Tax directors are on high alert due to the M&A boom

In the midst of record-breaking merger and acquisition activity, tax directors have cautioned firms about the possible hazards of combining multiple tax processes.

Following a surge in mergers and acquisitions, tax leaders have been advised to put strong policies into place to properly integrate recently acquired firms.

The demands come in the wake of a record-breaking uptick in worldwide dealmaking, with Refinitiv reporting that the value of deals increased 64% annually to $5.8 trillion in 2021. The previous record, $4.55 trillion, established in 2007, was surpassed.

Refinitiv reports that despite significant economic challenges, $2 trillion worth of tie-ups were recorded in the first half of the year, continuing the wave of acquisitions into 2022.

For businesses at every level of the tax operating model, Susie Cooke, partner and national tax transformation leader at KPMG in Toronto, says M&A can offer issues.

"Following a merger or acquisition, the integration of tax operations is often overlooked," according to Cooke.

Having a solid change management plan in place is the most important component of merging business and tax responsibilities.

Businesses "without it, businesses are always at risk that integration will not work effectively," she continues.

According to David Peeters, senior director of worldwide indirect tax at US energy supplier World Fuel Services, his business has grown dramatically through M&A over the years.

This involves acquiring Flyers Energy, a California-based company that markets fossil fuels and alternative energy, for $775 million in 2021.

"When there is an acquisition, we want to help them [the acquired business] to be successful and to feel welcomed into a bigger team," adds Peeters.

He claims that his company supports an inclusive strategy for integrating tax teams by making them feel wanted, trusted, and essential to the success of the company as a whole.

System and process integration is essential to any effective merging of tax activities.

Given the amount of money needed and the nature of the many technology instruments used by businesses, it is also one of the most challenging types of unification to accomplish.

The difficulty of integrating technology solutions, according to Benoît Labiau, EMEA head of tax and treasury at medical technology company Terumo Europe in Brussels, emphasizes their significance for contemporary businesses.

According to Labiau, technology is no longer an extra but is instead increasingly essential to how businesses operate.

According to Francesca Farina, indirect tax manager at global heating systems supplier Ariston Thermo Group in Milan, mergers also increase awareness among the acquiring company's employees of the urgent need to invest in automated systems for sophisticated risk management.

"It also impresses on businesses the need to dedicate budget to IT implementation and training of personnel," according to Farina.

Additionally, businesses need to have clear plans for the automation technologies they want to use in their operations.

Few businesses employ the same ERP software or systems across their global organizations. Instead, they are often heavily customized to meet the requirements of each jurisdiction.

However, according to Matthias Luther, associate partner for indirect tax at EY in Hamburg, excessive degrees of ERP customization might be a hurdle to its total integration into a single system.

According to him, it is usual for firms to run two or more ERP systems simultaneously while manually compiling their data for tax filing needs.

According to Cooke, these manual modifications might raise the possibility of mistake and go against the trend toward more tax automation.

"Tax organisations do not always have time or funds, and so the integration is done piecemeal or in some cases not at all."

The strategic fit of an organization inside the newly expanded corporation can also have a significant impact on the degree of system integration.

According to Peeters, I don’t think I have ever seen an integration where everything is assembled into one system such as one global SAP environment, for example."

Following an M&A transaction, acquired companies typically continue to utilize their own automation systems.

This is frequently the result of deliberations about the expenses of acquiring technological solutions and the effects of downtime during the installation process on business operations.

According to Peeters, "If you acquire a business with 15 ERP systems and then you try to rationalise them into one, that could have huge costs implications in terms of time, resources and man-power."

Instead, businesses have attempted to achieve limited integration through add-on solutions for ERP systems or procedures.

Because of this, parent companies have been able to some degree standardize their platforms.

Companies frequently highlight organizational and cultural fit when trying to complete M&A deals. The failure of mergers, however, can occasionally be attributed to a collision of cultures when rival and acrimonious groups emerge inside organizations.

According to Peeters, tax directors must convey a strategic goal to new hires while allaying any concerns they may have about the new organization.

According to Peeters, "If people feel threatened or think that things are going to change then they might be inclined to leave, which increases [business] risks."

Companies should think about implementing a tier system for cultural inclusion. Gaining the trust of the workforce would be necessary before progressively implementing organizational changes, harmonizing tax risk management systems, and standardizing rules.

Both a top-down management strategy and a bottom-up, employee-driven process are needed to integrate teams. This entails convincing the workforce of the need for change while gaining their support.

Finding someone to oversee and organize the full integration process is a further crucial component.

To enhance the integration of certain tax tasks in the business, such as indirect tax and transfer pricing, this entails delegating responsibilities to designated managers.

To encourage open lines of communication between tax teams and the company's leadership, senior management must also be included in the decision-making process.

"If everybody starts following their own course then things can get messy after a while," according to Peeters.

When competent managers have well-thought-out company integration strategies, time might be on their side. However, because it highlights organizational flaws in freshly combined organizations, it might spell disaster for businesses with disorganized teams.

A sound corporate unification plan must focus on ensuring that company standards and procedures are consistent throughout the organization.

Making sure that businesses use comparable strategies for managing tax risk is another important consideration.

According to Cooke, businesses frequently have different goals, objectives, levels of risk tolerance, and management procedures.

According to Cooke, "Aligning these aspects across two organisations can be difficult as each will have built up their own approaches over time."

Companies that use cutting-edge automation solutions frequently provide less tax concerns and provide greater prospects for creating solid control frameworks.

This is crucial to ensure that tax information is correct and sent to tax authorities in the proper manner.

The organization's entire tax risk profile might rise as a result of poor data security, which would also take money and people away from higher-value jobs.

For most organizations, integrating enterprises successfully may be a minefield. But tax directors may find it particularly difficult since they frequently have to balance a variety of conflicting priorities while also running the danger of severe fines for non-compliance.

Although it takes time to align systems and cultures, the process may be sped up with cooperation, the right kind of monitoring, effective management, and communication.

By fLEXI tEAM