M&A and Transfer Prices: Post-Merger Integration

published on 10 November 2021 | reading time approx. 2 minutes

Transfer pricing aspects are an integral part of tax due diligences, but after the company has been acquired, the report usually ends up in a drawer. During the process of integrating the acquired company, intercompany transactions are mainly negotiated in accordance with the political agenda.

However, the transfer pricing aspects in the context of post-merger integration are as multifaceted and individual as the company itself and a proactive approach pays off, at the latest in the next tax audit. 

Group structure

When a company or a corporate group is acquired, many questions arise about compatibility with existing transfer pricing policies and the degree of integration into the acquirer's intercompany charging scheme.

• Can the business model be integrated or is the isolation in a subgroup preferable?
• Which functions does the newly acquired company already perform itself and which of them are therefore not subject to charging?
• Is vertical integration into the existing value chain planned?
• Are there any redundant structures which should be merged?
  

Although such issues are, of course, tackled from a business perspective during the M&A process, the tax implications usually take a back seat. 

Exit strategy

Not all alliances last forever. If the acquisition turns out not to fit the concept so well, the hasty leveraging of synergies and a high degree of integration can become disadvantageous in the medium term. Merged functions have to be separated again, functions outsourced to service centres have to be retrieved, and the value chain has to remain operative on a stand alone basis. Therefore, a possible exit strategy should be considered, when it comes to the integration of a transfer pricing systems, especially to mitigate the costs and effort arising from multiple changeovers.

Impairment

Allocations of costs for group functions in particular are often made very roughly. Either all imaginable costs are allocated to the newly acquired entity irrespective of the benefit.  Or the acquisition is exempted from all typical group charges in order to become a success story. Both scenarios entail double taxation risks. In the first case, deduction of business expenses may not be granted if, for example, the ERP system subject to cost allocation is not used by the new entity. In the second case, it is questionable whether the allocation of costs at the level of other group companies is appropriate.

The effect of intercompany transactions on the intrinsic value of the acquisition should not be underestimated. For example, the planning data on which the purchase price was based, can quickly become obsolete if a small company with lean administration is integrated into a larger corporate group and the costs of the group affiliation were underestimated.

Especially in the case of acquisitions from other corporate groups, the share of external and intra-group sales may significantly shift after the acquisition and the original sales forecast becomes outdated.

Impairments on the investment resulting from the aforementioned or similar neglected matters are annoying, but can easily be avoided if transfer pricing issues are kept in mind.     
  

Compliance

Once the strategic decisions have been made and the transfer pricing logic has been determined, the compliance effort should not be underestimated. Firstly, the relocation of functions or the change of transfer pricing methodology involve one-off documentation requirements. Secondly, in respect of the ongoing transfer pricing documentation, it should be decided whether the well-tried compliance system (e.g. documentation process, master file, transfer pricing guideline) is transferable or whether new standards must be created.

Conclusion

After a company or a corporate group has been acquired, it is advisable to put transfer pricing  on the agenda of post-merger integration early on. This can lead to a reduction of tax risks, saves restructuring frustration and is nonetheless required to fulfil legal obligations.