WHAT IS A TRANSACTIONAL TAX PRACTICE?

Transcription

1 Transactional Tax Insights Betsy-Ann Howe Tax Partner - Sydney 19 August 2014 Copyright 2013 by K&L Gates. All rights reserved. WHAT IS A TRANSACTIONAL TAX PRACTICE? Corporate transactions Mergers & Acquisitions Divestments Capital Raisings Joint Ventures ESOPs Due Diligence Financing Asset Finance (aircraft, ships, yellow goods) Bond Issues Investment Funds Retail Products Private equity Buy-outs (LBOs, MBO) Fund establishment and licensing Expansion Capital Investments Exits (tender sales and IPOs) Audit / Disputes LPP Review Objections Transfer Pricing documentation Briefs to Counsel Rulings klgates.com 2 8/19/2014 1

2 Structuring a Transaction SHARE SALE VS ASSET SALE? Tax is just one factor to be taken account of when you are looking at the structure of a transaction, irrespective of whether you are acting for the vendor or purchaser or the borrower or the lender Tax outcomes should not drive a transaction, but if the transaction is structured inefficiently then the economic outcomes for the parties may not be as expected and the commercial viability of the transaction may be impacted In a M&A transaction (and whether you are acting for the Vendor or the Purchaser) one of the first issues requiring consideration is whether the sale should be a share sale or an asset sale The tax issues associated with each transaction are different and usually the DD process will be centred around making this decision Share sales require, generally, more DD given the corporate history is being acquired Asset sales may require less DD (particularly from a tax perspective) klgates.com 4 8/19/2014 2

3 SHARE SALE V ASSET SALE A Vendor will generally want to sell the company because the tax issues are generally straightforward: What is the cost base of the shares? Warranties and indemnities required? Is the company a landholder? Is a CGT discount available to the vendor? GST usually neutral A Purchaser will generally want to acquire the assets / business: Allocation of purchase price across assets step up to market value easier to achieve Leave corporate history behind Can establish new corporate structure klgates.com 5 SHARE SALE Warranties and indemnities very important for the purchaser as the company history is being acquired Conduct of claims clauses important? ATO generally has a four year period in which to amend the tax position of the company so any warranties and indemnities must, minimally, cover this period Scrip or cash or both? Purchaser acquires tax profile of assets unless step up available through consolidation Many share acquisitions seek to utilise scrip for scrip rollovers for CGT purposes (this defers the capital gain arising on the disposal of the Vendor s shares) and can give rise to a cost base step up depending upon the rollover utilised GST treatment input taxed Stamp duty other than in NSW and SA no duty payable on a share transfer unless landholder provisions apply klgates.com 6 8/19/2014 3

4 ASSET SALE Different issues on DD - less concerned about warranties and indemnities relating to past tax history of the company, BUT change in ownership of some assets can have issues around cost base Allocation of purchase price across assets Vendor and Purchaser have different drivers: Vendor will be liable to a balancing adjustment in respect of some assets so will want the cost allocated to assets to be close to tax written down value The balancing adjustment is effectively the difference between the sale proceeds and TWD value Purchaser will want to allocate a higher value to assets. If the asset is depreciable, the higher the acquisition price the greater the depreciation available. Assets acquired which may be on sold should be as close to market value as possible Stamp duty payable on some business assets but not necessarily all e.g. goodwill and certain IP is dutiable in NSW and other States: Duties legislation provides a formula to apportion dutiable value between States Generally OSR accepts allocations agreed by independent third parties dealing on an arm s length basis and documented klgates.com 7 ASSET SALE - GST Supply of each asset may be a taxable supply unless it is GST-free or input taxed GST-free going concern requirements: purchaser must be registered for GST or is required to be registered supply if for consideration parties agree in writing that the supply is of a going concern vendor must supply everything necessary for the continued operation of an enterprise Vendor must continue to operate the enterprise until the day of the supply (eg completion) But what if there are a number of assets which make up a business being used by different vendors how do you apply the going concern provisions then? klgates.com 8 8/19/2014 4

5 ASSET SALE STAMP DUTY Stamp duty In NSW stamp duty is payable on the transfer of dutiable property which includes: Land in NSW, including options to purchase land in NSW Transferable floor space A land use entitlement Non-listed shares in a NSW company or units in a unit trust scheme Business assets A statutory licence under NSW law Certain partnership interests If the transaction involves any of the above, goods in NSW will also be dutiable property Business assets: Goodwill of a business, if the business supplied goods/services in NSW during the previous 12 months If the transaction involves goodwill, it will also include IP used or exploited in NSW during the previous 12 months A statutory licence or permission under Cth law, if rights have been exercised during the previous 12 months in NSW klgates.com 9 ASSET SALE STAMP DUTY EXEMPTIONS Certain transactions between related corporations or unit trust schemes are exempt from duty The transaction can either be the transfer of dutiable property from one member of a family to another (a relevant reconstruction transaction), or the formation of a new family by inserting a new head entity between an entity and the shareholders or unit holders of that entity (a relevant consolidation transaction) An entity can be either a corporation or a unit trust scheme For the purposes of this exemption, a family consists of a parent entity and its subsidiary entities. To be a subsidiary entity, the parent entity must either hold 90% of the securities of that entity, or control 90% of the votes at a general meeting of that entity Potential issues: New provisions enacted in NSW with the policy intention of broadening the circumstances in which the exemptions would apply However recent experience suggests that OSR is taking a restrictive interpretation of the provisions, limiting the availability of exemptions klgates.com 10 8/19/2014 5

6 STAMP DUTY DOCUMENTATION Asset sale Generally, OSR will require evidence as to value if there is nominal consideration or OSR does not believe consideration was market value Evidence of value will usually be sought where parties are associated persons not acting at arm s length or consideration is considered low for the type of property being sold Share sale OSR requires either of following: audited financial statements of the relevant company or unit trust, including a certified copy of the latest balance sheet and profit and loss statement for the last five years; or a valuation of the relevant shares or units, or a statement by one of the parties as to how the valuation was determined (certified balance sheet also required) klgates.com 11 Transactions Examples 8/19/2014 6

7 MINING AND RESOURCES Our client was a Canadian gold miner proposing a scheme of arrangement to enable a merger with an ASX listed Australian company The Australian company s sole asset was its gold mining project in Mali currently held in a Mali-subsidiary. There was a a requirement under Malian legislation to transfer the recently awarded mining permit to another Malian company within the Australian owned group The issue arose in due diligence as to whether this transfer had Australian tax issues, thus creating a potential cost in the merger process Although the transfer occurred between two foreign companies. Those companies were each a controlled foreign company (CFC) of the Australian group because the Australian parent held 50% or more of each company, directly or indirectly Under the CFC rules, an Australian taxpayer is required to include in its assessable income a share of the income or gains of a CFC even though the income or gains have not been distributed in certain circumstances, by applying Australian tax rules klgates.com 13 FINANCING SOUTH AFRICAN COAL MINES Our client owns coal mining assets in South Africa, is incorporated in the UK and has predominately Australian shareholders The tax residence of the company is a critical part of its global tax profile the significance being that if a company is tax resident in Australia it is liable to tax in Australia on its worldwide income Tax residence of companies is determined by the place of incorporation but also by where the central management and control of the company is located Double tax agreements will generally tie break to central management and control Residence of directors, location of Board meetings all critical issues and protocols need to be set and followed We have provided advice on a convertible note issue, capital raising by Hong Kong, Chinese and Luxembourg investors, project financing for development of the South African mines, corporate governance issues involving the interplay between the ASX listing rules, the UK Companies Act and the UK Takeovers Code klgates.com 14 8/19/2014 7

8 EMPLOYEE SHARE SCHEMES We act for many clients who have implemented ESS arrangements either as part of a merger or takeover, as part of start up arrangements or to incentivise staff An ESS may be implemented for all or any of the following reasons: Align the interest of the employees and the Company Provide incentives to employees to join and remain with the company for a certain period Encourage identification with and loyalty to the company Provide a secure pool from which to fund employee benefits Provide for succession planning Provide for employee participation toward an exit strategy There is no one fits all approach to ESS. For example, an ESS can be: Standard ESS Loan funded ESS Discretionary trust plan Unit trust plan Each has different tax implications (Div 83A, PAYG, FBT) which arise at different times klgates.com 15 CORPORATE RESTRUCTURE We recently acted for a privately owned group of companies specialising in commercial construction and facilities maintenance The Group structure was flat, with all shareholding being held in each company in the same proportions by the same shareholders The Group could not be grouped or consolidated for tax purposes and tax losses in one entity were unable to be utilised across the group We advised on a group restructure, which involved interposing a new holding entity between the companies and the shareholders, to enable a more efficient operation of the group and implementing tax funding, tax sharing and indirect tax sharing agreements to allocate tax liabilities across the group companies Relevant issues were ensuring rollover relief was available for CGT purposes, utilising the corporate consolidation stamp duty exemption and putting in place an employee share plan klgates.com 16 8/19/2014 8

9 UTILISATION OF TAX LOSSES We act for the RE of an ASX listed Australian fund investing offshore Following the GFC the former RE focused the investment strategy of the fund for a wind down and orderly realisation of trust assets However, as the market improved consideration was given to recapitalising the REIT and continuing with its investment strategy The REIT has substantial carry forward tax losses and the issue was how to utilise those losses for the benefit of existing unit holders and new unit holders Losses can only be utilised if there is continuity of ownership in the REIT or if the SBT can be satisfied Ownership requirements are 50% and, if breached, the only basis for carrying forward losses is SBT SBT is stringently applied by the ATO klgates.com 17 ESTABLISHMENT OF CONSULTING BUSINESS IN CHINA We act for a group of Australians seeking to establish an offshore structure to provide consulting services to Chinese nationals seeking to acquire Australian real estate We reviewed the tax issues associated with locating that business in either Singapore or Hong Kong and determined that Singapore was the more appropriate option In collaboration with the K&L Gates Singapore office we provided advice to implement the new business, including attending to the incorporation of the new company in Singapore From an Australian tax perspective, the primary issues associated with this business was the application of the controlled foreign company rules to the Australian shareholders We also provided advice and drafted agreements necessary for the establishment of the Singapore Company and arrangements with a Chinese joint venturer klgates.com 18 8/19/2014 9

10 FOOTBALL TOURNAMENT IN AUSTRALIA AND ASIA Our San Francisco office acted for the US owner of certain worldwide rights associated with the marketing and promotion of football tournaments in various locations around the world The client was intending to establish such a tournament in Australia and potentially in Asia Teams to play in the tournament include Real Madrid, AC Milan and the like International advice was provided out of Shanghai, Sydney, the US, Italy and Germany (from K&L tax partners in those jurisdictions) The issues were common across all jurisdictions: Were payments made by a promoter to the European clubs liable to tax in the country where the promoter was located? Were those payments subject to withholding tax? Were tax credits available for tax paid in Australia or other jurisdictions? How are broadcasting rights treated? klgates.com 19 Market Trends in Tax 8/19/

11 2014/15 FEDERAL BUDGET HIGHLIGHTS Start date of the new system for MITs will be deferred by 12 months to 1 July 2015 Company tax rate to be reduced by 1.5 per cent to 28.5 per cent and 1.5 per cent levy on companies with taxable income in excess of $5 million to fund the Government s paid parental leave scheme (expected to commence from 1 July 2015) Rates of the refundable and non-refundable offsets for the R&D Tax Incentive will be reduced by 1.5 percentage points The consolidation integrity package announced in the 2013/14 Budget will be modified The measure announced in the 2013/14 Budget to amend the principal asset test in the foreign resident CGT regime will be modified The income tax treatment of realignments of interests between joint venture partners in the minerals and petroleum industry will be clarified for changes of ownership within a common project Increase FBT rate from 47 per cent to 49 per cent (from 1 April 2015) klgates.com 21 EXPLORATION DEVELOPMENT INCENTIVE Introduction of Exploration Development Incentive announced in 2014 Budget Designed to allow shareholders in certain junior miners to receive tax credits for expenditure incurred, and apply those tax credits against the shareholder's own personal tax liability Tax credits will be available to all shareholders or, at the election of the company, only to holders of shares issued after 30 June 2014 Draft legislation has not yet been released, but the Government has undertaken to further consult with stakeholders Expenditure will be capped at $25m in to ensure cap is not breached an "ex-post modulation approach" will be applied by ATO klgates.com 22 8/19/

12 THIN CAP AND 23AJ Changes to thin cap and non-portfolio dividend exemption (s 23AJ) have entered House of Representatives Changes to the thin capitalization rules will apply to income years commencing on or after 1 July 2014, changes to s 23AJ will apply to distributions made after Royal Assent Amendments attempt to tighten the maximum statutory debt limit and worldwide gearing ratios for taxpayers subject to the rules Concessional amendments - 'de minimis' threshold for thin capitalization limits have been increased from $250,000 to $2million of debt deductions Amendments to s 23AJ will limited exemptions to equity interests under debt-equity rules and exclude debt interests klgates.com 23 FATCA Foreign Account Tax Compliance Act (FATCA) enacted by US Congress in 2010 Institutions required to report to US IRS information on US citizens with financial accounts 28 April Australia and the US signed an intergovernmental agreement (IGA) to assist in the facilitation of FATCA for Australian financial institutions 30 June Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014 introduced IGA measures into law Obligations will apply to Reporting Australian Financial Institutions requirements to provide information to the ATO In 2015 and 2016 due diligence procedures will apply when making payments to nonparticipating financial institutions No withholding for non-compliance klgates.com 24 8/19/

13 ATO FOCUS AREAS Trusts Cross Border Issues Withholding tax / Thin capitalisation / Transfer pricing Offshore Information Requests Profit shifting / use of tax havens Superannuation Employees v contractors Promoter penalties / directors liability GST Stamp duty market values klgates.com 25 8/19/