Joe Biden’s proposed tax hikes could lead to a spike in cross-border M&A activity

May 10, 2021

The Globe and Mail reports that U.S. President Joe Biden’s proposal to reverse the 2017 Tax Cuts and Jobs Act could lead to a surge in cross-border M&A activity as companies will try to cash out before the new tax rates are implemented.

Biden’s strategy involves raising the corporate income tax rate to 28% from 21% and increasing the levy on long-term capital gains from 20% to 39.6% for taxpayers whose income is above US$1 million.

Speaking to The Globe on the consequences of a proposed tax hike, Torys New York lawyer Michael Horwitz said a rise in capital-gains rates could actually lead to a slowdown in M&A activity next year.

“If higher capital-gains rates become effective [next year], it would increase pressure on family-owned businesses to complete anticipated or pending deals in 2021 ahead of the increase,” Michael said.

Co-head of Torys M&A Practice Michael Amm noted that the majority of acquirers have already budgeted for Biden’s new tax rates.

“When acquirers would do a [discounted cash-flow] evaluation, yes, that DCF will be lower by definition ... but I think anybody who’s trying to do a significant strategic transaction is probably not going to worry about that too much,” Mike said.

Michael added that a reduced free cash flow could deter debt-backed deals—as a decrease in returns could delay payments on credit facilities.

He also weighed in on the impact of the “Buy America” movement which acts as a stimulus for national job creation, particularly within manufacturing.

“We have Canadian clients who are looking to expand into the U.S. in industries that are heavily subject to [Buy America] requirements,” he said.

“For a Canadian company that’s participating in that to say, ‘I’m going to get bigger in my Montreal manufacturing plants and just ship everything down to the U.S.’ won’t work because you won’t meet Buy America requirements.

“The Buy America requirements are really onerous, and they’ve been increasing steadily through administrations.”

New York tax partner Peter Keenan noted that other countries such as Ireland, Singapore and Luxembourg have implemented a similar low-tax model to Biden’s proposal.

“There are a lot of countries [where] a fair amount of their economy is based on being a low-tax jurisdiction and serving as a headquarters space or a holding-company space,” Peter said.

You can learn more about Torys’ M&A and tax work by visiting the practice pages.

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