tax m&a webcast technology sector

Tax M&A Webcast

Technology Sector

January, 2021

US Tax M&A Trends – Tech Sector

Agenda

• Transaction Tax Overview• Exit Readiness:

• Israeli Tax Due Diligence & Structuring Considerations• US Tax Due Diligence & Structuring Considerations• IPO Readiness

• Interview with Laynie Pavio• Client Q&A

Tax M&A Webcast – Tech Sector

Transaction Tax Overview


Transaction tax overview

We guide you through the tax implications of your transaction and help you developalternatives to improve your company’s tax efficiency.

► Divestiture advisory services (sell-sidetransactions)► Alternative transaction structures► Use of existing tax assets► Identify the gain or loss in each taxing

jurisdiction► Utilization of tax losses

► Buy-side transactions► Understand target’s tax profile and potential

material tax exposures► Structuring advice and alternatives to help

improve prospective earnings or cash flows► Highlight opportunities for improved

operational efficiencies

► Business restructuring(internal restructuring, intercompanyaccount rationalization, legal entityrationalization)► Understand the tax impact associated with

realigning legal and operating structures► Identify ways to improve performance and

strengthen your business► Help you eliminate unnecessary tax costs

and inefficiencies► Assist your efforts to realize the value of tax

assets


Tax Due Diligence & StructuringIsraeli Tax Considerations


Israeli Transaction Tax Overview:Exit Readiness: Introduction► Typical types of Acquirers – Technological Entities

► Corporate acquirers (Multinational) – would generally be with the purpose of along term acquisition, investing/operating in the same sector of the acquiror andwith the purpose of combining the Target’s business in the acquirer business.These kind of acquirers are the more common ones.

► Private Equity acquirers – would generally be with the purpose of a short terminvestment, in order to sell the Target with a profit after only few years.

► When a Technological entity is in the process of negotiating a sale, it is important tounderstand the potential acquirer’s profile and its most important criteria / needs whenevaluating an acquisition, sometimes these needs may even constitute a deal breaker.

► After identifying the potential acquirers and their possible criteria / needs whenevaluating a potential acquisition, the Target should prepare appropriately for a futurepossible acquisition.


Israeli Transaction Tax Overview:Exit Readiness: Corporate Acquirers► When the acquirer of an Israeli tech entity is a corporation (usually a

multinational corporation), the acquirer from his perspective is in fact acquiring:► Technology; and► Workforce / Employees.

Usually when being acquired, the Target is still in its first years of operationalactivity and often even has not yet generated significant revenues or profits.

What would a corporate acquirer mostly be interested in (i.e., in the potentialTarget)?

► Workforce – satisfied and committed employees to stay for the long term.

► Protected Technology – including patents protection, intercompany agreements etc.

► Reputation considerations

► Quality of Financial Statements – when the acquirer is a public entity, it is usuallyconsolidates the group’s FS, therefore Target’s results and infrastructure forconsolidation purposes might be crucial, in addition to an appropriate bookkeeping.


Israeli Transaction Tax Overview:Exit Readiness: Corporate Acquirers► Intellectual Property –

The main interest of a corporation acquirer would generally be the Target’s intellectualproperty (“IP”), while in some cases the acquirer would want to keep the IP at theTarget level in others the acquirer would transfer the IP following the acquisition.

Main issues relating to possible IP migration by a potential acquirer for which Targetshould properly prepare:► IP valuations;► Appropriate structure;► How to transfer the funds (received as a consideration for the IP) out of Israel in the

most tax efficient way;► No limitations of transferring the IP (such as OCS/IIA limitations);► Transfer Pricing considerations

► Israeli target becomes an R&D centre (Cost +) – likelihood, how would it work?,ITA might require a profit split, etc.


Israeli Transaction Tax Overview:Exit Readiness: Corporate Acquirers

Main issues relating to keeping the IP in the Target (i.e. in Israel) by a potentialacquirer for which Target should properly prepare:► Corporate Income Tax rates and possible entitlement to benefitted tax rates

according to the Encouragement Law;► Possible risks of the benefitted tax rates;► Applicable tax rates when distributing profits;► Potential combination of the Target’s operations together with the Group’s

operations and sales – without it being considered as a deemed sale of the IP or asa deemed royalties transaction; etc.


Israeli Transaction Tax Overview:Exit Readiness: Corporate AcquirersWhat issues would a corporate acquirer examine relating to the potential Target, andwhich might have an impact on the transaction (or completing it)?

► Compliance issues –► Financial Statements and Tax Returns – submission and statute of limitation;► Day-to-day tax reporting compliance – capital gains, WHT obligations, VAT etc.;► Acknowledgment of any tax rulings obtained and meeting its conditions; etc.

► Legal issues and Legal Compliance –► Legal agreements;► Intercompany agreements and appropriate transfer pricing;► Equity incentive plan; etc.

► Investment Rounds► Past investment rounds made with no exposures► Reverse Vesting► Secondary


Israeli Transaction Tax Overview:Exit Readiness: Corporate AcquirersWhat issues would a corporate acquirer examine relating to the potential Target, andwhich might have an impact on the transaction (or completing it)?

► Tax positions► FIN48 including working papers;► Tax opinions; etc.

► Quality of Financial Statements► Appropriate bookkeeping;► Readiness for future consolidation of results;► Readiness for future implementation of USD regulations, if required; etc.


Israeli Transaction Tax Overview:Exit Readiness: Private Equity Acquirers► When the acquirer of a tech Israeli entity is a Private Equity, the acquirer from his

perspective interested mostly for the following:

► Growth potential – streamlining and improving profitability, sometimes in a shorttime;

► Funding considerations –► How to potentially serve a debt?► How to deduct financing expenses for tax purposes?

► Keeping current management and key officers –► How to keep management and key officers in the most tax efficient way?;► Transfer of management to a new holdings entity; etc.


Israeli Transaction Tax Overview:Exit Readiness: Private Equity Acquirers► How to prepare to a potential acquisition by a Private Equity acquirer?

► Have the ability to increase revenues and profitability (in the shortest period of time, as possible);

► To have an efficient and convenient structure for future acquisition;

► To have a satisfied and committed management to stay for the long term; etc.


Tax Due Diligence & StructuringUS Tax Considerations


Purpose of tax due diligence

► Identify cash tax exposures that could be inherited by Buyer► Recommend steps to protect against the above liabilities

► Indemnity, purchase price adjustment, escrow, etc.► Confirm assumptions built into the structuring proposals► Validate assumptions (e.g., NOLs, amortization) built into financial model and any

limitations► Recognize steps to be taken pre-closing or as a condition to close► Post-closing processes► Evaluate Target’s tax function► Identify planning opportunities


Exit readiness – US tax considerations

► Remote sales – economic nexus for sales tax &State income tax (direct model)

► Contractors – worker classification► Consolidation of FS

► Stock based compensation expenses – impact on US TPand expense allocation

► Incentivize key employees:► Ongoing considerations – ISO benefits - qualified

plan, section 409A; and► Consider transaction impact for option-holders

► Heavily invest in R&D – incurring NOLs and eligible for R&D taxcredits

► SaaS companies - advance payments, application of USrevenue recognition rules

► Deferred revenues – revenue recognition & treatment in assetdeals

► Investment rounds – limitations on the utilization of NOLs anddifferent types of equity instruments.

► Growth through acquisitions – treatment of transactioncosts

► Intercompany model – classification under the US SoftwareRegulations and US WHT

► Supply chain considerations – TP arrangements► Direct/indirect sales risks – PE considerations (including nexus)

and BEAT (for larger groups)► I/C balances – imputed interest & US WHT

I/C transactions & US WHTIncome tax items

Consider impacton purchaseagreement

& business deal

Contractualprotections

Employees & equity incentivesNon-income tax items & other! US parent structure - some Israeli companies are incorporated (or later on restructured) using a US parent structure. Such structure may

create significant adverse US tax consequences and risks, consequently requiring in depth analysis as to mitigation steps associated withsuch risks and potential restructuring to create a more tax efficient structure


SPA Review & Contractual Protections

► Tips for SPA review

► Recommend on appropriate tax representations and warranties in the purchaseagreement (PA) based on detailed TDD and transaction structure

► Tax reps. to survive for the applicable statute of limitation plus 90 days► Review definitions of working capital, indebtedness, current liabilities, taxes, etc.► Recommend on other contractual protections in connection with historical tax

exposures.► For example - escrow, PP reductions, right of set-off, etc.

► Recommend on broad tax indemnity for pre-closing taxes (depending on deal type),including:

► Specific tax indemnity for risk related transactions/areas► Review other tax related provisions such as:

► Cooperation on tax matters, straddle period definition, tax treatment oftransaction, PPA related sections, withholding tax, tax reporting procedures, taxelections, etc.


Type of transaction structures

Nontaxableassetacquisitions

Nontaxablestockacquisitions

Stock

TaxableTaxablestockacquisitions

Nontaxable

Asset

Taxableassetacquisitions


Stock VS asset purchase

The relative importance and influence of taxes in a particular transaction depends on anumber of factors related to the structure and economics of the deal and the nature of thebusiness being acquired (legal entity classification). Focus on structure/nature of the deal:► Stock vs. Asset Purchase

► Tax attributes and income tax exposures carry over in a stock purchase but typically do not inan asset purchase (or deemed asset purchase)

► Tax elections could be available to “convert” a stock acquisition to a deemed asset purchase for taxpurposes

► Beware of impact of management rollover on tax step-up

Asset Deal Stock Deal• Acquire certain assets and liabilities

• Step-up in tax basis

• Often more difficult from a legal and operationalperspective

• Buyer solely inherits historical non-income taxexposures

• If Target is anticipated to have material deferredrevenue at closing, need to consider treatment ofdeferred revenue.

• Acquire entity and everything contained withinentity

• No step-up in basis for tax purposes; taxdepreciation and amortization continue

• Often easier for non-tax reasons

• Buyer inherits historical income and non-incometax exposures


US Tax Modelling & StructuringValue of tax modelling & common misperceptions


Tax structuring – items examined by US acquirers

Initial considerations

► Understand Seller’s tax position, structure and attributes

► Evaluate ability to achieve a tax basis step-up (whole or partial) in the underlying assets

► Provides additional depreciation/amortization deductions that can reduce cash taxes

► Evaluate location of debt to maximize tax benefit of interest deduction to reduce cashtaxes and mitigate cost of cash flow

► Address management equity investments/incentives

► Coordinate with legal and other advisors

► Create tax efficient repatriation valves (to avoid Israeli/non-US WHT)

► Considerations relating to product and business integrations to avoid US WHT on I/Cpayments


Modeling cash taxes – US buyer’s view ofcombined enterpriseAdjustments need to be made to GAAP/book income in order to calculate cashtaxes. Common book-tax differences include:

► Amortization (goodwill / identifiable intangibles)

► Depreciation (buildings, furniture and fixtures, computers, etc.)

► Interest expense

► Book accruals (accrued salaries, bonus, vacation, etc.)

► Contingent liability reserves (environmental, restructuring, pension)

► Deferred revenue

Common misperceptions

► Target’s book/effective tax rate equals target’s cash tax rate almost never

► Transaction expenses are fully deductible unlikely

► Target’s pre-closing NOL available without limitation to offset post-closing taxableincome on a worldwide basis applicable limitations

► Post-closing interest expense is freely available as a shield against taxable incomemultiple limitations may exist

IPO ReadinessKey focus areas, risks and opportunities

IPO Readiness General Tax Considerations

Why does tax planning need to be a prioritythroughout the IPO process?

What are the tax considerations on the IPOstructure?

Tax function outsourcing and optimization

• No one-size-fits-all solution• Need to undertake extensive tax due diligence to

identify any cash tax exposures• Unfortunately, the tax implications can alter the

structure of the IPO• The company’s tax posture will be covered in the IPO

prospectus• Effective tax structures and reporting are key

(transparency)• You will need to establish or improve your tax

function and infrastructure so they are bothappropriate for public company status. The followingtasks should be achieved:

• Minimize your company’s effective tax rate• Establish a tax-efficient structure and assess

local incentives• Develop and improve your procedures to

review tax issues• Manage tax risk and controversies

• Review employee compensation & benefits, workerclassification issues and incentive stock option plans

• Identify and quantify historical tax exposures• Support with S-1 preparation and reporting• Compiling attributes and key metrics to support

prospectus or other reporting needs• TRAs – tax savings for pre-IPO owners

• Ensure that tax assets, such as tax losses carry forward,are not lost

• Steps taken during reorganization do not trigger transfertaxes or other taxes

• Restructuring to simplify or optimize the currentcorporate structure

• Location of head office/listed vehicle – WHT & taxefficiency of profit repatriation and income pooling.

• Amendments to existing or establishment of new annualincentive plans (as a result of changes to managementor the board of directors)

• Worldwide structuring and modelling, review of transferpricing methodologies and supply chain, including areview and update to the following:

• Intercompany agreements• Transfer pricing studies/documentation• Tax opinions and technical tax memorandums• Tax rulings

• Review the company’s indirect tax procedures andhistorical exposures


Questions?

tax m&a webcast technology sector

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