Cross-border mergers & acquisitions and corporate restructuring have been on a torrid pace. Of the more than $5.8 trillion in global M&A volume in 2021 (itself an all-time record), some $2.1 trillion—more than one-third—were cross-border deals. That is well in excess of the average over the previous decade of $1.3 trillion, a trend that VRC expects to continue.
The pace has slowed modestly in 2022, with roughly a quarter of deals crossing international boundaries in the first half of the year. This let-up is possibly attributable to geopolitical conflicts, most prominently a slowdown in investments from China into the U.S. However, the share of cross-border transactions among what EY calls “closely affiliated countries” has grown sharply, representing more than half of deals in 2022, compared to an average of 42% from 2015 to 2019.
Private equity has significantly contributed to cross-border deal flow, a strong dollar, and robust capital raising by U.S. sponsors. 42% of U.S. sponsor M&A volume went to deals outside the U.S.
Of course, not all cross-border transactions are straight acquisitions by one company or financial sponsor. Some changes in U.S. tax law have been designed to encourage repatriation of intellectual property and associated revenue are the latest examples of tax or regulatory changes compelling companies to move assets around and reorganize.
Additional measures are underway related to the OECD’s Base Erosion and Profit Sharing (BEPS) initiative can be expected to drive further reshuffling as multinationals look to optimize their corporate structures under the new regime.
While the number of deals and entity transfers has climbed, they haven’t gotten any easier to finalize. Complexity around multiparty deals, changing global tax regimes, and the ever-evolving treatment of intellectual property and other intangible assets make deal execution more challenging than ever. This complexity requires bringing the right team to the table to ensure all of the company’s needs are fulfilled, including tax and financial reporting.
A handful of engagements VRG members have helped with in the recent past highlight the challenges of getting cross-border deals done in a complex environment:
In one transaction, a VRG member was engaged by a global software provider to review a prospective go-private transaction. Initially, we performed a high-level analysis and prepared a roadmap of the company’s tax valuation needs for the transaction, giving the company and its advisors the ability to budget for the project and ensure management was fully aware of potential issues. Working hand-in-hand with the company’s tax function, the VRG member assisted with the relative allocation between U.S. and rest of world entities pre-deal. This entailed valuing 40 operating entities that rolled up into 20 reporting units and ultimately pushed down into 200 legal entities composed of entrepreneurial entities, IP holding companies, limited risk distributors, and value-added distributors. As a follow-on to the initial go-private transaction, the team in the following years was tasked with valuing several IP holding companies in connection with cross-border transfers designed to optimize the businesses. Bringing in the right resources at the right time gave the client the most flexibility as they consummated the deal and helped smooth out the deal economics and the accounting, tax and legal issues.
Supporting Arm’s Length Royalty Rates
A high-tech company engaged a member firm to determine appropriate arm’s length royalty rates for intellectual property under U.S. IRC § 482 for transfer pricing purposes.
The project required identification of economic ownership, by reporting unit, of several intellectual property transactions between the U.S. parent and individual reporting units domiciled overseas and for transactions between the individual reporting units. VRG performed a search for comparable licensing transactions of intellectual property within the high-tech industry and developed appropriate support for the royalty rates that would withstand IRS scrutiny.
Collaborating with company management, our team conducted a detailed analysis of the intellectual property and the functions and risks related to the corresponding reporting units and the respective IP transactions and helped the company establish arm’s length licensee and licensor relationships.
In the final analysis, the arm’s length ranges of royalty rates provided a supportable basis for transfer prices between the company’s U.S. parent and multiple overseas domiciled subsidiaries.
An Aggressively Acquisitive MNE
A VRG member was brought in by the tax function of an acquisitive global consumer goods company that needed to establish arm’s length values of certain IP consistent with the OECD Transfer Pricing Guidelines that consisted of a functional analysis of the relevant legal entities under the DEMPE (Development, Enhancement, Maintenance, Protection, Exploitation) framework and a valuation analysis to establish the IP values.
VRG initially conducted a high-level review of the company’s data—with input from the company’s auditors to specify the requirements for a more detailed evaluation under the DEMPE rules.
Ultimately, the member performed a robust valuation of the company’s IP using the DEMPE framework taking into account the relevant DEMPE functions performed by the legal owner of the IP (U.S.), the prior economic owner (AUS), and the future economic owner (HK).
Management had a clear understanding of the requirements and scope of the project before undertaking a full-fledged analysis, avoiding surprises in scope and budget in the process.
Because of its active cross-border M&A docket, the MNE ultimately engaged the VRG member on an ongoing basis.
Believing in Evolution
A VRG member was engaged to assist an international company with material operations in Australia, the U.S., and Singapore in valuing IP being transferred from Australia to the U.S. This IP migration was particularly complex, as the entity being valued started at inception as a contract manufacturer, but over time had evolved into a more entrepreneurial organization.
After properly framing the approach during our pre-planning assessment, the member proceeded to identify the relevant assets owned by the entity and then value the underlying assets. Following this project, we were asked to determine the value of the Singapore entity at creation and the value of assets transferred.
Fielding the Best, Most Accountable Team
In the case studies illustrated here—and, indeed, in every complex cross-border engagement—we take a “best-team” approach. That means while we tap local experts worldwide, we also leverage a senior lead consultant based in the client’s key geographical jurisdiction. That senior lead then establishes and coordinates the project, liaises efficiently with client stakeholders and other professional services providers, and ensures, most importantly, ultimate accountability for the work’s speed, quality, and professionalism.
Complexity cannot be eliminated in cross-border financial transactions involving multiple entities, a thicket of tax laws, and local regulatory considerations. But with the right partners, those with boots on the ground and deep experience navigating complexity, it can be managed and even turned to an advantage.