52 } MALAYSIAN BUSINESS z JUNE 16, 2012

MYTAX

Tax Considerations in M&As

zzz BY ANAND CHELLIAH

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Opportunities and pitfalls to look out for. The global economic crisis triggered a wave of austerity measures, particularly in Europe, with Ireland, Greece, Portugal and Spain on severe preservation and rehabilitation mode. Over in America, kick-starting an economic revival seems very much the order of the day, with government-led measures being implemented to boost consumer

spending and employment figures. In Asia, China recorded its first signs of a slow-down in growth. Merger and acquisition (M&A) activity experienced a slump over the last year, as a result of countries reforming tax systems and exercising prudence in spending whilst trying their best to boost attractiveness and competitiveness to attract precious foreign direct investment and transaction flows.

However, one poignant fact is apparent – an economic slowdown and turmoil also creates opportunities for a class of M&A activity, particularly centred around lower transactional costs (‘value for money buys’) and business combinations in which entities seek to boost growth and competitiveness by business combinations and amalgamations to better exploit economies of scale and new markets. Capital is looking for new avenues to earn better returns, be it buying cheaper ‘stressed’ assets for re-sale to Asia, or getting prepared for the next wave of growth when economic recovery takes hold in the next cycle.

M&A interested parties, be it buyers or sellers, should stick to key principles – remain sensitive to economic and market conditions, keep abreast of the latest tax rules and regulations that keep changing with the economic climate, and maximising the tax position in the countries in which they have invested in, be it tax risk minimisation or availing themselves of incentives and opportunities offered by competitive tax regimes. Every transaction has tax implications.

This article seeks to outline some broad tax issues and considerations that need to be borne in mind when looking at M&A opportunities in Malaysia. A snapshot of some interesting facts pertaining to a few selected countries in the Asian region are also included. The objective is not to go into substantive detail on a particular country but to enumerate some of the planning points that need to be thought about in undertaking M&A opportunities.

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z that of risk of inherent liabilities being passed on to a buyer in a share acquisition – in an asset acquisition, the buyer avoids undertaking contingent risks associated with the target company, be it legal, commercial, operational or taxation-related risks;

z unutilised tax losses and unabsorbed capital allowances are ‘preserved’ in a share transfer whereas asset deals will entail a fresh start for the buyer. Recent amendments to the Income Tax Act restrict the availability of unutilised losses where a substantial change of ownership occurs and this may warrant additional consideration and planning.

z asset acquisitions allow an unrelated party buyer to claim capital allowances on the purchase price paid for qualifying

MALAYSIAw Share deals versus asset deals The regime in Malaysia generally makes share deals conducive

as stamp duty on share transfers (0.3% ad valorem on market value) is generally lower than on asset transfers. There is also no capital gains tax on sale of shares and securities (with the exception of shares in ‘real property companies’). Asset transfers’ step-up of value may be possible with a proper and commercially sound allocation of purchase price to assets acquired. New transfer pricing and anti-avoidance rules may place a dampener on such deals, particularly where related parties are involved. The main issues to contend with in share versus asset deals are as follows:

OTHER COUNTRIES IN THE REGION

A look at some of the equivalent M&A tax issues in some neighbouring Asian countries reveal some of the following broad features: CHINASellers are taxed on 20% on the gain from a deal as income tax. An asset deal is taxed as a disposal of different types of assets depending on categories and allocation of purchase price and this creates room for tax planning. Under an asset deal structure, however, the seller faces double taxation issues arising from the taxing of the sale as income tax and then a potential taxation of dividend appropriation at the shareholder level in the seller company. The buyer is generally free of tax. On the other hand, the buyer can, subject to the rules, obtain a higher base cost in an asset deal, which can be depreciated or amortised in future years.

Interest is generally tax deductible and special purpose vehicles are commonly used in structuring deals to enable tax effective financing of acquisitions. Target company losses can be carried forward under a share deal structure.

INDIAIt is important to ensure that the entire asset or share transaction is carefully documented to support the legality and validity of the transfer and the protection of the rights of seller and buyer, particularly where transactions are structured to minimise stamp duty. Transfers of businesses as a whole (‘slump sale’) as opposed to allocating values to individual assets are common and create some planning opportunities. In share acquisitions, gains arising from the sale of shares are normally taxable, unless specifically exempt or sheltered under a tax treaty. Recent budget proposals by the Indian Government seeks to introduce retrospective amendment to tax indirect share transfers following an apex court ruling against the Indian Revenue authorities. The proposals are currently the subject of much international and local debate and concern.

No thin capitalisation rules are present currently and deductions for interest are allowed. However, complex rules exist over foreign and local debt, which needs careful consideration. Transfer pricing rules will apply to all related party transactions, including interest charges.

SINGAPOREThere is a similar tax regime to that of Malaysia historically but Singapore has developed a very competitive and investor- friendly tax regime to encourage M&A activity. Transaction tax costs are generally low due to lower corporate tax rates, absence of capital gains tax, and fairly generous stamp duty exemptions. A special regime was put in place recently to provide for business amalgamations, designed to ensure no adverse tax effects would arise as a result of companies amalgamating their business for sound commercial reasons. In 2010, special rules were also introduced to support M&A activity whereby a writing-down allowance based on the acquisition cost up to a ceiling of S$5million for each qualifying acquisition would be available to the acquirer.

Intellectual property can avail itself of relief over a period of 5 years. Interest relief for leveraged deals will be ring-fenced so careful planning is required to overcome restrictions in the availability of deductions.

INDONESIAThe purchase of shares is generally simpler than the purchase of assets from a buyer’s perspective. Finance costs can augment the cost of acquisition in determining the taxable gains in a disposal. There is no tax advantage in stepping up the value of tangible and intangible assets of a target company as Indonesian tax principles adopt historical cost for acquisition purposes. Debt pushdowns for financing costs are acceptable to the tax authorities. Capital gains on the sale of unlisted shares and non-property assets are taxed at 25% or 30%. Sale of shares in listed entities is subject to a tax of 0.1% of transaction value.

THAILANDAsset deals afford the opportunity of a step-up of value to a buyer whilst share deals do not allow such step-up, although the gains are taxed at 30% corporate income tax. Interestingly, amortised capitalised goodwill is a tax-deductible expense subject to specified rules. Share deals allow losses to be utilised by the new owner whilst in asset deals, this will not be applicable. Reorganisations or amalgamations are provided reliefs from corporate income tax, VAT, stamp duty and specific business tax (on the sale of immovable property). Share deals outside Thailand between non-residents are considered outside the scope of Thai tax.

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capital expenditure whilst the seller may be subject to a balancing charge at his end on the excess of disposal proceeds received over his tax written down values of assets sold;

z Tax incentives in Malaysia are given to companies and not qualifying assets and thus may not be transferable or enjoyed by a new asset owner;

z specific licensing issues that may render an asset deal unfeasible since licenses may not be transferable or subject to certain ownership conditions. Conversely, this can also work the other way where stringent equity ownership controls in certain sectors within the Malaysian economy may necessitate an asset deal instead and is common in Malaysia in the energy, resources, pharmaceutical, transportation, and several other sectors;

w Limitations on deductibility of interest on borrowings Malaysia is currently transitioning from an imputation system

of tax to a single-tier dividend system by end-2013. Under the single-tier system, dividends will be treated as tax-exempt income, and interest on borrowings used to finance acquisitions of shares in companies is not available for relief against such exempt income. This measure is widely seen as a significant impediment to M&A activity as financing of investments and tax-efficient holding and intermediate company structures are key to a vibrant M&A market. Strategies to push debt down to operating company levels and innovative finance instruments are quite often difficult to implement. Offshore debt is permissible, subject to Central Bank regulations and

Anand Chelliah is an Executive Director and Transaction Tax Leader of TAXAND MALAYSIA, which is part of the TAXAND Global Organisation, the first global organisation of independent tax advisers with a presence in over 50 countries. He can be contacted at ac@taxand.com.my. The views expressed here are his own.

impending thin capitalisation rules, but withholding tax of 15% (subject to preferential tax treaty rates) needs to be considered in undertaking offshore finance structuring. The Labuan International Business and Financial Centre has been actively promoted to facilitate inbound and outbound structures to minimise or eliminate withholding taxes.

w Other direct and indirect costs Gains on disposal of real property are subject to tax at

graduated rates of 10% to 0% depending on the length of time of ownership of the asset. Stamp duty on property transactions can be significant at rates up to 4% of market value of property. Group restructuring schemes and amalgamations may qualify for stamp duty exemptions provided qualifying criteria are met. Transfers of property between ‘associated companies’ (90% control test) may also be granted waiver of stamp duty.

In share acquisitions, stringent due diligence procedures cannot be over-emphasised. The Malaysian tax authorities have stepped up their tax revenue collection efforts in recent years and have been aggressively pursuing tax compliance audits and transfer pricing challenges. It is imperative therefore that M&A strategies in the Malaysian market be carefully evaluated and effectively planned. mb

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