How pillar two raises the bar for tax teams in M&A transactions

When a company undertakes an acquisition, tax leaders must manage an exceptional set of hurdles. Imagine grappling with disparate tax data scattered across incompatible systems in two distinct organisations. Factor in divergent processes, technology choices, and the looming uncertainty surrounding compliance postures – particularly those of the acquired entity, which might not align with the acquirer’s perspective. This intricate web of complexities demands meticulous attention and strategic foresight from tax leaders.

Still, the acquiring organisation needs to be ready to meet compliance obligations and complete provisioning tasks almost immediately post close. Developing a plan for tax from the moment the transaction is agreed and making good use of the period from announcement to deal close will be vital for success.

Now, consider the added headache of pillar two compliance and the new data requirements these rules create. Tax teams may already be straining as they try to ensure they have the granular data and the systems they need to make accurate tax calculations at the entity and jurisdiction level, as pillar two demands. New global minimum tax requirements clearly add complexity and urgency to the tax team’s mandate, locally and centrally, in any merger integration process.

Some acquisition accounting practices that were common in the past may no longer be sufficient, particularly with regard to the handling of purchase price accounting. Accounting adjustments such as goodwill amortisation may not be recognised for minimum tax calculations, so these need to be organised and allocated carefully post merger to allow for accurate effective tax rate (ETR) calculation under pillar two rules. Similarly, deferred tax assets and liabilities in a merger need to be assessed to see how they might interact with, or change, top-up tax obligations.

All of this creates additional systems requirements for the combined organisation. Finance and tax need to be able to separate certain values for book and tax purposes. If legacy systems from one side of the merger or the other do not make this easy, the tax team may, at least initially, be using cumbersome manual processes, which add to the extra work that already comes with an acquisition and subsequent integration.

Through 2026, many companies intend to rely on the transitional safe harbour provisions of pillar two. But a merger can affect the ability of a company to meet the safe harbour requirements in a given jurisdiction. It could put a company above the minimum revenue or income thresholds, for example, or merger-related adjustments could impact the simplified ETR calculation for the transitional safe harbour.

The big picture is that you can no longer simply take tax calculations from an acquired entity and add them to what was already being paid in the same jurisdiction. The calculation of the acquired company’s corporate income tax could affect the top-up tax. If you have a French entity in the acquired company and a French entity in the existing company, now you need a new calculation for France as a whole. Having the right data readily available is vitally important to accurately assess pillar two obligations.

In Deloitte’s work with multinationals that are going through mergers, several principles have emerged that can help tax leaders to organise their approach:

• First, it is important to gain visibility into the organisation you are acquiring, and to do so as soon as possible.

• Second, the tax team should build smart, preparing for pillar two as new systems and processes are established for the combined organisation.

• And finally, tax leaders should seize the moment and recognise that mergers offer a prime opportunity to upgrade systems, enhance technology, and pursue changes. These upgrades, while always necessary, are even more critical now due to the demands of pillar two compliance.

Pre-close tax due diligence often fails to address all the tax-related questions. The deal decision is rarely a tax decision: tax is the tail unlikely to wag the dog. When a deal is announced, though, it becomes urgent to gather information.

Integration planning requires proactive collaboration with key stakeholders, including IT and finance, to effectively address tax requirements. Tax leaders should move quickly to engage with them. Tax will want visibility into how processes are organised in the entities being acquired, what the reporting structure looks like, where data resides in their systems, and which bolt-on software modules they use. The goal is to build knowledge but also to advocate for what tax needs and to explain how tax benefits the organisation by, for instance, mitigating cash taxes and resource demands. The period from deal signing to deal close is valuable.

Despite limitations on data sharing and system integration before a merger closes, it is crucial to start the learning process. Tax leaders should prioritise understanding the structure of the acquired company’s tax function and leverage any permissible data requests strategically to gain valuable insights. They can have conversations about the acquired organisation’s tax positions, assessing how they align with internal views and how they may impact compliance risk.

Priority topics should be identified. Some may, in fact, emerge from the diligence process. A key concern for pillar two is likely to be the quality and availability of granular tax data, at the entity and jurisdiction levels.

It is worth pointing out that companies actively moving forward with their pillar two transition – addressing data needs and pursuing standardisation – will be better positioned to integrate acquisitions. Companies that only do occasional deals or smaller transactions might be able to get through the merger, even if their pillar two compliance preparations are lagging. But any company that is a serial acquirer will benefit greatly from having its own preparations for global minimum tax compliance well mapped and making progress to quickly absorb the additional burden that will come their way.

The more extensive data requirements ushered in by global minimum tax initiatives should inform the choices made by tax leadership during M&A planning and execution. Centralised insight and control over tax processes and decisions become more important as full pillar two compliance requirements come into effect. The value of data and process standardisation goes up.

Tax has historically been a receiver of data, not its owner. As new processes are created during a merger, there is an opportunity to more fully map key sources of data and redesign their organisation. Enforcing full documentation of the processes that are being established or preserved for the combined organisation will likely pay future dividends. To prevent critical knowledge gaps, especially during potential post-merger staff transitions, tax leaders must proactively identify and document key data sources and processes, ensuring no single individual holds exclusive knowledge.

Tax leadership should look on both sides of their deal to identify the best practices that either company has implemented, and these should be embraced by the tax team for the combined organisation. An acquirer does not have a monopoly on good ideas. Wherever tax systems are more robust, they should be preserved and shared. One side may be further along in its pillar two transition. If the acquired tax team has more robust systems, data, or processes for pillar two compliance, those should be built into the new combined tax function.

Mergers are not just about adapting to change but about seizing the opportunity to innovate, implement new approaches, and reshape the tax function for the better as new people come in and others take on new roles. Budget constraints may be loosened for a time as an acquisition is completed and integration moves forward. System upgrades or technology additions that had been delayed might now get fast-tracked.

Tax leaders should seize the moment and advocate for changes to make the integration smoother for the combined organisation and create the more robust capabilities demanded by pillar two. As the merger attracts cross-functional stakeholders to plan the deal execution, there may be unusual opportunities to explain what the tax team needs – and how advancing tax capabilities will benefit the business and foster long-run efficiencies.

Mergers represent a pivotal juncture in a company’s evolution, demanding careful navigation of the complexities and the ability to capitalise on strategic opportunities. Engaging external expertise can provide invaluable support and a broader perspective, effectively enhancing the tax team’s capabilities during this demanding period. Early in the timeline, after gaining some insight during the pre-close period into the challenges that are coming, tax leadership would do well to assess where they have strengths in-house and where outside assistance is going to be most useful.