• Search Results
  • Audit
    • Tax
    • Advisory

      Friday 15 November 2019
      please select a sub-page

      Beware: local tax issues can derail M&A

      US state and local business tax issues are more likely to derail the foreign acquisition of a US company than any other tax issue, yet, they are often overlooked in M&A strategies. The US experience is mirrored in many countries and has important lessons for M&A around the world.
      The discovery that an American-based target company has not correctly met state and local tax compliance could play havoc with its earnings and balance sheet, affecting the purchase price and possibly the purchase itself. 

      Unrecorded tax liabilities can become the responsibility of the buyer, even if the liability relates to periods prior to the buyer’s ownership. Saddled with an unexpected liability, the buyer may decide it paid too much for the target or the expected return on investment will be less than expected. 

      Cover your bases
      The best way to avoid an unexpected state or local tax issue is to conduct an in-depth tax review as part of the M&A due diligence process. Buyers tend to believe that indemnity clauses and escrow agreements offer sufficient protection from state and local issues, but this is not always the case. It’s not unusual for US audits of state and local taxes to take three to five years. By the time an assessment is issued, funds to cover a liability may no longer be escrowed.

      Example situation
      Consider this scenario. A state audits a company after it has been acquired by a foreign company. The audit spans a period including pre and post buyer ownership. Because a tax clearance certificate was not obtained in relation to the sale, the state assesses the buyer at a time when there is no money left in escrow. The buyer seeks satisfaction from the seller, relying on the indemnity language in the purchase agreement. The seller baulks, arguing that the buyer’s post-acquisition actions precipitated the audit and resulting liability. In addition to paying the assessment, the buyer incurs legal fees in its attempt to force the seller to honor the indemnity agreement. Eventually, a settlement is reached, but not before significant time and money are spent.

      Take the initiative
      In summary, US state and local tax issues can be complex. Evolving nexus standards, business structure, business activities, and state and local tax requirements all come into play, as does the taxability of goods and services for states in which a company does business. The evolution of business processes and the documentation that surrounds transactions serve to complicate the situation. To avoid post-acquisition issues relating to unrecorded taxes, business owners need to be proactive about due diligence.

      For further information, contact:
      Craig Arends
      Email: craig.arends@cliftonlarsonallen.com
      Tel: +1 612-376-4500

      Back to top