Prof. Dr. Wilhelm Haarmann, Partner at McDermott Will & Emery, and Dr. Nils Wighardt, Associate at McDermott Will & Emery, discussed risks and challenges of tax guarantees in M&A transactions and talked about ways to prevent trouble related to tax law in these transactions.
To start the interview, Mr. Haarmann gave a short insight on his first nine months at McDermott Will & Emery and spoke about the IBA conference in Seoul in which he participated in a panel about tax war the day before the MuMAC.
The first question of the interview aimed on the definition of taxes in an M&A deal, and the problem that a specific tax doesn’t fall under this definition. As buyer and seller have different interests in a deal, there can be also different ways to interpret what a tax is and what not. Therefore, to be secure and prevent more problems in arbitration or in court, a clear definition is essential in an M&A deal, in the interest of both sides.
The next topic of the interview was the overlap of other clauses that have an impact on taxes, and if the equity guarantee also covers the tax provision and the tax liability. In general, all tax issues should be covered in the balance sheet, and taxes are also part of the equity guarantee. Mr. Haarmann gave the advice to make always clear under which guarantee the taxes fall, to prevent further problems or discussions regarding this point.
Next up for discussion were tax audits, and how problems between seller and buyer can arise even after a done deal. From a legal point of view, the buyer has the say. But under certain circumstances, the seller can have an interest in also having influence, which is not in the interest of the buyer. Therefore, this problem can only get solved through negotiation, and will get decided with the fact who has the stronger position, buyer or seller.
Mr. Haarmann next addressed whether the wording in an M&A deal obligates the parties to initiate a tax audit immediately works after closing. Most of the time it works, but it depends strongly on a good relationship between the companies and the tax auditor, who has also an interest in clearing these kinds of question.
The next point of the interview was about the changes in tax law, and the difficulties more aggressive tax structures bring to M&A deals. Mr. Haarmann explained the impact of the new DAC 6 initiative, and in general the impact of new and aggressive tax structures. As a strategy to prevent problems with aggressive tax structures it makes sense to ask for aggressive tax structures to be fully disclosed and warrantied as within the law—not only to sewre the economics of the deal but also to prevent high fines or even criminal liability.
The importance of possible insurance against the risks of these aggressive tax structures was pondered, and it was mentioned that an insurance is possible—with the limit of criminal activities.
After that, Mr. Haarmann explained that it is possible to agree on a guarantee on the existence of an APA. He explained that it is very expensive for the company, but gives also a certain security to the company.
To close the session, Mr. Haarmann explained the difference between commercial arbitration and tax arbitration.
Dr. Nils Wighardt,
McDermott Will & Emery