P2 seeks to enforce a global minimum income tax at an effective rate (‘ETR’) of 15% for each country in which an in-scope MNE operates. When buying a target company (‘Target’), MNEs should assess P2 risks as part of the DD. Besides general attention points (which entity is subject to P2 top-up tax, use of tax havens or preferential regimes, etc.), there are also more specific P2 attention points in a deal context, three of which are highlighted in this Snippet.
The P2 ETR is determined on a jurisdictional basis which means that profits and taxes of group entities in the same country are generally blended. We refer to our prior Snippet on that topic. As a result, the Target’s P2 status may be affected by other seller group entities in the same country outside the deal perimeter. If information on such entities is not made available, it is difficult to assess the Target’s P2 position and model the P2 impact going forward. In W&I insurance deals, insurers may then be reluctant to cover P2 risks.
P2 operates a transitional rule that may deny a step-up in P2 basis to fair market value of assets transferred within the group after Nov. 30, 2021 and before the ‘transition year’. We refer to our prior Snippet on this topic (https://lnkd.in/ehMkhrb6). If this rule applies, the P2 ETR is reduced if a step-up is granted for local tax purposes, resulting in higher depreciation or a lower capital gain than for P2 purposes. MNEs should assess historic asset transfers within the seller group to determine how any step-up in asset book value is treated for local tax and P2 purposes.
Temporary book-to-tax differences are addressed under P2 via deferred tax accounting. Deferred tax liabilities (‘DTL’) are formed for temporary differences that give rise to higher profit for tax purposes in the future. When formed, a DTL increases the P2 ETR and an opposite effect occurs upon reversal. DTLs are recaptured under P2 in the year of formation to the extent not reversed in the next 5 years. This retroactively reduces the ETR in the year of formation. There are certain exceptions to this recapture rule, but those generally do not apply to DTLs for intangible assets. Although the 5-year term is reset upon acquisition of the Target, adverse impact may arise if the DTL reverses in more than 5 years post-acquisition. This is particularly relevant for intangibles that are typically amortized over a longer term (e.g., goodwill or IP). MNEs should review the Target’s DTLs and flag recapture risks relating to intangibles. This may also affect pricing as the buyer never got the ‘upside’ of forming the DTL.
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