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Deal breakers

A survey into the hidden VAT cost on merger & acquisition activity across Europe


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Despite turbulence in the global credit markets the volume of Merger & Acquisition (M&A) activity worldwide continues to grow. In the first six months of 2007 corporate and private equity backed M&A activity globally increased by 50 per cent to $2,780bn (£1,390bn).

We have witnessed a surge in "mega-deals" in both corporate and private equity and predictably, as the size of transactions has increased so have the transaction fees and the associated VAT.

Given this trend, it is no surprise that tax authorities internationally are paying more attention to the VAT implications of such transactions. This interest is evidence by steady growth in litigation on M&A VAT matters in individual EU member states and the European Court of Justice - most notably the Kretztechnic (C465-03) and Investrand (C435-05) cases.

It seems, therefore, that tax authorities across Europe are seeking to understand the structure of M&A transactions and are increasing challenging the approach adopted to VAT recovery on transaction costs. This is causing delays and in some cases additional funding for deals is required as a result.

Some of the findings may prove surprising for those who assume VAT on transaction costs is always recoverable. For example, in almost two thirds of the countries surveyed local VAT authorities have challenged VAT recovery on M&A costs leading to restricted VAT recovery.

Against this backdrop Deloitte has conducted an international survey on M&A VAT issues with a view assessing how corporate and private equity deal makers can optimise the VAT position on M&A activity.

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