Tax Issues in Business Combinations

Accounting rules under IFRS and US GAAP require the use of one specific accounting method, the purchase (acquisition) method—for almost all types of business combination transactions. These accounting rules require the buyer to consolidate the newly acquired subsidiary, while the seller records the disposal of the subsidiary, as described in previous chapters. However, tax rules may be different. Depending on the tax structure of the transaction, the seller may or may not be required to pay taxes following the transaction, while the buyer may or may not receive a step-up in the tax basis of the acquired assets. Furthermore, the tax structure of the transaction has a significant effect on the recognition of deferred tax assets and liabilities on the acquirer’s balance sheet. In this chapter, we discuss some tax aspects of business combinations. We distinguish between taxable and tax-free transactions, between the book basis and the tax basis of an asset, and between a step-up and a carryover in the tax basis of an asset in a business combination. We also discuss the recognition of deferred tax assets and liabilities and the status of acquired goodwill in business combinations.