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Setting up a tax practice is really about implementing the ideas that the PE firm and its advisers had before the acquisition. The PE firm was right to focus on tax compliance. The most important thing, of course, is to make sure that there are no backlogs and that tax returns are dealt with by the various tax advisers in a timely manner. A calendar needs to be drawn up of which returns need to be filed in which country. This applies to corporation tax, payroll tax and VAT (and their equivalents).
The first thing to hold onto is, of course, tax due diligence. VAT and payroll tax can soon be dealt with locally if all goes well.
From a group perspective, the main issue is corporate tax. Apart from the acquired company, you have to deal with the PE company and the investors who need information for their tax returns.
Some of the work we encounter in the context of group corporate tax:
- Align the financial year as closely as possible
Some countries use a statutory financial year, e.g. 1 April to 31 March. This cannot be changed. In other cases, for practical reasons, it is desirable for the financial year to be as close as possible to that used by the Group.
- Setting up transfer pricing
Every international company has a transfer pricing methodology. However, in the case of a carve-out from a multi-billion dollar company, this was not tailored to the acquired business. We obtained quotes from a number of firms specialising in transfer pricing and presented the best one to the board. In the Netherlands we have an affordable and good quality service in this area compared to many other countries. We provided the TP firm with the necessary information from the company so that the correct TP methodologies, accepted by all relevant tax authorities, could be selected and implemented in the company. The maintenance of the internal transfer pricing methodology could then be transferred to the company.
In our experience, getting transfer pricing right is important, not only for accountability to tax authorities but also internally. TP companies use databases to derive market prices for transactions and services. This avoids differences in receivables and payables between group companies and ensures cost recovery and positive cash flow where costs are incurred in the business.
- Tax structure and substance
Prior to the acquisition dates, the PE firm’s tax advisor had neatly rigged the structure with holding companies in which the acquisition transactions would take place.
Inherited from the past, a group of companies in a Dutch fiscal unity still had a structure that suited the main shareholder. What was a useful structure in the past is no longer so. A Dutch intermediate holding company, even if it is the group head of the fiscal unity, must contain sufficient activities and associated management to be considered full-fledged by the Dutch and foreign tax authorities. Cooperation between countries in tax audits (also for each other) is improving, so that the existence of substance is really tested.
The non-production activities were transferred to the intermediate holding company through bottom-up mergers. Before the end of the first reporting year, everything was settled and the merger balances were submitted to the notary within the legal deadline. It is important that the intermediate holding company can repatriate the amount invested in another country through dividends. Proof of substance is particularly important for countries where the monetary authority has tight control over outflows from the country (this includes all major non-Western economies).
