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Driving value across the deal

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This session involved a panel discussion highlighting the current deal landscape and discussing anticipated trends moving into 2019 and beyond, including new demand for joint ventures/partnerships as well as the impact of tax reform on M&A planning.

Veröffentlicht in: Wirtschaft & Finanzen
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Driving value across the deal

  1. 1. Brought to you by the KPMG U.S. Manufacturing Institute #KPMGauto Tax executive forum panel 14th Annual Automotive Executive Forum at the North American International Auto Show
  2. 2. 2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c 2 14th Annual Automotive Executive Forum at the North American International Auto Show © 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 #KPMGauto CPE Code: ce7c Moderator and panelists Moderator Katy Chapman Managing Director, M&A Tax KPMG LLP Phillip DeSalvo Principal, M&A Tax/Partnerships KPMG LLP Ron Dabrowski Principal, Tax, WNT KPMG LLP Lenny LaRocca Partner, Financial Due Diligence KPMG LLP Panelist
  3. 3. Marketplace update
  4. 4. Joint venture considerations
  5. 5. Executive summary – Overview of partnerships
  6. 6. 6© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Benefits of investing in a tax partnership — Flexibility in issuing varying types of equity interests to sponsors or management, including profits interests. — Tax-deferred contributions are not subject to the control requirements found in corporate context. — Partners are not required to use the same percentage for each item of partnership income or deduction in determining a partner's ratable share. Partnerships may make special allocations of various items determined at the entity level in different percentages, subject to the economic relationships of the partners. — No federal entity level tax on partnership income. Partners pay tax at their applicable tax rate based on their allocations of income from the partnership, whether or not any distributions are made by the partnership. Income allocations increase a recipient’s tax basis in its partnership interest and may allow distributions to be received tax free or reduce gain on an eventual sale of the partnership interest. — Cash distributions are generally tax deferred to the extent of the distributee partner’s tax basis in its partnership interest. — To the extent that the amount of cash distributed exceeds the distributee partner’s basis, gain will be recognized and the basis of partnership assets may be increased provided there is an IRC Section 754 election in place — The purchase of a partnership interest allows the purchaser an opportunity to obtain a stepped-up tax basis in the partnership’s assets, which can reduce the purchaser’s prospective cash tax liabilities through increased depreciation and amortization deductions. — Generally, a prospective buyer will pay a premium for the ability to obtain a stepped-up tax basis in acquired assets (e.g., corporate asset sale, partnership asset sale, or sale of partnership interests versus a sale of corporate stock). — Note: If the anticipated monetization strategy is a public equity offering, increased value may also be realized by a partnership's historical owners through the use of an umbrella partnership C corporation ("UP-C") initial public offering. Formation: Flexible Economic Ownership Operation: Single Level of Tax & Tax Deferred Distributions Disposition: Increased Value Delivered to Buyer
  7. 7. 7© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Legal entity tax filing comparison (By number) 2.54 2.48 2.22 2.21 2.52 3.57 3.88 4.01 - 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Millions Tax Year Legal Entity Comparison by # - 2004 to 2016 Corporations vs. Partnerships Corporations Partnerships Source: Internal Revenue Service - Tax Filings Data by Entity
  8. 8. Common issues with operating joint venture
  9. 9. 9© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Common issues with operating Joint Ventures: Inaccurate historical tracking of Section 704(c) Inaccurate historical tracking of I.R.C. Section 704(b) and tax capital accounts In particular, where the partnership owns I.R.C. Section 704(c) property, detailed tracking of the capital accounts is necessary in order to properly allocate items among the partners. Pro rata allocations of partnership items based on the number of units held by the partners is a common pitfall that can lead to inaccurate reporting. Partner A takes an initial I.R.C. Section 704(b) capital account of $150 and a tax capital account of $50. Partner B takes an initial I.R.C. Section 704(b) capital account of $150 and a tax capital account of $150. — Pro rata allocations under these facts will generally be incorrect. — Tracking of the partners’ capital accounts differs if the remedial method is used as opposed to the traditional method (or traditional with curative allocations) for I.R.C. Section 704(c) purposes. — Incorrect tracking of the partners’ capital accounts will generally result in incorrect partner allocations and may impact the accurate reporting of future transactions. — Historical allocations will be increasingly scrutinized under the new CPAR audit regime. Partner B Operating Partnership Partner A 50% Interest 50% Interest $150 cash Amortizable Intangible: $150 FMV $50 tax basis
  10. 10. 10© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Common issues with operating Joint Ventures: Issuances of profits interests or options Partner B Operating Partnership Partner A Services Employee Profits Interest Issuances of profits interests or options Analysis of the terms of the underlying agreements and the timing of issuances is required in order to report the proper tax treatment of issuances of profits interests or options to acquire an interest in the partnership. The partnership will often desire and may be required to revalue the partners’ I.R.C. Section 704(b) capital accounts in connection with the issuance of a new partnership interest (including partnership options) as depicted above. Analysis may be required to support the position that the newly admitted partner did not receive a capital interest in the partnership, and therefore taxable income as a result of the issuance. It is impermissible for an individual to be both a partner and an employee of a partnership for federal income tax purposes. Lists of new partners should be reviewed every year and consideration should be given to the proper income tax treatment of items (e.g., compensation versus guaranteed payment).
  11. 11. Common issues with joint venture distributions
  12. 12. 12© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Common issues with joint venture distributions: Non-pro rata contributions and distributions Non-pro rata contributions by partners and non-pro rata distributions from the partnership Non-pro rata contributions and distributions are potential “revaluation” events for capital account purposes that can create “reverse” I.R.C. Section 704(c) layers. These transactions may require inside basis adjustments pursuant to I.R.C. Section 734(b) (e.g., if a partner receives a distribution and recognizes gain under I.R.C. Section 731(a) and the partnership has made an I.R.C. Section 754 election, etc.). These transactions may also trigger ordinary income recapture pursuant to I.R.C. Section 751(b) to the extent the partners’ shares of depreciation recapture and certain other ordinary income items has shifted. If the partnership has an I.R.C. Section 754 election in place and either Partner A or Partner B recognize gain pursuant to I.R.C. Section 731(a), the partnership must make an adjustment to the inside basis of its assets under I.R.C. Section 734(b). Non-pro rata distributions may have the effect of changing the underlying economics of the partnership. Following the distributions, Partner B’s economic investment in the partnership is greater than Partner A’s. To the extent that Partner A’s share of depreciation recapture and certain other ordinary income items has shifted to Partner B, Partner A may be required to recognize ordinary income under I.R.C. Section 751(b). Partner B Operating Partnership Partner A $2M $1M 50% 50%
  13. 13. 13© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Common issues with joint venture distributions: Non-pro rata contributions and distributions (12/31/19) Cash (1/1/18) Equipment Disguised sales pursuant to I.R.C. Section 707(a)(2) Contributions of property to a partnership may be recharacterized as sales of the property if the contributor receives distributions from the partnership that are, in substance, consideration for the contributed property. Distributions received within 2 years of the contribution are presumed to be consideration for the contributed property under Treasury Regulations. The Regulations also provide for several exceptions to the disguised sale treatment, including certain leveraged distributions, operating cash flow distributions, reasonable guaranteed payments, and the reimbursement of “preformation capital expenditures.” Because the above distribution occurs within two years of the contribution of equipment, the cash received by Partner A is presumed to be consideration for the equipment. The contribution may still qualify for nonrecognition treatment under I.R.C. Section 721 if it satisfies the requirements of one of the exceptions for disguised sale treatment found in Treas. Reg. Section 1.707-4, or if the facts and circumstances indicate that the transaction is not in substance a sale. The tax impacts of distributions versus disguised sales may not be the same on the partners’ capital accounts. There may also be a disguised sale of partnership interests between partners, depending on the facts and circumstances surrounding the contribution and distribution of cash in the partnership. Partner B Operating Partnership Partner A
  14. 14. 14© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Common issues with joint venture distributions: Mixing bowl transactions (1/1/18) Intangible Asset with Built-in Gain (12/31/24) Intangible Asset Mixing bowl transactions pursuant to I.R.C. Sections 704(c)(1)(b) and 737 Under I.R.C. Section 704(c)(1)(b), a partner who contributes property with a built-in gain or loss at the time of the contribution must recognize gain or loss if the property is distributed to another partner within 7 years of the contribution. Under I.R.C. Section 737, a partner who contributes appreciated property may be required to recognize gain upon the receipt of distributions of other property within 7 years of the contribution. In general, because the above distribution occurs within seven years of the contribution of the same intangible asset, Partner A is required to recognize any remaining built-in gain that was inherent in the asset at the time of the contribution upon the subsequent distribution to Partner B. Such a transaction would impact Partner A’s capital accounts and I.R.C. Section 704(c) profile. Partner B Operating Partnership Partner A
  15. 15. Up-C joint venture: Staged business combination considerations
  16. 16. 16© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Up-C joint venture transaction overview PubCo 2PubCo 1 Public 2Public 1 Business 1 Business 2 (Target) Business 3 (Unwanted) UP-C Joint Venture Profile — PubCo 1 transfers Business 1 to New LLC HoldCo in exchange for Due to certain operating synergies and other business considerations, PubCo 1 desires to acquire Business 2, and in turn PubCo 2 is marketing carving off Business 2 and selling such business to a third party. — In lieu of a typical purchase and sale transaction, the parties agree to form a joint venture to operate Business 1 and Business 2 as a new combined business ("New LLC HoldCo"), in an UP-C structure, benefiting from the partnership structure and increased value delivered to stakeholders due to increased tax basis from prospective taxable unit purchases.
  17. 17. 17© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Up-C joint venture transaction overview (continued) UP-C Joint Venture Formation — PubCo 1 transfers Business 1 to New LLC HoldCo in exchange for common units. In addition, PubCo 1 is named as the Managing Member of New LLC HoldCo. — PubCo 2 transfers Business 2 (Target) to New LLC HoldCo in exchange for common units, which include an Exchange Right characteristic. - Through the Exchange Right, PubCo 2 may put its common units to the partnership, which has the option to satisfy this put with cash or PubCo 1 shares. The right to exchange may be limited by certain lock-up provisions, as well as floors and caps on how many Units may be exchanged in any given transfer. — While not depicted, PubCo 2 retains Business 3 outside of the newly formed joint venture, and has effectively carved out Business 2 (Target) as part of the UP-C Joint Venture. — Note: There may be significant pre-transaction restructuring efforts required by both parties to effectuate the joint venture. PubCo 2PubCo 1 Public 2Public 1 Business 1 Business 2 (Target) New HoldCo LLC Common units (Managing Member) Common units & Exchange Right 1 Business 1 Business 2
  18. 18. 18© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Up-C joint venture transaction overview (continued) PubCo 2PubCo 1 Public 2Public 1 Business 1 Business 2 (Target) New HoldCo LLC Business 3 (Unwanted) Common units (Managing Member) Common units & Exchange Right 2 TRA or similar agreement UP-C Joint Venture Other Considerations — TRA: As part of the transaction, the parties may enter into a Tax Receivable Agreement ("TRA") or similar agreement. The market terms on such agreements may differ from the UP-C IPO TRA sharing percentages (commonly 85% and paid as utilized on a with and without basis). — Section 704(c): Unlike a traditional UP-C and many other joint ventures, the UP-C Joint Venture involves two contributing parties (i.e., each partner is likely contributing built in gain / built in loss property). This puts pressure on the following: - Negotiating agreed upon Section 704(c) methods (e.g., traditional vs. remedial) for each asset class upon formation. - Interaction between Section 168(k) and Section 704(c) in applying the remedial allocation method on bonus eligible assets. — Section 743(b): Application of Section 168(k) on Section 743(b) adjustments and potential impacts to Tax Receivable Agreements.
  19. 19. Tax reform considerations
  20. 20. 20© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Acquisition considerations Acquisition considerations generally Acquisition form — Taxable v. tax-free — Stock acquisition versus asset acquisition - An asset acquisition may result in a stepped-up tax basis in the acquired assets (a portion of the assets which may qualify for immediate expensing under tax reform) - However, in the cross-border context, a traditional asset acquisition is often more complicated and may be impractical under foreign law — Whether to use a holding company structure - May be relevant to repatriation or income tax treaty planning - Capital/Internal financing structure — Maximizing indebtedness and interest deductions is a key consideration of inbound and outbound acquisitions
  21. 21. 21© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Acquisition considerations Use of foreign cash — Whether to use cash of a foreign subsidiary (i.e., cash that cannot be repatriated to the U.S. parent without a tax cost) to make an acquisition. — Note: New section 245A provides an exemption for dividends received from specified 10-percent owned foreign corporations, but there could still be withholding tax costs associated with cash repatriation Post-transaction integration — The form of the acquisition may result in an inefficient ownership structure that requires post-acquisition planning and restructuring. Inversions — An inversion typically occurs when a U.S. corporation changes its place of incorporation or corporate ownership to a foreign jurisdiction with a more favorable tax system. — Authority released on April 4, 2016, combined with the substantial changes due to U.S. tax reform, not only can reduce the benefits of inverting, but also make them more difficult to achieve Acquisition considerations generally (continued)
  22. 22. 22© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Purchase of target stock with no section 338 election Acquisition considerations generally (continued) Target retains its: — Historical tax attributes (e.g., NOLs, etc.), subject to section 382 and other limitations; and — Tax basis in its underlying assets (i.e., no step-up/down to fair market value). Stock purchase with section 338(g) election In a qualified stock purchase (“QSP”) of Target, a section 338(g) election treats the transaction as a purchase of Target’s assets for U.S. tax purposes. As a result of such election: — Target takes a fair market value tax basis in its assets (including the stock of Target subsidiaries); — E&P and tax history of Target is eliminated; and — Additional section 338(g) elections may also be made with respect to lower-tier 80%-owned subsidiaries. If Target is a foreign corporation (and seller not a U.S. taxpayer), a section 338(g) election is not expected to result in any additional U.S. tax cost. Must consider FIRPTA implications with respect to U.S. Sub (including section 1445).
  23. 23. 23© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Stock purchase with section 338(h)(10) election Acquisition considerations generally (continued) In certain QSPs (e.g., Buyer’s purchase of Target stock out of a U.S. consolidated group or otherwise from a U.S. parent corporation, or a purchase of an S corporation), if Buyer and Seller(s) make a joint section 338(h)(10) election, the transaction is treated as a deemed asset acquisition for U.S. tax purposes. As a result of the election: — The selling group (or shareholder(s)) recognizes gain or loss on the deemed asset sale. - Tax basis in its underlying assets (i.e., no step-up/down to fair market value). - Note: Seller may negotiate a “gross-up” payment to compensate for any incremental tax liabilities resulting from the transaction. — Target takes a fair market value tax basis in its assets (including the stock of any subsidiaries). — Target’s historical tax attributes (e.g., NOLs, E&P, etc.) are eliminated. — Additional section 338(h)(10) elections (for U.S. Subs) or section 338(g) elections (for foreign Subs) may also be made with respect to lower-tier 80% owned subsidiaries. — Note: The benefits of making this election (i.e., basis step-up) should be weighed against the benefits lost as a result of the election (i.e., historical tax attributes) and any U.S. tax cost.
  24. 24. 24© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 14th Annual Automotive Executive Forum at the North American International Auto Show #KPMGauto CPE Code: ce7c Acquisition considerations generally (continued) — Under Tax Reform, bonus depreciation was expanded to include a 100% deduction for the cost of qualified property (i.e., tangible depreciable property with a class life of 20 years or less) acquired and placed in service after September 27, 2017, and before January 1, 2023 - Phase down in 20% increments from 2023 to 2026 - Immediate expensing applies not only to “original use property” as under the current bonus depreciation rules, but also to used property if it is the taxpayer’s first use — Note: Immediate expensing is unavailable for goodwill and other intangible property, which remains amortizable under the straight-line method (i.e., pro rata) over 15 years Section 338 and immediate expensing — Immediate expensing provides an incentive for buyers to structure business acquisitions as asset deals or deemed asset deals (e.g., using section 338 elections), particularly for tangible asset intensive targets - But consider whether to elect out of full expensing if it would result in creation of an NOL that would only be usable to the extent of 80% of taxable income - Election to forego full expensing may be made on a class by class basis — Exclusion of amortizable acquired goodwill from immediate expensing impacts tax implications of purchase price allocations — Immediate expensing increases net unrealized built-in gain (NUBIG) uplift in section 382 calculations — May result in increased book tax differences/deferred tax liabilities on opening balance sheet Section 338 impacts
  25. 25. © 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 817205 The KPMG name and logo are registered trademarks or trademarks of KPMG International. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. kpmg.com/socialmedia

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