PwC Transactions Blog

While first indications of economic recovery are appearing, liquidity still stays very high on the agenda of the CFOs and treasurers. As confirmed by PwC’s recent global treasury survey amongst nearly 600 treasurers, there has been a significant jump in the importance of working capital during the crisis and this is expected to last after the crisis. It had been the key trigger to put into practice what we have all known for long. This has lead to several implications for the mergers & acquisitions activity:

Liquidity has a bigger impact on defining deal value

In the current climate, balance sheet items, and more particularly working capital elements are assessed much more carefully by potential acquirers. While working capital levels at deal closing always had been area of concern or even disputes, there is a clear trend to increase scrutiny of the target’s bad debt levels, collectability of receivables and other cash conversion indicators. This also means that treasury and finance are now involved much earlier in the entire deal process, to allow for sufficient time to perform appropriate due diligence on these items, in order to accurately assess deal value.

Focus on implementing working capital changes

Secondly, it has become evident, that working capital levels may change tremendously in a successful acquisition, providing a cash boost instead of a cash drain to the buyer. As such, it has become increasingly common that acquirers are specifically assessing any improvement potential in net working capital. More and more, purchasers are now also seeking to support the financing of the acquisition through a release of excess cash from working capital. Such buyers leverage the momentum of the change of ownership to achieve step changes in the working capital performance.

But it shouldn’t stop with quick fixes. Once new management was able to squeeze initial efficiencies in a post-merger integration phase, it will need to consider the following questions:

• How do we get this into the DNA of the organisation and make it business as usual?
• How do we get from top-of-average to being best-in-class?

At the other end of the table, if there is an opportunity to improve the working capital performance of a firm that is to be sold, we see that vendors are seeking to identify and extract that cash before the divestment.

We do not expect this focus on working capital management to be a short-lived trend. The survey confirms that it is rated as one of the three key areas of focus post-crisis.

Today, more than ever, effective tax management is key in case you are dealing with situations such as:

-        determining a bid price in an acquisition process;

-        reallocation of existing bank debt and intercompany debt;

-        reorganizing your current group structure;

-        understanding  the impact of taxes on your cash position;

-        a complex supply chain with multiple countries and entities;

-        valuation of deferred tax assets;

Effective tax management can result in decreasing the effective tax rate, maximising the use of available tax assets, optimising the existing leverage, improving the cash flow and reducing compliance costs.

Modelling your taxes helps you to better understand, anticipate and further optimise your direct and indirect tax charges and to obtain an improvement of your working capital based on your business plan.

Depending on your needs, such tax model can provide you a fair and better understanding of the tax impact of maintaining your current group/financing structure as opposed to implementing alternative scenarios, allowing you to decide on such restructuring/refinancing scenarios in a more informed manner.

…Hence, tax modelling is an indispensable aspect of financial management.

In times where cash is king the Belgian Government has introduced VAT measures to free up working capital and help companies through the crisis.

Both for companies in a regular VAT refund position and companies in a regular VAT payable position special measures have been taken.

1. For companies in a VAT refund position, the conditions to get a VAT refund on a monthly basis have been eased.

In order to benefit from the monthly VAT refund, a company should now meet following conditions:

- At least 30% of the turnover of the calendar year preceding the request for monthly refund concerns:

• Supplies of goods and services that are exempt from Belgian VAT in accordance with articles 39, 39bis and 39quater of the Belgian VAT Code (amongst others intra-Community and export supplies of goods);
• Supplies of goods and services that are exempt from Belgian VAT in accordance with articles 40, § 2, 1° and 2°, 41, § 1, 2° to 7° and 42 of the Belgian VAT Code (amongst others international transport);
• Supplies of goods and services for which the co-contractant is liable to account for the Belgian VAT due in accordance with articles 51, § 2, 5° and 51, § 4, of the Belgian VAT Code;
• Supplies of goods and services for which the reduced VAT rate is applicable in accordance with articles 1bis, 1quater to 1sexies of Royal Decree n° 20 and headings XXXI, XXXII, XXXIII, XXXVI and XXXVII of table A enclosed to this Royal Decree;
• Supplies of goods and services that are located outside Belgium to the extent that the VAT credit comes from the pre-financing of VAT on these goods and services.

- The VAT credit during the calendar year preceding the request for monthly refund amounted at least to 12.000 EUR.

Companies that want to benefit from the monthly VAT refund, should submit a request with their local VAT inspector. Once the request is approved, the appropriate box of the Belgian VAT return will have to be ticked in order to get a VAT refund.

2. Companies in a VAT payable position that can demonstrate they face financial difficulties as a result of the economical crisis can apply for a postponement of the payment of VAT due.

The Belgian VAT authorities have published temporary measures to allow the postponement of VAT payments with a reduced late payment interest.

This temporary and exceptional measure is aimed at helping companies that encounter temporary financial/economic difficulties (including restricted access to banking credit) and does not apply to companies that were already suffering from financial difficulties regardless of the impact of the financial and economic crisis. The notion “economic/financial difficulties” should be assessed by the VAT Collectors with flexibility. The sector in which a company is active can already give a good indication.

Also foreign VAT taxable persons registered for Belgian VAT purposes (and accordingly registered in the National Register for Enterprises) should be able to benefit from this measure.

The measure will in principle allow the postponement of the payment of the VAT due over the first three quarters/resp. 9 months of 2009, without any penalties and at a reduced interest for late payment of 3% per year (instead of the standard 9,6% for VAT per year).

Taking into account the reduced interest of 3% on an annual basis this measure can be considered an interesting opportunity to free up working capital and help your company through the crisis. Compared to current market conditions, multiple corporates will indeed have to pay higher interest rates if they seek external funding.

To apply for the measure a company should demonstrate the temporary character of the financial difficulties encountered to the local VAT Collector with a duly motivated request. In case the VAT Collector acknowledges the temporary difficulties, the payment of VAT can be postponed for all (or some) periods concerned or an instalment plan can be agreed upon. Depending the case guarantees may need to be agreed upon. The payments should all be made by the end of 2009.

In any case, the measures will only apply provided the periodical VAT returns are filed in due time and the agreed payment terms are applied meticulously.