M&A integration and indirect tax: managing the moving parts before, during, and after a transaction - Look in the ‚I’s

Page 5 of 6: Look in the ‚I’s

Look in the ‚I’s

As anyone who has lived through the M&A experience knows, there are a number of moving parts relative to indirect tax. It is not uncommon for some things to be overlooked or underplanned. But when that happens, serious and material consequences can occur, substantially affecting the cost as well as the ultimate success of the transaction.

Implementation

Once a commercial and tax-efficient structure is determined—one that addresses both historical and potential risk—it is time to take the theory behind the structure into the realm of practice.

• Who is taking care of filing VAT registrations?
• When should you apply for VAT registration, since average lead times in jurisdictions can be several months?
• Who is responsible for maintaining a structure and making sure the business is acting in accordance with the model?
• How is this communicated throughout the organization?
• How will ongoing monitoring be handled?

Most ERP systems, including SAP, Oracle, JD Edwards, and Peoplesoft, are equipped with some form or forms of VAT functionality. However, they typically still require significant configuration and may need to be customized to deal properly with indirect taxes.

They will also need to be updated and tested to reflect new contracts and billing flows. Ownership of these tasks must be determined and communicated up front, so that the ERP system can accurately issue invoices from day one.

Integration

The next stage involves integrating the legacy business into the new business if possible, or devising a hybrid model through which the two legacy systems run side by side.

Although a fully integrated system is more likely to yield greater economies of scale, tax knowledge continuity is critical to managing risks in either case.

The continuity includes others outside the tax arena—the logistics team who understands the physical shipments and flow of goods and would complete and submit customs declarations; the shared service center clerks who actually create the sales invoices; the IT team who manages data sharing between different systems.

Impact

The impact we are talking about here is largely concerned with potential problems and cautionary tales.

• What if VAT registration is not obtained on time?
• The ERP system is not tested or updated?
• There is no central ownership of key processes?
• Appropriate project team participants do not understand the material impact of indirect tax?

The results of these gaps in practical application can range from logistical problems (customs not allowing goods to clear in a country) to invoicing errors (invoices needing to be redone and cash collections delayed), from incorrect tax treatment on transactions to difficulties in VAT compliance that can result in payment and reporting errors and penalties.

Interim solutions and workarounds

When the new business model cannot be implemented into the purchaser’s own ERP system within a given time frame, the typical solution is to temporarily outsource the process to the seller through a temporary service agreement. But such workarounds, however practical, can lead to new risks.

In an asset deal, for example, an ongoing relationship with the seller as part of the transition agreement could be seen as outsourcing VAT accounts payable/accounts receivable processes. That in turn could trigger VAT compliance issues, difficulties in accessing data, questions around the quality of VAT controls, and blind reliance on an ERP set up with an outcome that could not be verified.

There are possible people issues as well. Although the vendor’s (seller’s) staff and systems are used to bridge the gap until the necessary resources, knowledge, systems, registrations, and authorizations are in place, the people doing the work have no real vested interest in the new model. In fact, they may even be losing their jobs because of the merger or acquisition.

Invoicing in the interim

In worst case scenarios, staff members may not feel responsible for the work they are doing. We have seen results that, if not costly and catastrophic, certainly undermine the functionality and credibility of the enterprise.

One of the most common side effects of an integration that cannot be fully realized surfaces in the realm of invoicing. For example, large numbers of payable invoices are not correctly coded so VAT is not deductible. Or when the legacy system is only half integrated into the new model, incorrect sales invoices are issued, causing problems for customers, incorrect reporting of tax figures, and missed compliance obligations.

Knowing who is legally obliged and practically able to issue invoices is critical in interim or transitional situations.

Is the previous owner legally allowed to issue invoices? Whose VAT compliance issues are these and how can the new owner obtain and share information?

Can the new company continue billing its customers? Implementing a transitional arrangement—especially if it is unplanned—can be expensive, causing delays to the overall integration and setting practical, commercial risks into motion.