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Doing Private Equity Deals in the New International Tax Environment

The international tax landscape is on the cusp of a significant change, spearheaded by the OECD-led Base Erosion and Profit Shifting (BEPS) project.

The Changing tax landscape has created a plethora of tax risks and opportunities that can have a material impact on deal valuations. The international tax landscape is on the cusp of a significant change, spearheaded by the OECD-led Base Erosion and Profit Shifting (“BEPS”) project. In this initiative, the OECD adopted a 15-point Action Plan to address BEPS with the following objectives: protect tax bases, offer certainty and predictability to taxpayers, and eliminate double non taxation. 

It is now clear that broader international tax related matters are being taken seriously by many countries, including many emerging jurisdictions which, while not members of the OECD, have embraced and begun implementing changes to their domestic tax laws inspired by BEPS recommended reforms. 

This paper briefly summarizes the following key BEPS Actions which are crucial for PE managers to be aware of given the anticipated impact on PE funds: 

  • Action 2 - Hybrid Mismatch Arrangements 
  • Action 4 - Interest Deductibility 
  • Action 6 - Preventing Treaty Abuse 
  • Action 7 - Artificial Avoidance of Permanent Establishment 

For each of these initiatives, PE funds will need to carefully consider their acquisition structures for potential current and future exposures and plan for a future in which governments are more coordinated and aggressive in challenging investment structures historically employed by PE managers. Additionally, there will be greater pressure for PE funds to assess the Seller’s structure upon acquisition to determine whether potential withholding is required. 

Key takeaways for Deal teams 

  • Assess BEPS impact on transaction risk, structures, and deal value 
  • Build sustainable structures by focusing on operational substance 
  • Effectively manage potential tax leakage in transaction models 
  • Avoid reputational risk by being on top of these developments 
  • Elevate tax matters during the transaction