Taxation of cross-border mergers and acquisitions

610 Pages·2017·2.5 MB·English

Taxation of
cross-border
mergers and
acquisitions
2018 edition
kpmg.com/tax
KPMG International
Table of contents
Executive summary
Executive summary 2
Africa
South Africa 7
Asia
China 21 Oman 99
Hong Kong (SAR) 37 Philippines 109
India 47 Saudi Arabia 117
Indonesia 59 Singapore 125
Japan 67 Thailand 137
Korea 75 Turkey 147
Kuwait 85 United Arab Emirates 157
Malaysia 89 Vietnam 161
Central and South America
Argentina 169 Mexico 207
Brazil 179 Panama 215
Colombia 189 Uruguay 221
Costa Rica 199 Venezuela 225
© 2018 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 233 Luxembourg 391
Belgium 241 Malta 403
Bosnia and Herzegovina 251 Netherlands, The 413
Croatia 259 Norway 427
Cyprus 265 Poland 435
Czech Republic 271 Portugal 445
Denmark 279 Romania 457
Finland 289 Russia 463
France 297 Slovakia 475
Germany 313 Slovenia 485
Greece 331 Spain 491
Hungary 343 Sweden 505
Iceland 353 Switzerland 513
Ireland 361 Ukraine 525
Italy 375 United Kingdom 537
Jersey 385
North America
Canada 547 United States 559
Oceania
Australia 579 New Zealand 595
© 2018 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
Easing uncertainty boosts M&A worldwide
In the past year, the global economy turned the corner — Globally, December 2017 alone saw five deals valued at
to solid growth. 2017 was the first year since the crisis almost US$200 billion.
that none of the 45 countries and jurisdictions monitored
— The energy, mining and utilities sector led the way
by the Organisation for Economic Co-operation and
globally in 2017 with deals valued at US$543.7 billion,
Development (OECD) were contracting. This tailwind of
followed by industrials and chemicals (US$395 billion)
global growth has been supportive of M&A activity. The
and consumer markets (US$380 billion).
OECD’s 13 March 2018 release of its global outlook showed
an upward revision of global growth to 4.1 percent in 2018 Despite a correction in global markets early this year, M&A
and 4.0 percent in 2019. This optimistic forecast is reflected activity in 2018 could surpass 2017. Debt is expected to stay
in almost all countries and jurisdictions, with developed relatively inexpensive in the near term globally, and high
markets seeing the greatest upward revisions. accumulations of uninvested capital, or ‘dry powder’, are
ready to be spent.
In addition to economic momentum, several structural
changes could pave the way for further M&A activity. The With a clearer idea now emerging as to the potential future
implications of US tax reform are becoming clearer. An impacts of Brexit, US tax reform and international tax
outline of terms of Britain’s exit from the European Union changes from the Organisation for Economic Co-operation
(EU) has been mostly resolved. Elections in countries like and Development’s (OECD) base erosion and profit shifting
France, Germany and the Netherlands were won by parties (BEPS) project, private investors that have been taking
that generally uphold the mainstream. The upcoming a wait-and-see approach may begin moving in from the
elections in Brazil is widely expected to have similarly sidelines, emboldened by consistent growth to enter
positive outcomes for global markets. multiple large deals.
As structural reforms and economic growth provide
P rivate investors that have been
the backdrop, the performance of M&A markets is
getting stronger across the world. Following a relatively taking a wait-and-see approach may
sluggish 2016, M&As got off to a slow start in 2017 but
begin moving in from the sidelines,
gained momentum as the year unfolded. According to
Mergermarket,1 by the end of the year: emboldened by rising political stability
— North America saw almost 6,000 deals valued at and consistent growth to enter
1.4 trillion US dollars (US$).
multiple large deals.
— With 7,235 deals, higher volumes of lower value
European transactions amounted to US$929.3 billion.
At the same time, strategic buyers are reviewing their mix
— About 3,750 deals totaling US$673.5 billion took place of assets to help determine they are well positioned for
in the Asia-Pacific region (except Japan), while over the coming years. Strategic buyers are also seeing a surge
450 deals in Japan totaled US$40.1 billion. of investor activism — a call to rationalize their asset mix
through spin-offs and carve-outs of non-core assets outside
— Lower but nevertheless healthy deal volumes occurred
the mainstream of the business.
in Latin America, with almost 600 deals worth
US$80.4 billion, and the Middle East and Africa, with With interest in disposing of assets generally rising among
just over 400 deals worth US$59.4 billion. both private equity and strategic buyers and growing demand
1 Mergermarket, Monthly M&A Insider, January 18, 2018, p 3–8.
2 | Taxation of cross-border mergers and acquisitions
© 2018 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.
from retail investors, interest in exits through initial public Of course, such substantial reforms will create both
offerings may very well continue to climb. winners and losers. Nevertheless, US tax reforms could
drive significant M&A activity involving the US over the next
Region by region, some of the more significant factors
few years. The longer-term impact is less certain, as many
influencing the world’s M&A markets are as follows.
aspects of US tax reform will expire in 5 years unless further
legislation is enacted to extend the time-limited changes.
North America
While re-negotiation of the North American Free Trade Europe
Agreement between Canada, the United States and Mexico
Europe seems to have emerged from a period of political
continues to create uncertainty over future trade conditions,
uncertainty in good shape, with projected economic
US tax reform is having a bigger, more immediate impact
growth of 2.4 percent in 2017,2 the fastest in a decade,
on M&A activity. The reform’s US$1.3 trillion in tax cuts will
the European Commission says. Growth is expected to
undoubtedly free up cash that can drive domestic investment.
continue at 2.3 percent in 2018 and 2 percent in 2019.3
Concerns that recent elections would produce waves
T he reform’s fundamental changes to of populist governments across Europe did not pan out.
the taxation of multinational entities Markets in Europe and the UK have recovered from the
initial shock of Brexit, and they seem to be proceeding with
could particularly affect planning for
‘business as usual’ as the Brexit negotiations continue.
cross-border deals.
Technology is propelling
US tax reform’s fundamental changes to the taxation of considerable M&A activity in
multinational entities could particularly affect planning
Europe with consolidation in the
for cross-border deals. The changes include a shift from
a system of worldwide taxation with deferral to a hybrid technology sector itself and more
territorial system, featuring a dividend exemption regime technology buys from companies
with current taxation of certain foreign income, a minimum
in traditional industries seeking to
tax on low-taxed foreign earnings, and new measures to
deter base erosion and promote US production. increase their performance.
In particular, the dividend exemption regime could prompt
companies with offshore cash reserves to repatriate Technology is propelling considerable M&A activity in Europe
these profits, and those companies may then look for new with consolidation in the technology sector itself and more
opportunities for investment closer to home. In addition, technology buys from companies in traditional industries
even though interest rates remain low, the new limit on the seeking to increase their performance. In some sectors,
deductibility of interest expense to 30 percent of adjusted technology is increasingly entwined, as shown by recent
taxable income may cause some international companies to activity in financial services (i.e. fintech) and healthcare.
move debt out of the US to foreign jurisdictions.
The OECD’s BEPS project and the European Union’s (EU)
ATAD 1 and 2 continue to alter the landscape for M&A in
2 European Commission, Winter 2018 Economic Forecast.
3 See note 4.
Taxation of cross-border mergers and acquisitions | 3
© 2018 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 and beyond. EU member states are required to — Peru and Colombia are attracting interest from private
transpose minimum rules under the ATAD into domestic equity, particularly in the energy sector. Colombia
law by 2019. introduced a major tax reform in January 2017 that,
among other things, eases and simplifies corporation
The BEPS changes restricting interest deductions based
taxation while also addressing tax evasion.
on a limit of 30 percent of earnings before income taxes,
depreciation and amortization (EBIDTA) are among the — With corporate tax hikes and increasingly complex
changes having the biggest impact since these restrictions anti-avoidance rules, Chile’s recent tax changes have
are new to many European countries and jurisdictions, to some extent bucked international trends, but the
including the UK, Poland and Slovakia. country’s strong social and political stability continues to
attract investors.
Many European countries and jurisdictions were among the
first 70 countries and jurisdictions to take part in the signing — The tax-friendly countries and jurisdictions of Central
ceremony for the OECD’s multilateral instrument (MLI) America remain viable, including Costa Rica despite its
to combat treaty abuse in June 2017.4 The MLI provides a rising labor costs.
vehicle for the swift implementation of the tax treaty-related
measures for hybrid mismatches, treaty shopping, permanent Asia-Pacific region
establishments and mutual agreement procedures. In the Asia-Pacific region, the near-term outlook is generally
positive with adequate surplus capital and conditions for
A ttention to the new risks from executing transactions getting easier. Like Latin America,
however, the cross-border M&A climate in the Asia Pacific
BEPS-driven tax changes is especially
is mixed:
important when completing tax
— Ongoing tax reforms in Australia continue to dampen
due diligence reviews, defining the M&A environment. These reforms include a diverted
tax indemnities, and undertaking profits tax that took effect in July 2017, increased
withholding taxes on capital gains of non-residents
acquisition integration planning.
selling certain Australian real property, and more capital
gains tax changes affecting ‘look-through’ earn-out
arrangements.
These changes could significantly affect cross-border M&A
planning, structuring and financing in Europe and other — Outbound investment from China in specific sectors
regions. Attention to the new risks from BEPS-driven tax has slowed in the past year under a stated government
changes is especially important when completing tax due policy as worries that rising amounts of capital outflows
diligence reviews, defining tax indemnities, and undertaking have led to tighter foreign investment controls.
acquisition integration planning.
— Japan’s corporate tax rate has been steadily dropping
to a current effective rate of about 30 percent (see
Latin America
Japan commentary at page 67). The lost tax revenues
Following the boom years of the recent past, countries and
are being recouped through various measures, such as
jurisdictions in this region have been establishing a firmer
new limits on loss carryovers and scheduled increases
foundation for businesses and investing in their longer-term
to its consumption tax rate (from 5 percent in 2014
success. The diversity of tax regimes in the region creates
to 8 percent currently and 10 percent in 2019) (see
varying conditions for foreign investment:
page 67). Corporate tax rates have also dropped in
— Brazil’s upcoming election and stabilizing currency are Malaysia and Vietnam.
helping to boost investor confidence and as a result the
— Hong Kong (SAR) proposed to extend its profits tax
M&A market is rebounding.
exemption for offshore investment funds to onshore
— Argentina’s new government is making progress privately offered open-ended fund companies. It has also
on structural reforms that are likely to attract foreign introduced a two-tiered profits tax regime that sees the
direct investment. These reforms include opening tax rate for the first 2 million Hong Kong dollars (HKD)
the previously state-dominated airline industry to of profits reduced to half of the standard profits tax rate
competition, comprehensive tax reform, curbing (see Hong Kong (SAR) commentary at page 40).
subsidies on gas, electricity and transportation, enacting
fiscal discipline, and reforming the judiciary.
4 OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS.
4 | Taxation of cross-border mergers and acquisitions
© 2018 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.
Technology accelerates tax due diligence Long-term outlook
reviews
While the short-term outlook for global M&A is seemingly
The far-ranging impacts of current and potential future US, bright, some clouds on the horizon could alter the situation
international and other tax reforms are complicating efforts in the longer term. Many US tax reform measures will
of sellers to demonstrate full tax compliance to potential expire in 5 years. With a US presidential election coming in
buyers and of potential buyers to conduct thorough due 2020 and Congressional elections in 2018, 2020, and 2022,
diligence regarding their targets’ tax affairs. With so many whether these measures will be extended is unknown. If
tax changes coming on stream, planning the tax-related China continues to shift its global activities, the long-term
details and clauses of legal agreements in advance is implications are unclear. International tax rules should
crucial to mitigate tax consequences, with special attention generally remain somewhat stable for 2018, but this
to clauses referring to price, contingent prices, liabilities, may very well change in 2019 and 2020 as the minimum
indemnification and warranties. standards agreed by countries and jurisdictions taking part in
the OECD BEPS project begin to take effect.
Brazil is leading a trend among tax and
The current period of stability has
regulatory authorities worldwide to
M&A tax professionals with KPMG’s
require electronic access to taxpayers’
members firms optimistic that M&A
digital records and accounts, and
deal volumes will continue to increase,
Latin American dealmakers have
at least for the remainder of 2018.
been among the first to deploy this
technology in the M&A space.
Brazil is leading a trend among tax and regulatory authorities In summary, M&A activity is on the rebound worldwide
worldwide to require electronic access to taxpayers’ digital as synchronized global growth combined with rapid
records and accounts, and Latin American dealmakers have technological change spur a realigning of strategic objectives.
been among the first to deploy this technology in the M&A While the outlook is hazier 3 to 5 years out, the current
space. Advanced data and analytics and artificial intelligence period of stability has M&A tax professionals with KPMG’s
are transforming due diligence processes. As compliance- members firms optimistic that M&A deal volumes will
driven automation and standardization enables richer data continue to increase, at least for the remainder of 2018. How
and more powerful analytic results, due diligence teams can long the current buoyancy will continue remains to be seen.
take a deeper dive into the tax affairs of targets more quickly, For now it seems the time to ‘wait and see’ is over, and
potentially shortening the deal-making process and enabling buyers and sellers have at least a limited window to make
better decisions. hay while the sun shines.
However, many sellers are reluctant to offer this level of
openness, with sellers in the US generally showing less
comfort than their counterparts in Europe and the Asia
Pacific region. As the use of data and analytics in M&A
becomes more entrenched over the next 3 to 5 years, sellers
in all parts of the world could be compelled to become more
transparent.
On the buy side, early adopters of data and analytics could
gain a significant competitive advantage, while those who
delay may risk losing out as they struggle to catch up.
Technology is also changing the composition of M&A teams,
as data and analytic skills become an increasingly important
part of the talent mix.
Taxation of cross-border mergers and acquisitions | 5
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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
US
T: [phone]
E: [email protected]
Angus Wilson
Asia Pacific Regional Leader for Deal
Advisory, M&A Tax
KPMG Australia
Tower 3, 300 Barangaroo Avenue
Sydney, NSW 2000
Australia
T: [phone]
E: [email protected]
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South Africa
Introduction Key tax provisions
The environment for mergers and acquisitions (M&A) Withholding taxes
in South Africa is far less clement than in previous Withholding tax on interest
years due to political and economic uncertainty. As of 1 March 2015, a 15 percent WHT is imposed on
These constraints have reduced the economy’s interest received by or accrued to a non-resident (that is not
a controlled foreign company — CFC). An exemption applies
growth and led to a decrease in M&A activity. Ratings
for any amount of interest received by or accrued to a non-
downgrades have also led to concerns about the
resident in respect of:
adverse effects of rising financing costs on the M&A
— government debt instruments
environment.
— listed debt instruments
Recent developments
— debt owed by a bank, the South African Reserve Bank
(SARB), the Development Bank of South Africa (DBSA) or
The latest tax amendment cycle has seen significant
the Industrial Development Corporation (IDC)
changes to the taxation of extraordinary dividends, along
with a clampdown on schemes designed to facilitate — debt owed by a foreign person or a headquarter company.
distributions to non-resident shareholders free of dividend
South Africa is in the process of renegotiating its existing tax
withholding tax (WHT).
treaties in light of the new 15 percent WHT on interest.
Tax-exempt and dividend WHT-exempt dividends exceeding
Withholding tax on dividends
15 percent of the market value of the shares and declared
within 18 months before the shares’ disposition are subject A WHT on dividends applies regarding all dividends declared
to either income tax or capital gains tax (CGT) where certain and paid to non-residents on or after 1 April 2012. The dividend
minimum shareholding thresholds are met (10 percent for WHT is levied at a rate of 20 percent (increased from 15 percent
listed entities, 50 percent for unlisted entities, and 20 percent as of 22 February 2017), subject to treaty relief.
for unlisted entities where no shareholder holds a majority
Withholding tax on royalties
interest).
Royalties paid by a South African entity to a non-resident are
Dividends paid to non-residents are subject to dividend WHT subject to a WHT of 15 percent as of 1 January 2015.
at a rate of 20 percent (unless reduced under tax treaty).
Deductibility of interest on debt used to acquire equity
By contrast, the return of so-called contributed tax capital
As of 1 January 2013, interest incurred on debt to finance the
(CTC) — generally, the share capital and share premium
acquisition of the shares is deductible for tax purposes, where
of a company — is not subject to tax for the non-resident.
a South African company acquires at least a 70 percent equity
Legislation has now been introduced to curb schemes that
shareholding in another South African operating company.
seek to inflate the CTC available for distribution.
An ’operating company’ includes any company that carries
These changes significantly limited the ability of sellers to on business continuously by providing goods or services for
exit a South African investment through a share buy-back consideration. The provisions require at least 80 percent of
mechanism. In addition, the new extraordinary dividend the receipts and accruals of the operating company to be
regime may adversely affect the ability of companies to ‘income’, that is, non-exempt amounts. Where the shares in
restructure using the so-called ‘rollover relief’ provisions the operating company are acquired indirectly through the
(which broadly allow companies to transfer assets in a tax- acquisition of shares in a controlling company, the interest is
neutral manner; see ‘Crystallization of tax charges’ below).
Taxation of cross-border mergers and acquisitions | 7
© 2018 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
deductible only to the extent that the value of the controlling from a non-resident person in a controlling relationship with
company shares is attributable to the operating company; the the debtor (i.e. back-to-back funding).
deduction may also be limited under the interest limitation
Essentially, where section 23M applies, the interest
rules discussed below.
deduction by the debtor cannot exceed:
Interest deductibility for M&A transactions
— the sum of:
Previously, interest on debt used to fund certain transactions
(discussed below) was not automatically deductible. Approval — interest received
from the South African Revenue Service (SARS) was needed.
— a formula-based percentage of ‘adjusted taxable
This approval process has been replaced by section 23N, income’ (essentially, EBITDA). The percentage of the
which essentially limits the deductibility of interest where adjusted taxable income varies based on the average
debt is used: South African repo rate during the year of assessment
and is limited to a maximum of 60 percent.
— to fund the acquisition of a business or assets from a
related group entity on a tax-neutral basis — less:
— to fund at least a 70 percent equity shareholding in a — interest incurred on debts other than debts falling
South African operating company. within section 23M (where the interest falls within
both section 23M and section 23N, the portion of
In these cases, the amount of interest deductible in the year
interest disallowed under section 23N is excluded
of the transaction and the following 5 years cannot exceed:
from the calculation).
— the sum of:
Any interest disallowed under section 23M may be carried
— interest received forward to the following year of assessment and deemed as
interest incurred in that year.
— a formula-based percentage of ’adjusted taxable
income’ (which is essentially the company’s earnings The provisions do not apply where the creditor funded the
before interest, tax, depreciation and amortization debt advanced to the debtor with funding granted by an
(EBITDA)). The percentage of the adjusted taxable unconnected lending institution and the interest charged
income varies based on the average South African on the loan does not exceed the official rate of interest for
repo rate during the year of assessment and is purposes of the Income Tax Act plus 100 basis points.
limited to a maximum of 60 percent.
Asset purchase or share purchase
— less:
The following sections address those issues that should be
— the amount of interest incurred on debts not falling
considered when contemplating the purchase of either assets
within the section.
or shares. The pros and cons of each option are summarized at
These rules apply to transactions entered into on or after the end of this report.
1 April 2014, and also to the refinancing of transactions that were
Purchase of assets
subject to the earlier pre-approval process discussed above.
The decision of whether to acquire the assets of a business
Where such interest is disallowed, the disallowed portion of
or its shares depends on the details of the transaction. The
interest is lost and cannot be carried forward.
advantages and disadvantages of both purchase mechanisms
Limitations on interest paid to non-residents need to be understood in order 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 interest WHT in South the purchase price for tax purposes. However, other
Africa and who are in a controlling relationship with a South considerations may make an asset purchase far less favorable,
African resident debtor. including, among other things, an increased capital outlay,
legislation that may disallow the deduction of interest
The limitations also will apply between a debtor and creditor
(discussed above), the inability to use the tax losses of the
who are not in a controlling relationship where a creditor
target company, and the inability to deduct or recover VAT
advances funding to the debtor and the funding was obtained
8 | Taxation of cross-border mergers and acquisitions
© 2018 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.