated itself. Armed with this information, the buyer could negotiate a reduction of the selling price or secure indemnification from the identified risk.
The tax advisory input also would extend to opportunities inherent in the deal structure. With effective planning, deal costs would cascade down the group to sit in an appropriate entity for commercial and corporate income tax deduction purposes, and value-added tax would not ‘‘stick’’as an unrecoverable cost—at a rate of up to 25 percent in the European Union (Hungary even 27%).
Asset deals are less rigorously subject to tax due diligence: The historical risk usually remains with the seller and the buyer takes on only the risks directly associated with the assets (e.g. VAT adjustment period). In cases where all the assets qualify as a business going concern, the transfer might not be subject to VAT. The seller would not have to charge and report VAT, the buyer would not have to pay or deduct VAT, and both parties could see a cash flow advantage.