Transaction tax

Share buy-back tax could have wider impact: EY

The new 1% excise tax on share buybacks contained in the Cut Inflation Act could potentially impact a surprisingly wide range of transactions including special purpose acquisition company (SPAC) liquidations, Ernst & Young tax experts said in a webinar this week.

Under the Curbing Inflation Act enacted last month, publicly traded companies starting next year must pay a 1% tax on the fair market value of shares over $1 million. they redeem during a taxation year. The tax can be offset by stock issuances, including stock options issued to employees.

In the simplest scenario, this would mean that a public company that racked up $100 million in buybacks in 2023 but issued no shares would have to pay an excise tax of $1 million, according to webinar material. from EY. Similarly, a public company that buys back $100 million but issues $125 million of stock as part of a compensation plan for its employees should in theory pay no additional tax due to the offsets.

But the devil will be in the details or more literally the advice experts expect on the new US Treasury tax. For example, it is unclear how shares repurchased in leveraged privatization transactions would be affected by the tax. Similarly, SPAC entities could fall foul of the new tax if they are unable to find an acquisition partner and return cash to their shareholders, EY experts said.

“The most profound impact of the stock buyback excise tax may be on corporate transactions that bear little resemblance to the prototype stock buyback program that Congress likely had in mind,” he said. said Shane Kiggen, director of EY’s international tax and transactional services for domestic mergers and acquisitions. during the webinar.

There is also uncertainty as to how the tax will take into account stock options issued to employees that can be used as compensation, Rachael Walker, head of EY’s national compensation and tax benefits practice, said during the webinar. “If it’s at the time of exercise, writing an option would not generate compensation,” she said.

Companies should take the time this year to re-evaluate their strategies before the new tax takes effect, Don Bakke, also a director at EY National Tax M&A International Tax and Transaction Services, said during the webinar. They could consider accelerating buybacks now or delaying issuances until 2023, he said.

A spokesperson for the Internal Revenue Service declined to say when or if advice would be forthcoming.

The new tax comes as the frenetic pace of the pace of actions slowed down in the second trimester, according to the Wall Street Journal. For the 12 months to March, the value of stock buybacks by S&P 500 companies jumped 97.2% to $985 billion, from $499 billion a year earlier, report says of June 16. S&P Dow Jones Indices Release. Howard Silverblatt, senior index analyst at S&P, said buybacks could hit a new high this year as falling stock prices make buybacks less costly and fewer stocks generate higher earnings per share. , according to the press release.