How would a global corporation tax affect M&A deals involving UK companies?

After all the announcements made at the G-7 summit in Cornwall, UK, the proposed global tax regime has been a hot topic of discussion. Recognizing the global interconnectedness of economies and increasing cross-border transactions, G-7 Finance Ministers boldly affirmed their collective mission to “change the world” through creative tax reform. Indeed, UK Chancellor of the Exchequer Rishi Sunak called the deal “seismic”. In many ways, this is a token announcement.

The reforms included two actions. The first was to allow governments to tax part of the profits made by multinational corporations based on the income generated in their country; the second set an overall minimum corporate tax rate applicable to large corporations.

Despite the complexities surrounding this global tax overhaul, progress has been made. On Friday, July 9, all G-20 countries announced their endorsement of the deal, with details to be agreed by October 2021.

According to estimates by the Organization for Economic Co-operation and Development last October, the proposed tax reforms could generate between $60 billion and $100 billion a year in additional tax revenue. While much work remains to be done to identify gaps and secure cross-border deals, this is an attempt by nations to address the most critical challenges facing the global economy. The appearance of this “historic agreement” could eventually make global tax havens obsolete.

Mergers and acquisitions (M&A) have become increasingly global and competitive in nature and taxation can have a significant impact on asset valuations. Because companies don’t know exactly how and when tax rates and policies change from country to country, assessing and determining the tax implications of a transaction can be a difficult exercise.

Pious wish or achievable reforms?

Implementing the proposed framework for corporate taxation will be a legal conundrum. This will be further complicated by domestic political conversations between major political parties that will need to take place alongside ongoing international negotiations between G-7 finance ministers. Finding national consensus within countries, before then aligning international goals between countries, will be a delicate balancing act that could take years.

Already, the proposed tax seems to rest on shaky foundations. In the United States, several prominent Senate Republicans have expressed strong opposition to the tax. Chancellor Sunak has also signaled his intention to exempt the City of London from the tax, which if successful will no doubt trigger similar calls from financial hubs like New York and Paris.

And for those in favor of a global corporate tax, some worry that the proposal does not go far enough. The proposed 15% rate is 6% lower than what was originally promised by US President Joe Biden earlier this year, but is still seen as a turning point in the transformation of the global tax system.

Finally, the overall effectiveness of the tax will be determined by the willingness of other major economies outside the G-7.

For the proposals to be globally effective, there must be continued consensus among the 139 members of the Inclusive Framework on Base Erosion and Profit Sharing (BEPS). The framework brings together 117 countries and jurisdictions to collaborate on implementing tax planning strategies to address asymmetries in current tax rules.

At present, 130 countries have signed the agreement, which demonstrates that there is support in principle for this tax overhaul. However, reaching consensus on the actual details of the proposals will be easier said than done given the myriad of different perspectives countries have on tax policies.

An agreement on the parameters for which companies will be subject to this tax reallocation – and on the proportion of their profits that will be affected – will undoubtedly be equally important. If there is not consistent acceptance of the proposals, their final implementation could be delayed indefinitely.

It’s a developing story that will continue to unfold in the months to come. G-20 countries might agree, but there is already strong opposition from low-tax regimes like Barbados, Ireland and Hungary. Although this is a tax issue, the large number of government and private actors involved makes it a complex undertaking.

Tax transactions and mergers and acquisitions in the United Kingdom

It is unclear what final form the overall corporate tax will take. Nevertheless, it is necessary to understand how such a tax could affect different markets. The fact that seven of the world’s wealthiest economies are keen to put in place a universal framework means that now is an ideal time to examine the potential effects of such a tax.

To understand the implications for M&A transactions, we must first consider how taxation affects such transactions in the UK today.

Any M&A transaction must take into account the tax obligations involved throughout the process. This is made even more complex with cross-border transactions where two or more national tax frameworks need to be consulted in order for all legal obligations to be met.

As noted by KPMG, the UK tax environment for M&A transactions is constantly changing in response to factors ranging from the current tax climate to perceived competitive pressures in different countries. Brexit has also affected the directive and regulations governing M&A activity in the UK

When looking at the taxes applicable to M&A transactions in the UK, they can generally be broken down into the following categories.

Stamp duty

The first category covers transfer duties and notary fees. This category mainly includes stamp duties. General stamp duty is levied on instruments involved in the transfer of shares and transferable securities, but is only relevant where the instrument in question is executed in the UK

Reserve stamp duty is subject to agreements to purchase taxable securities. In this case, taxable securities refer to shares in companies incorporated in the UK or companies which have a register of their shares in the UK. Stamp duty land tax is also applicable on the transfer of land in the UK.

Capital gains tax and income tax

UK residents are subject to capital gains tax on any gain arising from the disposal of assets in a merger and acquisition transaction. Rates vary depending on an individual’s tax bracket. Individuals are also required to pay income tax on all income received beyond the personal allowance, which depends on the level and type of income received.

Corporation tax

Finally, we come to corporation tax. In the UK, all tax resident companies are subject to corporation tax on their worldwide profits. However, there are exemptions for companies that have offices and operations outside the UK. In some cases, these companies may apply to be exempt from corporation tax on profits directly attributed to a foreign branch.

The main UK corporate tax rate is currently 19%. This is a competitive rate with corporation tax in other G-7 economies—in the United States, the rate is 21%.

However, the UK’s Spring 2021 budget presented by Sunak announced that the tax rate would rise from 19% to 25% in April 2023 for companies with profits above 250,000 pounds ($346,600). This tax hike is no doubt part of the UK government’s strategy to deal with rising public debt fueled by all the Covid-related grants and aid packages for businesses and individuals.

With respect to non-UK tax resident companies, corporation tax will apply if a company trades through a permanent establishment in the UK and that establishment generates profits.

What would a universal corporate tax mean for M&A transactions?

The introduction of a corporate tax bill with a minimum rate of 15% will have an impact on companies considering mergers and acquisitions. At present, companies must determine where their main activities or headquarters will be based, which will no doubt be influenced by the amount of tax they will be required to pay in each national jurisdiction. The introduction of a universal rate would mean that it would no longer be necessary to take corporate tax into account in the strategic planning of mergers and acquisitions transactions.

The conclusion of agreements is skyrocketing. New projects on Datasite’s platform, which are deals at launch rather than announced, increased 33% globally in the first quarter compared to the same period last year. Moreover, this momentum does not seem to be weakening: Q2 2021 is proving to be one of our busiest quarters.

New projects are up 76% globally, compared to the same period a year ago. We see this as a long-term trend that is likely to continue for the rest of the year, fueled by the rollout of mass vaccinations and the global easing of lockdown restrictions, along with favorable interest rates and access. easy to capital.

Technology is transforming the way M&A transactions are handled by providing online platforms that store files, flag issues, and streamline the entire transaction so that all transactions are transparent and accessible to all parties involved. . While this does not replace the need for clear strategies and strong relationships to fuel successful M&A transactions, using technology to streamline the process will undoubtedly encourage more companies to consider M&A activity. purchases.

For now, we have to wait and see if the proposed global corporate tax will be realized. While this makes sense in principle, the challenge is to maintain consensus with major global economies so that the tax can be implemented.

We will likely see lengthy negotiations and complex legal conversations over the next few years. Regardless of what should happen, it will be interesting to see how such a proposed tax would ultimately affect businesses when it comes to cross-border mergers and acquisitions activity involving UK companies.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

Merlin Piscitelli is Chief Revenue Officer of Datasite, EMEA.

The author can be contacted at: info@datasite.com