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How To Tackle Oil and Gas Company Tax Challenges During an Acquisition
In the late 1800s, John D. Rockefeller built Standard Oil into the oil and gas industry’s leading company through a strategy that included buying up its competitors. Since then, mergers and acquisitions (M&A) have been a constant theme in the industry.
M&A activity has ebbed and flowed over time, with a recent increase in activity in the third quarter of 2018 following a previous lull, according to a report from PricewaterhouseCoopers (PWC). However, whether M&A is on an uptick or not, oil and gas professionals must always be prepared for M&A to ensure smooth integration of new business units, subsidiaries or companies following such activity.
In particular, excise tax professionals have huge challenges after a merger or acquisition, from what the best approach is to handling tax management system data migration, to managing new and complex licensing and registration requirements now that the company operates in new jurisdictions. In the end, it all boils down to one thing: How do we remain compliant?
The Challenges For Excise Tax Professionals
Tax Management System Migration
The first thing a company needs to consider after a merger or acquisition is how they’re going to handle the integration of tax management systems and potential data migration issues. When doing these business transactions, there will usually be a temporary services agreement developed that includes use of the non-surviving entity’s tax management and other IT systems for a certain period. After the temporary period expires, the company that acquired the unit needs to pay a vendor fee if they wish to continue using these systems – a fee that can be as high as millions of dollars. Put simply, that means that once the acquisition is completed, tax professionals are under the gun to integrate the data from the acquired unit’s systems into their own – or face significant financial penalties.
Yet, these systems vary greatly between companies, making migration complex – especially if those hired to do the migration are not tax experts. Professionals must ask themselves questions like what enterprise resource planning (ERP) they will use if they have one, and, ultimately, how it will all tie together. And, if completely manual processes are in place on both sides, these professionals will be left wondering how they will get all of this implemented while dealing with the other financial and technical issues that come with a merger.
New Licensing and Registration Requirements
Another challenge that might arise with a merger or acquisition is business expansion into new regions. To continue to do business in those areas, that company will need to ensure its firm is registered and has the proper licenses for those locations. This is complex as each state is very different; without experience it can be daunting to know where to begin and which licenses are required.
Finally, in a merger or acquisition, there is also a high probability that the acquired business unit will work with different suppliers, customers and other counterparties than the present company. The challenge with this is tax rates and responsibilities are dependent on where the company and its counterparties are registered, and what jurisdictions the products pass through as they are delivered to and from counterparties. If a business’s tax professionals don’t know, or have the wrong information on their counterparties, all parties could be liable for underpaying (or overpaying) excise and other taxes, or they might find themselves facing financial penalties.
Best Practices During a Merger or Acquisition
There are certain steps oil and gas companies can take to ensure a merger or acquisition goes smoothly.
Get a Head Start
Ensure that tax professionals are part of the acquisition planning process as early as possible to get a head start on tax data migration, understand new registration and license requirements and determine who new counterparties are. This can help assess whether additional temporary resources or permanent resources will be needed at any point.
Develop a Comprehensive Plan
Meet with the tax professionals at the new business to develop a data migration plan, confirm locations where they are doing business, and the counterparties they work with. Contact regulatory authorities to secure any required licenses or registrations in new jurisdictions as needed. Also prepare a plan to normalize master data from the acquired systems to the target filling systems.
Automate with Cloud-Based Excise Tax Management
Using a SaaS-based solution to manage taxes can help streamline compliance and is a must as a business grows in complexity. For example, when a jurisdiction rule or form changes the system automatically updates, helping to increase accuracy and reduce risk. It can also help manage required documentation, as well as get tax and other forms filing-ready. There are a myriad of other benefits that real-time, scalable automation provides, allowing both tax professionals and the IT department to spend time on other more strategic tasks.
It is a fact that mergers and acquisitions in the oil and gas industry will always come with challenges and change, but there are ways to effectively manage tax challenges. Combining tax management systems, understanding new licensing and registration, and knowing the new counterparties can all be barriers oil and gas companies face during a period of M&A activity. However, with so much else to take care of, tax management shouldn’t slow a company down. By ensuring all critical parties are involved in the planning process early on, developing a comprehensive plan to migrate tax systems and integrate tax information, and using a cloud-based solution to automate and manage excise and other tax processes, businesses can focus on the bigger picture and ensure they’re remaining compliant.
John R. Beaty II is vice president and general manager of Avalara Excise. Avalara helps companies of all sizes achieve transactional tax accuracy for their indirect tax requirements. Beaty has over 22 years of process technology consulting experience in the petroleum industry and 30 years of team development and organizational leadership, as well as an eight-year enlistment in the United States Marine Corps. He graduated from Texas A&M University with a bachelor’s degree in management.
About Avalara Excise
Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, ecommerce, and other financial management system providers, Avalara delivers cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, excise, communications, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in the U.K., Belgium, Brazil, and India.