6.4 Viewed from the perspective of the Buyer he can bring the full power of the tax covenant to bear if a deferred tax asset is understated, but he has to rely on the protection of the warranties if a deferred tax liability is underprovided. 6.5 We therefore need to consider whether tax covenants should address deferred taxation in a different way: should we treat deferred tax balances, whether asset or liability, on a consistent basis? 6.6 The answer to this question should be, in our opinion, a guarded but certain “yes”. It is our view that the concentration on the cash flow effects of tax payments can be an elegant means of ensuring equity between the two parties: there is an absolute certainty to cash receipts and payments which is comforting. Having said that, it is rather odd that claims can be made under the tax covenant for a loss, when there has been no reduction in the net assets of the Company: for most purposes it is the reduction in the value of the Company or in its level of the net assets which is the measure of loss that might be expected. If a corporate tax provision is found to be understated, it is very likely that the deferred tax provision will be overstated by the same amount, if it relates to a timing adjustment. 6.7 We fully recognise that there are some capital-intensive companies where the timing of tax payments is a matter of some importance, and where a switch from deferred tax provisions to corporate tax liabilities is a material issue. However, there are very many corporate transactions where this is not so: the business is not capital-intensive and the drivers of value have been the profit forecasts, with the multiplier being coloured by the extent of the asset backing. In such cases it matters little in terms of value what the split is on the balance sheet between the corporate tax liability and the deferred tax provision: a transfer between the two would not have had any appreciable impact on the price or the value received by the Buyer. 6.8 This is a matter on which this publication is engaged in missionary work: we believe that the burden of post-completion record keeping when there are claims under the tax covenant in respect of timing differences is likely to be totally disproportionate in the majority of cases. In such cases we are of the view that there should be a different approach to the tax covenant. We have included 2 samples of tax covenants prepared on the basis that timing differences are ignored. These two samples relate to deals with and without Completion Accounts respectively. The Buyer does not claim under the tax covenant if an increased tax liability now is effectively matched by an identical saving some time later. 6.9.1 the protection for the Buyer is now extended, so that a claim can be made if it is found that a provision for deferred tax is insufficient in the Last Accounts or the Completion Accounts; 6.9.2 the cost of confirming the existence of corresponding savings is now much reduced, to the significant benefit of the Covenantors: many corresponding savings, in respect of timing differences, will be a thing of the past; 6.9 The main effects of this change are:
42
Made with FlippingBook Learn more on our blog