FRANCE: An Introduction to Tax
WHAT MAKES TAXATION SO SPECIAL IN TRANSACTIONS?
The first factor is the hybrid nature of taxation, which is the discipline that by its nature is at the crossroads of purely legal and economic or financial approaches.
From the legal approach, we share the reasoning and the translation of the tax matters raised by the transaction in the legal documentation (LOI, SPA, Resps and warranties). Through the construction of the price and its tax impacts, but also from the point of view of managing the risks associated with the warrantee coverage that may be agreed between buyers and sellers. For example, the price may be based on several adjustments, particularly in terms of tax (deferred tax, tax provisions, economic charge for transfer tax, etc.). In France, moreover, the tax discipline remains the responsibility of the lawyers, who are above all driven by their legal culture and education. This connection is not without influence and the link with the legal approach is strong and requires a fine integration of the tax aspects of the transaction in the legal documentation exchanged between the seller and the buyer.
Our tax system is a concentration of rules based on accounting principles and regulation. Of course, the link is not total, and taxation has its own autonomy, but this link is very structuring for analysis. In order to provide good tax advice, it is also necessary to understand how it translates into accounting and finance implications for the target company. In the same way that in taxation a risk is generally evaluated at an X amount, the advice on the structuring of transactions can have a significant impact on the approach to the price of the target company and the economics of the transaction, whether on the seller or the buyer side. The link between finance and tax discipline is therefore both methodological and ontological, because ultimately one cannot exist without the other.
In short, the best approach is to play perfectly on these two approaches in order to deliver relevant tax advice that will be reflected in the legal documentation of the deal as well as in the financial and accounting parameters of its actors. In fact, the tax approach requires to have a high degree of acuity, in order to understand both approaches to deals, as well as a great deal of agility on the part of advisors in order to balance the two approaches without losing sight of either one.
The second factor is the extremely diverse nature of taxation depending on the country in which the players in the deals are located, both on the seller/buyer side and on the target company side. Indeed, while in legal and financial matters, standards do usually converge from country to country in terms of concepts and tools, there tends to be a greater level of discrepancy in tax systems from country to country. Most transactions today involve groups with international activities. Each subsidiary of a group will therefore have to be analysed separately in each country by local experts. The coordination of tax information therefore plays a central role. Acting as a meaningful tax advisor in transactions requires therefore not only an international mindset but also an international structure behind.
The third factor is the ever-evolving, not to say unstable, nature of tax regulations. Indeed, every country revises part of its tax rules when adopting its budget pack every single year. This obviously creates an extremely reactive context which deserves anticipation, agility and a strong connection on the part of tax advisers. France is a model of instability, where the rules play between reaction/attraction effects for investors, and each time there is a change of government significant parts of the rules are revised. A very active player in the transaction field will therefore have to constantly reassess the evolution of tax rules in its own environment. For example, France has continuously revised its rules on the deduction of financial charges over the last 10 years, which is a key factor in most leveraged buyouts. A solution to the challenge of this evolution is the long-term monitoring of the clients' operations. This is a key success factor and a guarantee of security: to follow clients beyond the closing date to check with them the execution of their investment plan over the long term, as this is a key factor in the success of their operations.
The fourth factor is the omnipresence of a third player in transactions: the tax authorities! Indeed, most of the significant acquisition transactions are generally subject to the control of the tax authorities. Multiplied by the number of countries and the very different cultures of the tax authorities, this implies quite a bit of anticipation:
- Either the tax audit is carried out a priori, in the form of a tax ruling (so decried but never so useful) when the parties wish to submit a sensitive point in the structuring of the deal to the tax authority for their clearance. Indeed, the tax rule remains general and the parties may have a strong interest in securing their transactions when they require clarification on the application of the tax to the transaction in a specific context,
- Or the audit is carried out a posteriori and tax specialists are able to explain the conditions of the operation to the authorities that audit them. However, it is often in the international field and when there are international flows in the transactions (cross-border deals) that many efforts of conviction must be made by tax specialists. From this point of view, all tax lawyers must be able to anticipate and deal with communication with the authorities during or after the deal and this is a key element of success for the transaction.
The fifth factor - and we will certainly stop our list here even if we are aware that there are necessarily others - is the spillover effect of tax matters onto the reputational environment. No company today wants to structure its operations in such a way that it exposes itself to a risk to its reputation. However, governments have increasingly favoured and even developed a "name and shame" approach to tax matters, so as to punish deemed unfair taxpayers through their reputation. More and more, the term "optimisation" is becoming part of the forbidden vocabulary of tax professionals. Beyond its technical aspects, it is increasingly necessary to look at the substantial and ethical dimension of the operations. In countries whose public finances are still dependent on taxation, it is therefore necessary to give a permanent perspective to a rule which, fundamentally, has none in terms of its ethical dimension. The tax rule, in the wake of high-profile cases involving counsels and stunned clients, has been invited into the social and economic debate. To the point, moreover, of challenging the professional rules of the tax lawyer, in the deeply secret and confidential link that binds them to their client. As an example, the tax profession must also now master the DAC 6 disclosure type of compliance rules in Europe, which aim to establish an unprecedented form of transparency on the tax aspects of deals. Tax advisors must therefore also consider, particularly at the time of the deals, the reputational exposure of the players in the transactions and the wise advisor must know how to integrate it into his global approach to the deal, beyond its technical aspects.
In the last decade, a tax advisor’s role has been to integrate all these parameters and find a good balance between them. Achieving this has required to create a new model which places the tax expertise in the centre of the court acting at the cross of many different approaches and to mobilise a transaction team that will integrate all the tax aspects of the operation from corporate tax to customs and transfer pricing. Tax is one of the most exciting and demanding areas and it has become one of the most strategic areas for deals.
Denis Andres, Managing Partner, Arsene
Mirouna Verban, Partner, Arsene
François Lugand, Partner, Arsene