US Tax Legislative Update
In this edition of Weil, Gotshal and Manges’ Expert Focus series on tax issues, the firm’s tax co-chair Joe Pari and international tax head Devon Bodoh discuss recent developments in tax aspects relating to M&A including debt exchanges, OECD’s implementation of Pillar Two, treaty qualification and tax insurance.
“So, it’s important to think about tax when engaging in a transaction with respect to one’s debts even if there’s no cancellation of the old debt and issuance of a new debt in form.”
Debt Exchanges
Joe discusses the reworking of corporations’ indebtedness following interest rates rises and other issues in the market which have caused borrower distress and whether such modifications to debt arrangements will constitute a deemed exchange of outstanding debt for tax purposes.
He explains what to consider in relation to:
- adjusted issue prices and unpaid interest; and
- cancellation of indebtedness in certain circumstances, such as publicly traded companies (with a wider definition than may be expected), leading to significant tax consequences where there is a deemed exchange of debt (with two exceptions, explained).
He describes bankruptcy issues in some detail and moves on to give examples of what to consider when making modifications to a debt instrument or the lender is agreeing to a forbearance.
OECD Pillar Two Implementation
Pillar Two imposes a minimum tax to mitigate tax competition. Devon observes that its impact is now being seen as countries start implementing Pillar Two, with dislocation and global cross-border transactions and operational tax on existing corporations. It is hard to value tax benefits going forward. The US has a form of minimum tax regime which is not quite Pillar Two compliant. The interaction of the US with the full OECD Pillar Two implementation countries is important as one tries to model out when engaging in transactions.
Treaty Qualification
Devon touches upon the issue that both in the US and globally there is an increased focus on the effective use of tax treaties and tax treaty qualification to mitigate tax that would otherwise be imposed.
Tax Insurance
Demand for insurance is very high in public as well as private equity/private transactions. Tax insurance is taking the place of a lot of post-closed indemnities. Devon highlights that tax opinions by counsel are often required for policies related to a particular risk. Both parties need to forward plan the timing and effort required for counsel to negotiate with insurers in order to get the policy in place.
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