the new tax paradigm – time to act · the new tax paradigm – time to act ... deal value (usd...

The new tax paradigm –Time to act

2016 KPMG Asia Pacific Tax Summit

JW Marriott Hotel, China Central Place, Beijing9-12 May 2016

KPMG Asia Pacific Tax Centre

Focus on M&A: Boosting deal values through taxThinking beyond regulation and policy

Arco Verhulst (moderator)

Global Head, Deal Advisory M&A Tax

Len Nicita

Deal Advisory M&A Tax

- KPMG in Australia

Michael Wong

Deal Advisory M&A Tax- KPMG in China

Girish Vanvari

National Head of Tax

- KPMG in India

David Lewis

Deal Advisory M&A Tax- KPMG in Japan

Panellists

1. M&A Market2. Key Country Changes

3. Structuring Opportunities

4. Outlook

5. Q&A

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Document Classification: KPMG Confidential

©2016 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

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North America Europe Asia Pacific (incl Japan) Other Regions Average deal value (USD m)

Source: Mergermarket Website, accessed March 2016

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Global

Source: Mergermarket January 2016 Monthly M&A Insider

North AmericaUS$2,079.1bn

5,442 deals 48.6%

EuropeUS$1,099.7bn

6,244 deals 25.7%

C&S AmUS$63.1bn 540 deals

1.5%

ASPAC (ex. JP)US$927.8bn 3,802 deals

21.7%

Afr & M. EastUS$47.3bn 429 deals

1.1%

JapanUS$61.6bn 396 deals

1.4%

Value(US$bn)

Up/Down Value % change

Cross border $1,673.3 17.8%Domestic $2,605.4 40.2%

Energy, Mining& Utilities

US$637.7bn1,331 deals

14.9%

Pharma, Medical& Biotech

US$574.6bn1,366 deals

13.4%

ConsumerUS$516.5bn2,015 deals

12.1%

Financial ServicesUS$496.4bn1,389 deals

11.6%

Industrial& ChemicalsUS$474.8bn3,137 deals

11.1%

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Global


Top 10 Deals in Announced in 2015

Bidder Company Target Value Announced Sector1 Pfizer Inc Allergan Plc US$183.7bn 23 Nov 15 Pharma, Medical and Biotech

2 Anheuser-Busch InBev NV SABMiller Plc US$120.3bn 11 Nov 15 Consumer

3 Royal Dutch Shell Plc BG Group Plc US$81.2bn 8 Apr 15 Energy, Mining and Utilities

4 Charter Communications Inc Time Warner Cable Inc US$77.8bn 26 May 15 Telecommunications

5 E l du Pont de Nemours and Company

The Dow Chemical Company

US$77.0bn 11 Dec 15 Industrial and Chemicals

6 Dell Inc EMC Corporation US$63.3bn 12 Oct 15 Business Services

7 Energy Transfer Equity LP Williams Companies Inc US$55.9bn 28 Sep 15 Energy, Mining and Utilities

8 Kraft Heinz Company Kraft Foods Group Inc US$54.5bn 25 Mar 15 Consumer

9 eBay Inc PayPal Holdings Inc US$50.5bn 26 Jun 15 Financial Services

10 Anthem Inc Cigna Corporation US$50.4bn 24 Jul 15 Pharma, Medical and Biotech

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Asia Pacific


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Asia Pacific


Top 5 Deals in Announced in 2015

Bidder Company Target Value Announced Sector1 Cheung Kong (Holdings)

LimitedHutchison Whampoa

Limited (50.03% stake)US$40.3bn 9 Jan 15 Consumer

2 CK Hutchison Holdings Limited

(shareholders)

Cheung Kong Property Holdings Limited

US$34.9bn 8 May 15 Real estate

3 China Tower Corporation Limited

China Mobile, China Telecom, China Unicom(wireless tower assets)

US$33.7bn 14 Oct 15 Telecommunications

4 SK C&C Co Ltd SK Holdings Co Ltd (68.18% stake)

US$24.4bn 20 April 15 Energy, Mining and Utilities

5 China Yangtze Power Co Ltd

Sanxia JinshajiangChuanyun Hydroelectric

Power Co Ltd

US$12.5bn 7 Nov 15 Energy, Mining and Utilities

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Global and Asia Pacific Comparison

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China outbound

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Source: Dealogic;, accessed April 2016; Includes all announced M&A transactions by Chinese companies

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Focus on ‘quality growth’ – not only more but also larger deals announced in high value-added and consumption-related sectors. For instance, 2015 saw 99 deals in the computer and electronics sector up from 57 in 2014, with their total disclosed value increasing from USD 9.0 billion to USD 11.8 billion.

More deals were announced by privately owned enterprises (POEs), which accounted for 75.9% of the total number of deals in 2015, which was up from 68.0% in 2014 and 55.1% in 2010. State-owned enterprises (SOEs) are still doing the majority of the largest deals.

Three trends characterized China’s outbound M&A in 2015

More deals in developed markets in 2015 compared with prior years. This translated into 408 deals or 81.3 percent of the total, with a value of USD 67.8 billion in 2015, up from 277 deals with a value of USD 52.3 billion in 2014, and 225 deals with a value of USD 33.3 billion in 2013.

Source: KPMG China Outlook 2016, accessed April 2016

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Top countries/regions for Chinese outbound M&A in 2015Rank

Country/region

No. of deals Investment targets

1 US 113 Computers and electronics, healthcare, real estate, machinery, telecoms, insurance, utility and energy

2 Australia 42 Mining, utility and energy, real estate, agribusiness and food, healthcare

3 South Korea 38 Computers and electronics, consumer products, leisure and recreation,

telecoms

4 Germany 26 Automotive, machinery, healthcare

5 Taiwan 24 Chemicals, computers and electronics, consumer products, financial services, healthcare

6 UK 24 Computers and electronics, professional services, real estate, transportation

RankCountry/region

Disclosed deal value (USD Billion)

Investment targets

1 US 14.4 Computers and electronics, healthcare, real estate, machinery, telecoms, insurance, utility and energy

2 Italy 10.6 Automotive, financial services

3 Australia 8.4 Mining, utility and energy, real estate, agribusiness and food, healthcare

4 Ireland 7.5 Transportation, financial services

5 Taiwan 5.9 Chemicals, computers and electronics, consumer products, financial services, healthcare

Source: Dealogic, accessed April 2016; includes all announced M&A transactions by Chinese companies

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Top sectors for Chinese outbound M&A in 2015 Rank Sector

Disclosed dealvalue

(USD billion)Sector No. of deals

1 Financial services (including insurance) 18.1 Computers and electronics 99

2 Computers and electronics 11.8 Healthcare 54

3 Utility and energy 10.2 Real estate (includinghotels and restaurants) 35

4 Automobile 9.6 Mining 33

5 Real estate (includinghotels and restaurants) 7.4 Financial services

(including insurance) 27

6 Transportation 7.0 Transportation 26

7 Oil and gas 6.8 Utility and energy 23

8 Mining 4.5 Professional services 24

9 Healthcare 3.3 Consumer products 23

10 Leisure and entertainment 2.2 Oil and gas 21

Source: Dealogic, accessed April 2016; includes all announced M&A transactions by Chinese companies

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Key policy initiative encompassing over 70 countries—70% of global population, 55% of global GNP

Objective: improve infrastructure connectivity to facilitate trade and investment

It should drive infrastructure development and generate new markets both outside and within China’s landlocked west regions

The “Belt and Road” initiative at a glance

Countries included in the “Belt and Road” initiative

> US$1.1 trillion has already been allocated by multilateral development banks and Chinese financial institutions to finance “Belt and Road” infrastructure projects


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Australia

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Japan

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Japan (cont’d)Japan sell-side M&A transactions by industry

Software & IT (21.9%)

Services (15.%)

Retail & wholesale (10.9%)

Electronics (6.2%)

Food & beverages (3.6%)

Chemicals (3.3%)

Heavy Industry (3.1%)

Financials (2.8%)

Real estate & hotels (2.6%)

Other (30.6%)

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India

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1. M&A Market

2. Key Country Changes3. Structuring Opportunities

4. Outlook

5. Q&A

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New U.S. Proposed Regulations on Debt/Equity

• If finalized as proposed, the proposed regulations would:

— Impose enhanced documentation and disclosure requirements,

- Note: Failure to satisfy these requirements results in the instrument being automatically classified as equity

— Automatically re-characterize certain related-party debt instruments as stock if issued in or in connection with (or in close temporal proximity to) certain transactions

— Permit the Internal Revenue Service to bifurcate certain related-party indebtedness as part equity and part debt

On April 4, 2016, the U.S. Treasury Department issued proposed regulations that would, if finalized as proposed, introduce sweeping changes to the treatment of

certain related party indebtedness.

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Key Country Changes - Australia

• BEPS

• MAAL

• Withholding tax

• Thin capitalization restrictions tightened

• Same business test

• Taxation of trusts

• Certain investments in Australia by foreign persons require approval

• Stronger links between FIRB and the ATO

Australia seems focused on strengthening integrity provisions rather than incentivizing investment

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Key Country Changes - Japan

Lower headline tax rates

• Effective corporate income tax rate for large companies reduced to below 30% from 1 April 2016 (down from approx. 40% in 2012).

But balanced by tax increases elsewhere

• Decrease in national tax rates generally balanced by increases in local taxes, hence actual tax savings may not be as large as first appear.

• Consumption tax increased from 5% to 8% in 2014, potentially going to 10% in April 2017.

Increasing restrictions on loss usage

• Usage of carry-forward losses by large companies to offset current year taxable income is being significantly curtailed:

FYs beginning on or after: 1 April 2015 1 April 2016 1 April 2017 1 April 2018

Maximum amount of taxable income offset-able with losses 65% 60% 55% 50%

The Japanese government is strongly pushing ahead with its lowering of Japan’s historically high corporate tax rate, however decreases in corporation tax are generally

balanced by tax increases elsewhere.

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Key Country Changes - India• Place of Effective Management (POEM) – to be applicable from FY16-17

• GAAR not deferred – to be applicable from FY 17-18

• Introduction of patent regime (concessional rate of taxation of 10 per cent from patents)

• Concessional rate of 10% to non resident shareholders on long term capital gains on saleof shares of closely held Indian companies

• Phasing out income tax incentives available to companies

• FDI permitted under automatic route in Alternative Investment Funds, REITs, INVITs

• Real Estate Investment Trust (REIT) and Infrastructure Investment Trusts (INVIT) –exemption from dividend distribution tax for dividend declared by SPV to Business Trust

• FDI relaxation in insurance, defence, Private sector banks, real estate sector

• Guidelines for FDI in e-commerce sector i.e. online market place model

• Small finance and payment bank licenses

• Key initiatives by Government - Start Up India, Ease of Doing Business, Make in IndiaInitiative, Digital India, Smart City Mission, AMRUT mission (for urban transformation)

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Key PRC Tax issues for China outbound investors

PRC Tax residence

• Managing foreign holding and operating companies

CFC rules

• Current rules

— controlled enterprises; effective tax on profits below 12.5%; profits retained beyond reasonable commercial needs)

• Tax return disclosure requirements

• Proposed CFC changes in draft Circular 2

Foreign tax credits

• Current rules

— Non-PRC taxes actually paid; min. 20% direct/indirect in entity; held within three tiers of PRC resident (five tiers for oil and gas entities);

• Chinese “sandwich” structures

• PRC GAAP account required to compute FTC claims

1. M&A Market

2. Key Country Changes

3. Structuring Opportunities4. Outlook

5. Q&A

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Structuring opportunities – Australia

Onshore investors

Offshore feeder fund

Asset Trust Op Trust

Lease

Land based assets

Operating assets

Stapled Structure Objective:

• Asset with high land/finance asset base (e.g. traditional orresource based infrastructure

• Utilize Australian Managed Investment Regime

Key Mechanics:

• Two Australian Trusts established

• Land/financial assets acquired into Asset Trust. Land basedassets leased across to Op Trust

• Op Trust carries on the business.

• Worst case scenario, profits of Op Trust taxed at 30%. Profitsof Asset Trust subject to final withholding tax of 15%.

• Care needed in implementation and management of structure.

Structuring Possibilities:

• Offshore disposal of non-TARP assets still free from Australian tax if held on capital account

• Increasingly looking to split assets between different buyers to maximize price (back to the future and pre-GFC structures). This is manifesting itself in private equity as well as resource/infrastructure based deals.

• Increasing use of stapled structures in non-property transactions. Significant scrutiny from ATO but ifcommercially justifiable, a good opportunity.

For illustrative purposes only

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Structuring opportunities - India

A Ltd

Hold Co.

Target

Merger

Acquirer Co.

Acquisition Structuring - Tax break on depreciation on goodwill

Objective:

• Acquirer Co. to acquire Target (Book value – say INR 100mn)

• Amortization of acquired goodwill by Acquirer Co.

Key Mechanics:

• Target to merge into Acquirer Co.

— Consideration to be issued by Acquirer Co. in form ofOCPS (at fair value – say INR 1000 mn) to A Ltd.(shareholder of Hold Co.)

o Merger to be a non-tax neutral merger

— All assets and liabilities of Target to be taken over byAcquirer Co. and recorded at its fair values (say INR500 mn)

• Goodwill (INR 500 mn) recorded in the books of AcquirerCo. – to be amortised

— Tax break on depreciation on goodwillFor illustrative purposes only

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Structuring opportunities – India (cont’d)

Objective:

• Cash rich target

• Utilize target’s cash to reduce acquisition cost / serviceacquisition debt

Key Mechanics:

• Foreign Investor to form a wholly owned subsidiary in India(‘HoldCo’)

• Funding of HoldCo by way of listed Non ConvertibleDebentures (‘NCDs’)

• HoldCo to utilize NCD proceeds to acquire desired stake in theTarget

• Target to be subsequently merged into HoldCo and cashsurplus in Indian target can be used to redeem the NCDs

• Tax break on the interest paid by the HoldCo to Investor on theNCDs’

Investor

HoldCo

Indian target

Merges into HoldCo

Service debt / Redeem NCDs

Equity +Listed NCDs

Acquires stake in Indian target

Profitable + cash rich

Leveraged Buy-Out and debt-push down


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Structuring opportunities - Japan

Japan Co

LP

Non-treaty

Investors

GP

100% shareholder

Treaty Investors

Treaty? Exemption?

Offshore

Japan

Share sale taxable for foreign investors

in Japan

Partnership exemption

• Sale of shares by foreign investors are taxable in Japan if:

— Investor owns more than 25% of the outstanding shares in the Japanese company ; and

— Sells more than 5% of those shares in a single fiscal year.

• Shareholdings through a partnership are aggregated for determining shareholding percentage.

• Some tax treaties provide exemptions from this tax

• It is possible for a flow through partnership (e.g. Cayman LP, although US LP is uncertain) to apply for looking through treatment and non-aggregation of holding if certain requirements are satisfied.

However, requires disclosure of all investors and LP agreement translated in Japanese. Investor must hold less than 25% and cannot participate in management (among

other requirements)

Debt arrangements

• Certain types of debt instruments (e.g., registered bonds) are free from Japanese withholding tax.


1. M&A Market



4. Outlook5. Q&A

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China - Looking forward

Chinese ODI is expected to continue to be undertaken across more sectors

Key drivers

• Acquiring experience, technology, brands and human capital to become more competitive, and support China’s transition towards an advanced economy, which can benefit countries which are strong in sectors such as advanced manufacturing and information communication technology

• Accessing high-quality products and services that can be deployed in China to meet its evolving consumption needs, which will likely benefit sectors such as agriculture and food production, healthcare and eldercare services

• Creating new sources of demand for products and services affected by overcapacity issues in the domestic market

• Sourcing investments which allow Chinese companies to diversify their portfolio risk and earn more stable returns

• Building a credible track record that facilitates expansion into new markets, particularly in developed economies

1. Sectors

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2. Types of investors

More Chinese companies should make investments overseas, and POEs are expected to feature increasingly in this trend

• POEs are active in many of many overseas countries, there is typically less sensitivity around inv of the new sectors where Chinese companies are investing, and from the perspective investments by POEs compared to SOEs. This is reflected, for example, in the higher approval thresholds for POEs under the China-Australia Free Trade Agreement (ChAFTA)

• Financial investors will likely continue and increase their participation in Chinese ODI

— Insurance companies, because of the relaxation of regulatory restrictions on their overseas investment activities, and given China’s economic slowdown and stock market volatility, are expected to step up efforts to diversify their overseas investments, especially into real estate, to improve their overall risk/return profile

— Financial investors – including state-owned financial institutions and funds and multilateral development banks – will likely co-invest in, and in some cases, provide advice and support to Chinese companies undertaking ‘Belt and Road’ projects and investments

— Chinese private equity (PE) funds which source and aggregate Chinese and international capital to co-invest in outbound deals by Chinese strategic investors

— Chinese-backed venture capital firms looking for opportunities outside China to strengthen their offerings in the domestic market.


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4. Partnerships

3. Countries

More win-win cooperation is expected between Chinese and foreign companies, with partnership and building trust lying at the heart of these collaborations

• Deals may often be struck on the basis of the Chinese partner providing one or more of the following advantages: access to China market demand, funding, a strong balance sheet, cost-competitive inputs to the production process, and/or unique expertise that can help the foreign company expand its business locally and/or in third countries

More investments are expected to be made in developed economies, as well as along the “Belt and Road”

• More investments will likely be made in North America, Europe and other developed economies, where there are more high-quality targets which can help Chinese companies upgrade, transform and improve their competitiveness

• More projects and investments are expected to be undertaken along the 'Belt and Road', as the objectives come to be better understood and the mode of implementing this initiative continues to evolve over the coming years


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5. Drivers

These three drivers will likely have a positive impact on Chinese ODI in 2016 and beyond

Government initiatives• China is advancing a new paradigm of international cooperation through its ‘Belt and

Road’, ‘International Production Capacity Cooperation’ and ‘Third-country Market Cooperation’ flagship initiatives

New funding sources

• Chinese financial institutions and companies have announced over USD 1.1 trillion of funding for ‘Belt and Road’ projects, while the AIIB and BRICS New Development Bank each have USD 100 billion in authorized capital

• In January 2016, China became a member of the European Bank for Reconstruction and Development (EBRD) which opens the way for the EBRD to support ‘Belt and Road’ projects in member countries

Free trade agreements

• China’s Free Trade Agreements (FTAs) with Australia (ChAFTA) and South Korea both came into force in December 2015. These FTAs are expected to add impetus to the already dynamic investment and trade relationship that China has with these countries



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Sectors to watch in 2016

Agriculture and food

High-tech manufacturing

Transportation

Real estateInfrastructure

HealthcareICT

1. M&A Market



4. Outlook

5. Q&A


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

Thank You

kpmg.com/socialmedia kpmg.com/app

© 2016 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

the new tax paradigm – time to act · the new tax paradigm – time to act ... deal value (usd...

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