By, Bloomberg BNA
Republican backers of a broad overhaul to the federal tax code signed into law on January 1, 2018 promised it would leave companies with more cash and new opportunities that would boost the bottom line. Many firms now see provisions in the law impacting mergers and acquisition activities in a positive way.
The Trump administration’s framework for tax reform “contained a number of ‘playing field’ levelers to help U.S. companies better compete in the global marketplace,” according to a recent memo from Blythe White, a Paducah, Kentucky-based financial services firm.
The tax law “changes will have a significant impact on deal modeling, tax diligence and acquisition agreement negotiations,” even though the new provisions “generally serve as an overlay to existing tax law, rather than a complete rewrite of the prior Internal Revenue Code,” according to an analysis of the bill’s potential impacts by global law firm Skadden, Arps, Slate, Meagher & Flom.
The law is expected to have impacts at home and abroad. Domestically, the reduction of the U.S. corporate tax rate to 21 percent “will make the United States a more attractive jurisdiction for inbound M&A activity and also may increase the value of U.S. domiciled businesses,” Skadden predicted. International tax rule changes “should allow many U.S. companies to access the cash of their foreign subsidiaries at a lower U.S. tax cost, which could provide them with liquidity to fund acquisitions.”
The law also has the potential to impact reorganizations, corporate transactions, the value of net operating losses, limits on interest deductibility, and the international tax system, according to Skadden.
A January memo from Winston & Strawn, a global law firm, said the provisions in the law intended to raise revenue “will have a particular impact on the private equity industry and on M&A activity in general,” including a new 3-year holding period to be eligible for long-term capital gains treatment with respect to carried interests, a new limitation on the deductibility of interest, the repeal of the ability to carryback net operating losses, and a minimum tax on large corporations making deductible payment to affiliates.
Winston & Strawn highlighted the reduction in the corporate tax rate from 35 percent to 21 percent and the repeal of the corporate alternative minimum tax effective for a corporation’s first taxable year beginning after December 31, 2017 as significant for M&A activity. “The lower corporate tax rate has several implications,” the firm said.
“For example, disposing of unwanted assets in the context of a corporate acquisition will become less expensive because the resulting corporate tax will be lower. On the other hand, a lower tax rate means that any tax attributes of a target corporation (including tax attributes resulting from transaction-related deductions accrued at closing such as option cancellation payments and bankers’ fees) will be less valuable.”
In one sweeping change to prior law, Skadden said the new law “sharply limits the ability of businesses to deduct interest payments when calculating their taxable income, which could force a fundamental re-evaluation of the capital structure of every business that is subject to U.S. tax.”
Skadden also expects the new interest deduction limitation could “impact leveraged buyouts, both future deals and deals that already have closed.”