Taxation of cross-border mergers and acquisitions

568 Pages·2016·2.23 MB·English

Taxation of
cross-border
mergers and
acquisitions
2016 edition
kpmg.com/tax
KPMG International
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Table of contents
Executive summary
Executive summary 2
Africa
South Africa 7
Asia
China 21 Oman 91
Hong Kong 33 Philippines 99
India 43 Saudi Arabia 107
Indonesia 55 Singapore 113
Japan 61 Thailand 123
Korea 69 Turkey 133
Kuwait 79 United Arab Emirates 143
Malaysia 81
Central and South America
Argentina 147 Mexico 183
Brazil 155 Panama 191
Colombia 165 Uruguay 197
Costa Rica 175 Venezuela 201
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Europe
Austria 209 Luxembourg 361
Belgium 217 Malta 373
Bosnia and Herzegovina 227 Netherlands, The 383
Croatia 235 Norway 397
Cyprus 241 Poland 405
Czech Republic 247 Portugal 413
Denmark 255 Romania 423
Finland 265 Russia 429
France 273 Slovakia 439
Germany 289 Slovenia 447
Greece 305 Spain 453
Hungary 315 Sweden 467
Iceland 325 Switzerland 475
Ireland 333 Ukraine 485
Italy 345 United Kingdom 499
Jersey 353
North America
Canada 509 United States 521
Oceania
Australia 535 New Zealand 553
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Executive summary
Momentum buoys 2016 M&A markets
In 2015, it was a bumper year for mergers and acquisitions — Although Brazil’s economy has slowed, venture capital
(M&A), especially in the mid-market space. With the volume and early stage activity continued to gain momentum
of activity similar to previous years, the value of activity across Latin America in the first half of 2015. Mexico
shot up in many of the world’s markets, with standout and Argentina saw increased early stage investments as
performance in the US. compared to the same period in 2014.
Recent years have seen a significant amount of exit activity By sector, scientific advances and disruptive technologies are
among private equity funds, with a large number of initial propelling significant M&A movement in the pharmaceutical,
public offerings, especially in the first 3 quarters of the year, biotechnology, high technology and media industries. There
as funds successfully sold off portfolio investments to reap is also activity among companies involved in infrastructure
substantial returns. development, especially in Australia (e.g. energy and power
generation) and Asia (e.g. water security). Depressed oil and
Strategic buyers returned to the market in force in 2014
commodity prices continue to challenge companies in the
and into 2015. Following the lengthy post-financial crisis
energy, natural resources and mining industries. As these
downturn and ongoing uncertainty due to economic
companies focus more on their core businesses, assets are
struggles on Europe, strategic buyers are getting back on
coming available for good prices, opening opportunities for
their feet and their ability to price in synergies has made it
buyers looking to invest in these sectors.
harder for private equity funds to compete.
The environment shows promise not seen since the pre-
B y sector, scientific advances and
financial crisis markets of 2007, with private equity funds
having lots of accumulated capital but difficulties in deploying disruptive technologies are propelling
it, as resurgent strategic buying keeps prices above the levels
significant M&A movement in the
that institutional investors need for above-market returns.
pharmaceutical, biotechnology, high
Markets return to strength technology and media industries.
This momentum is expected to continue to build in 2016,
although markets will vary due to a number of factors: Drive to curb BEPS creates uncertainty
— While the US market is expected to continue to outpace
Perhaps the biggest tax developments affecting cross-
other areas in terms of deal flows, interest rates in the
border M&As globally — now and for years to come —
country are inching up, increasing the cost of M&As
stem from the Organisation for Economic Co-operation
financed with external debt.
and Development’s (OECD) project to encourage global
— Ongoing political uncertainty in Europe and Africa — due cooperation to address tax base erosion and profit
to the refugee crisis, geopolitical tensions, and fears of shifting (BEPS). In the fall of 2015, the G20 approved
a UK exit from the European Union (EU), among other the OECD’s final guidance on domestic legislative and
factors — may continue to dampen strategic buyers’ administrative changes to address all 15 points of Action
enthusiasm for deals in this region. Plan on BEPS.
— Markets in the Asia Pacific region vary widely and deal Now companies with cross-border transactions and
makers are watching China’s economic struggles closely, structures face a period of uncertainty as governments
but the outlook seems relatively bright for the region figure out how the guidance affects current rules, and
overall. Australia, China, India and Korea are showing then work to design and enact domestic tax changes —
particular strength in raising funds, and Singapore, Hong a process that could take years. While these developments
Kong and Sydney continue to develop as important hubs unfold, some potential buyers may avoid transactions
for facilitating deals in the region. involving sophisticated international tax planning structures.
2 | Taxation of cross-border mergers and acquisitions
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Even where such structures are onside with today’s tax — Country-by-country reporting: Many countries
legislation, it is difficult to predict whether they can be have already mandated country-by-country
sustained over the longer term. reporting for 2016 tax periods, with the first sets of
reports due in 2017. These reports require detailed
Already, the international drive to curb BEPS — both as
disclosure by location of a company’s tax payments
part of the OECD project and through countries’ unilateral
and related data. While the OECD has not proposed
moves — is altering the tax environment for cross-border
that the reports be made available for public scrutiny,
M&As in important ways:
the EU is consulting on this possibility as part of
— Focus on substance: Tax authorities are increasingly its tax transparency package. As a result, buyers
looking into whether there is sufficient business could gain access to more detailed information
substance in offshore business structures, especially about potential targets for due diligence purposes,
those involving low- or no-tax jurisdictions, and they and sellers should be mindful of the reputational
are denying preferential rates for dividend and interest implications of this increased transparency.
withholdings where insufficient substance exists. Patent
Within Europe, the European Commission’s (EC)
box regimes for intellectual property holdings will likely
investigations into the tax rulings of EU member states
continue to be available, but with changes to restrict
have caused some of the chill in local M&A markets. In
patent box benefits to the claimant company’s contribution
October 2015, the EC determined that Luxembourg and
to the development of the IP in question (i.e. through the
the Netherlands granted illegal state aid to a Luxembourg-
so-called ‘nexus’ approach).
resident and a Dutch-resident company by granting a
— Interest deductibility: The denial of deductions for selective tax advantage. The EC ordered both countries to
interest has emerged as a common legislative means recover the alleged advantage from the taxpayers. Then in
of eliminating the tax benefits of cross-border debt January 2016, the EC found that selective tax advantages
financing structures: granted by Belgium under its ‘excess profit’ tax scheme
were also illegal under EU state aid rules, and at least
— Germany and Denmark were among the first countries
35 multinationals (700 million euros in total) who benefited
to challenge tax deductions for interest paid on loans
must now return unpaid taxes to Belgium.
that were effectively taken up by companies to finance
their own acquisition by applying earnings-stripping The EC’s rulings are having effects beyond the EU, and not
regulations, and other countries have followed suit, just for those multinational companies caught up in the
such as Finland. investigations. Significant concerns have been raised in the US
Senate that US-based companies are being unfairly targeted
— Countries such as Sweden are tightening rules
by the EC’s investigations and the BEPS project more broadly.
for interest on related-party debt by requiring the
It remains to be seen whether the US will take a legislative or
beneficial owner of the interest to be subject to a
administrative response. For example, the Internal Revenue
certain level of tax.
Service could invoke a provision of the Internal Revenue Code
— The UK and US, among others, are considering a that allows the US to double tax payments due from another
proposed fixed ratio rule (FRR) to limit tax relief of country that is seen as systematically discriminating against
net (including third-party) interest of 10–30 percent US companies on tax matters.
of net earnings before interest, dividends, taxes and
Meanwhile, in 2014 and 2015, the US saw a record number
amortization (most countries expect 20–30 percent),
of cross-border M&A inversion transactions involving US
which will affect all international investors and
companies becoming foreign corporations. The US Treasury
especially highly leveraged groups.
Department issued a notice (Notice 2014–52) of its intent
Taxation of cross-border mergers and acquisitions | 3
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
to issue regulations to take “targeted action to reduce the planning. During the tax due diligence phase, it is also
tax benefits of — and when possible, stop — corporate important to consider local country tax rulings obtained by
tax inversions.” In 2015, the Treasury Department the target company, if any, in various jurisdictions.
issued an additional anti-inversion notice. Although
Once BEPS exposures are identified, it is important for both
the regulations described in these notices may make
the acquiring company and target company to determine a
inversion transactions more difficult in some cases and
course of action. One approach may be for the seller of the
reduce some of the tax benefits of these transactions, the
target company to give the acquiring company a purchase
inversion trend has continued into 2016.
price reduction in anticipation that the acquirer will incur
In addition, in 2014 and 2015, a number of bills were future ‘BEPS unwind costs’. Another approach may involve
introduced in the US Congress that would further restrict the target company addressing the BEPS exposures through
inversion transactions or limit their tax benefits. Due to pre-acquisition structuring. As a general matter, acquirers
lack of bipartisan support for such targeted approaches to should consider any BEPS exposures specific to both the
inversion transactions, however, none of these proposals target and acquiring companies’ structures during the
has so far been enacted into law. Many members of acquisition integration-planning phase.
Congress think inversions should be addressed through
Once a deal has been made, companies should seek
broader US tax reform. Consideration by Congress of
whatever tax certainty they can over their post-transaction
both broad reform of the international tax rules and the
integration plans. Companies can reduce their tax exposure
targeted approaches is likely to continue, with the timing
by taking advantage of voluntary disclosure, horizontal
and outcome uncertain.
monitoring and advance compliance programs and by locking
in tax positions with tax authorities through tax rulings and
BEPS concerns critical for tax due
advance pricing agreements.
diligence reviews
In summary, M&A activity has bounced back, especially
Given the current drives by governments to increase tax in the US, after sustained global economic uncertainty.
collections and the uncertainty over future international M&A tax professionals with KPMG’s members firms are
tax reforms, sellers are advised to ensure they can optimistic that M&A deal volumes will continue to increase.
demonstrate full tax compliance to potential buyers. But intensifying scrutiny of M&A transactions from tax
Potential buyers should conduct thorough due diligence authorities and the potential for major international tax
regarding their targets’ tax affairs. The details and clauses reforms will continue to influence deal flows.
of legal agreements should be planned in advance in
order to avoid detrimental tax consequence, with special
attention to clauses referring to price, contingent prices, O nce BEPS exposures are identified,
liabilities, indemnification and warranties.
it is important for both the acquiring
Consideration of BEPS exposures is especially important
company and target company to
when completing tax due diligence reviews, defining
tax indemnities, and undertaking acquisition integration determine a course of action.
4 | Taxation of cross-border mergers and acquisitions
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
Arco Verhulst
Global Head of Deal Advisory,
M&A Tax
KPMG International
Fascinatio Boulevard 250
3065 WB Rotterdam
The Netherlands
T: [phone]
E: [email protected]
Devon M. Bodoh
Global Head of Complex Transactions
Group, KPMG International, and
Principal in Charge, Latin America
Markets, Tax
KPMG in the US
200 South Biscayne Boulevard
Miami, FL 33131
USA
T: [phone]
E: [email protected]
Angus Wilson
Asia Pacific Regional Leader for Deal
Advisory, M&A Tax
KPMG in Australia
10 Shelley Street
Sydney, NSW 2000
Australia
T: [phone]
E: [email protected]
Taxation of cross-border mergers and acquisitions | 5
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
6 | Taxation of cross-border mergers and acquisitions
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
South Africa
Introduction Withholding taxes
WHT on interest
The environment for mergers and acquisitions
As of 1 March 2015, a 15 percent WHT is imposed on
(M&A) in South Africa is far less clement than in
interest received by or accrued to a non-resident (that is not
previous years due to the harsh current economic a controlled foreign company — CFC). An exemption applies
climate and the global credit and liquidity crunches. for any amount of interest received by or accrued to a non-
These constraints have reduced the economy’s resident in respect of:
growth and led to a sharp decrease in M&A — government debt instruments
activity. The fundraising appetite for domestic
— listed debt instruments
financial investments is increasing, however,
— debt owed by a bank, the South African Reserve Bank
leading to more opportunities for the growth in the
(SARB), the Development Bank of South Africa (DBSA) or
small and medium-sized business market, which
the Industrial Development Corporation (IDC)
remains relatively active. Larger players are still
— debt owed by a foreign person or a headquarter company.
on the lookout for quality assets with long-term
growth potential. South Africa is in the process of renegotiating its existing tax
treaties in light of the new 15 percent WHT on interest.
WHT on service fees
Recent developments
Current legislation provides for a 15 percent WHT to be levied
Recent changes to the South African legislative framework on service fees paid to a foreign person, to the extent paid
have significantly affected the M&A environment. from a source within South Africa (subject to treaty relief). The
Historically, there was some uncertainty regarding effective date of the legislation has been delayed to 1 January
the appropriate method of dealing with these types of 2017 (from 1 January 2016) and may be repealed in its entirety
transactions from a tax and legal perspective. The South in the 2016 amendments.
African legislator has taken steps to address this uncertainty.
WHT on dividends
While some uncertainty remains, the recent changes are
A WHT on dividends applies regarding all dividends declared
steps in the right direction.
and paid to non-residents on or after 1 April 2012. The
Among recent developments, the most pertinent for M&As dividend WHT is levied at a rate of 15 percent, subject to
are as follows: treaty relief.
— a permanent, formula-driven restriction on interest WHT on royalties
deductibility for certain M&A transactions, which replaces
Royalties paid by a South African entity to a non-resident
the prior pre-approval process in which the tax authorities
are subject to a WHT of 15 percent as of 1 January 2015
regulated the deductibility of interest costs for leverage
(previously 12 percent).
buy-outs
Deductibility of interest on debt used to acquire equity
— the introduction of a withholding tax (WHT) on interest
As of 1 January 2013, interest incurred on debt to finance
— the introduction of limitations on interest deductions for the acquisition of the shares is deductible for tax purposes,
interest paid to, among others, non-residents where a South African company acquires at least a
70 percent equity shareholding in another South African
— provisions permitting the deduction of interest on
operating company. An ’operating company’ includes any
debt used to acquire equity shares, where specific
company that carries on business continuously by providing
requirements are met.
Taxation of cross-border mergers and acquisitions | 7
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.
South Africa
goods or services for consideration. Recent amendments The limitations also will apply between a debtor and
to the provision require at least 80 percent of the receipts creditor who are not in a controlling relationship where a
and accruals of the operating company to be ‘income’, that creditor advances funding to the debtor and the funding
is, non-exempt amounts. Where the shares in the operating was obtained from a non-resident person in a controlling
company are acquired indirectly through the acquisition of relationship with the debtor (i.e. back-to-back funding).
shares in a controlling company, the interest is deductible
Essentially, where section 23M applies, the interest
only to the extent that the value of the controlling company
deduction by the debtor cannot exceed:
shares is attributable to the operating company.
— the sum of:
Interest deductibility in respect of M&A transactions
Previously, interest on debt used to fund certain — interest received
transactions (discussed below) was not automatically
— a formula-based percentage of ’adjusted taxable
deductible. Approval from the South African Revenue
income’ (which is essentially the company’s earnings
Service (SARS) was needed in order to deduct the interest
before income taxes, depreciation and amortization
expenditure in question.
(EBITDA)). The percentage of the adjusted taxable
This approval process has been replaced by section 23N, income varies based on the average South African
which essentially limits the deductibility of interest where repo rate during the year of assessment and is limited
debt is used: to a maximum of 60 percent.
— to fund the acquisition of a business or assets from a related — less:
group entity on a tax-neutral basis
— interest incurred on debts other than debts falling
— to fund at least a 70 percent equity shareholding in a South within section 23M; where the interest falls within
African operating company. both section 23M and section 23N, the portion of the
interest disallowed under section 23N is not taken
In these cases, the amount of interest deductible in the year of
into consideration in the calculation.
the transaction and the following 5 years cannot exceed:
Any interest disallowed under section 23M may be carried
— the sum of:
forward to the following year of assessment, and deemed as
— interest received interest incurred in that year.
— a formula-based percentage of ’adjusted taxable income’ The provisions do not apply where the creditor funded the
(which is essentially the company’s earnings before debt advanced to the debtor with funding granted by an
income taxes, depreciation and amortization (EBITDA)). unconnected lending institution and the interest charged
The percentage of the adjusted taxable income varies on the loan does not exceed the official rate of interest for
based on the average South African repo rate during purposes of the Income Tax Act plus 100 basis points.
the year of assessment and is limited to a maximum of
60 percent. Asset purchase or share purchase
— less: The following sections address those issues that should
be considered when contemplating the purchase of either
— the amount of interest incurred on debts not falling within
assets or shares. The pros and cons of each option are
the section.
summarized at the end of this report.
These rules apply to transactions entered into on or after 1 April
Purchase of assets
2014, and also to the refinancing of transactions that were
subject to the pre-approval process discussed above. The decision of whether to acquire the assets of a
business or its shares depends on the details of the
Where such interest is disallowed, the disallowed portion of
transaction. The advantages and disadvantages of both
interest is lost and cannot be carried forward.
purchase mechanisms need to be understood in order
Limitations on interest paid to non-residents to effect the acquisition efficiently while complying with
legislative requirements.
As of 1 January 2015, section 23M imposes a general
limitation on interest deductions where payments are made Asset purchases may be favored due to the interest
to offshore investors (i.e. creditors), or local investors who deductibility of funding costs and the ability to depreciate
are not subject to either income tax or IWT in South Africa, the purchase price for tax purposes. However, other
that are in a controlling relationship with a South African considerations may make an asset purchase far less
resident debtor. favorable, including, among other things, an increased
8 | Taxation of cross-border mergers and acquisitions
© 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.