Cross Border Mergers & Acquisitions Accounting & Taxation Issues Amrish Shah October 4, *connectedthinking

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1 Cross Border Mergers & Acquisitions Accounting & Taxation Issues Amrish Shah October 4, 2007 *connectedthinking

2 Presentation Outline M&A Processes India tax considerations Cross Border M&A Accounting Treatment of Goodwill Case Studies

3 M&A Processes India tax considerations

4 Key M&A Processes M &A Processes PricewaterhouseCoopers 4

5 Share Acquisition Purchase of business by acquiring shares of the target company Capital gains on transfer of shares taxable Listed securities 11.33% & 33.99%, if STT not paid; otherwise 11.33% apart from STT of 0.125% Unlisted securities % & 33.99% Stamp Duty 0.25% of the value of shares transferred, if held in physical form Is duty payable on agreement to sell? PricewaterhouseCoopers 5

6 Key Tax Issues Restriction on closely held companies to carry forward tax losses Capital gains liability on off market transactions Rationalization of stamp law across the states to give uniform treatment PricewaterhouseCoopers 6

7 Cross Border M&A

8 Cross Border M &A - Key Considerations Identification & Commercial Acquisition Structure Tax Financing Legal & Regulatory

9 Taxing Questions : Structuring Cross Border M & A What should you acquire (assets or shares)? How should you acquire it (holding company issues)? How will you pay for it (tax-efficient funding)? How will you use profits (maximising dividend flows)? What if things don't work out (tax-efficient exits)? PricewaterhouseCoopers 9

10 Acquisition Structure Key Considerations Tax Requirement for an SPV or direct buyout Jurisdiction of SPV Tax incidence Single / multiple Raising of debt funds Local regulations Ability to push up/ down debt cost Intangibles and tax break on the same Tax Consolidation Dividend repatriation Accounting Amortisation of Goodwill Consolidation PricewaterhouseCoopers 10

11 Key Tax Issues Issues Amortization of Acquired Goodwill under tax laws Taxability of share swaps Acquisition through a merger India Not allowed Taxable Target merges with the WOS of Acquirer Merger is tax neutral only if shares are issued by the WOS to the shareholders of the Target Overseas Allowed in US, UK etc. Not Taxable in US, UK - subject to conditions Target merges with the WOS of Acquirer Shares of the acquirer directly issued to the shareholders of the Target Merger is still a tax neutral merger (US) PricewaterhouseCoopers 11

12 Key Tax Issues Issues Leveraged buy outs (LBO) Tax on dividend India Deductibility of interest on debt taken for acquisition of controlling stake in Target: When Target is an Indian company allowability is a challenge under Sec 14A When Target is a foreign company- can be allowed as a deduction against the dividend upstreamed to India To use the cash flows of the Target to service the debt it can be merged with the acquirer however, interest deductibility debatable Dividend Distribution % on dividend declared by an Indian company Overseas Interest on debt taken abroad through a SPV acquiring shares of the Target, is allowed as a deduction against operating income of target, either by: group consolidation, where the SPV and the Target are assessed as single entity; or Pass-through status to certain entities; or Subsequent merger of acquirer with Target Dividend received in India from overseas company 33.99% PricewaterhouseCoopers 12

13 Accounting Treatment of Goodwill

14 Accounting treatments of Goodwill A comparison Subject IFRS US GAAP Indian GAAP Amortization of Acquired Goodwill Capitalise but not amortised. Goodwill tested for impairment at least annually at the cash generating unit level Similar to IFRS, although impairment testing and impairment test itself are different Goodwill on business acquisition no specific guidance -general practice varies between no amortisation versus amortisation over period of 10 years. Reviewed for impairment whenever there is an indication Subsequent Adjustments Subsequent adjustment of provisional fair value, against acquired goodwill is allowed within 12 months of the date of acquisition Similar to IFRS Subsequent adjustments normally not allowed except for changes on account of deferred tax (for c/ fwd losses or unabsorbed depreciation not recognized on amalgamation) Negative Goodwill The identification and measurement of acquiree s identifiable assets & liabilities are reassessed and any excess thereof recognized in income statement Any remaining excess after reassessment is used to reduce proportionately the fair value of non current assets. Any negative goodwill remaining recognized as an extraordinary income Treated as capital reserve which is not amortized to income PricewaterhouseCoopers 14

15 Case Studies

16 Case Study I U CO 100% I CO 2 Share Acquisition Share Acquisition I CO 1 Mechanics U CO is a company incorporated in the UK U CO has a WOS in India, I CO2 involved in the same business I CO 1 desirous of acquiring the entire business of U CO in India and UK Instead of acquiring 100% stake in U CO directly, I CO1 acquires U CO and I CO 2 in two separate transactions Value of acquisition is split between U CO and I CO 2 Rationale In case only U CO s shares are acquired, dividend flows from I CO 2 will result in tax inefficiencies Split value is ok from a transfer pricing (tax) perspective since the transaction is between two unrelated parties, ie U CO and I CO 1 Split value should conform to the FEMA guidelines PricewaterhouseCoopers 16

17 Case Study II Proposed structure 100% U CO I CO SPV N CO US CO Acquire 100% Mechanics I CO wants to acquire 100% stake in US CO, which is also engaged in the same business as I CO I CO also has a 100% subsidiary, U CO (a Company in UK), which has substantial operations I CO would incorporate an SPV, N CO in a tax friendly jurisdiction, say Netherlands, to acquire 100% stake in US CO N CO would function as a holding Company of I CO for all future acquisitions and listedon one of the EU exchanges Rationale Capital gains on sale of shares by US CO to N CO not taxable in US Subsequent sale of shares of US CO - exemption from tax in Netherlands participation exemption Flips Limitation of Benefits (LOB) clause of Netherlands US Treaty to avail treaty benefits as discussed above: Acquiring company has to have substantial operations or It should be listed on one of the EU stock exchanges In the present case, N CO does not have substantial operations, nor is it listed in EU exchange currently. Hence, LOB clause would be applicable to transactions between N CO and US CO Dividends up-streamed by US CO to N CO - 30% on dividends in US as no active trade / business in Netherlands PricewaterhouseCoopers 17

18 Case Study II Alternative Tax efficient Structure I CO U CO 100% US CO 100% Share Acquisition Mechanics U CO would acquire shares of US CO, instead of N CO Rationale Dividends paid by US CO to U CO - Withholding 5% on dividends in US if LOB clause satisfied as per the active trade/ business test in the US-UK treaty Not an issue in this case since UK operations are substantially large Capital gains on sale of shares by US CO to U CO not taxable in US Any subsequent sale of shares of US CO - exempt from tax in UK - Substantial Shareholding exemption Repatriation of dividends to India still an issue in all outbound structures taxed at full rate of 33.99% - creative structuring required PricewaterhouseCoopers 18

19 Thank you This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this presentation without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this presentation, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this presentation or for any decision based on it. Without prior permission of PricewaterhouseCoopers, the contents of this presentation may not be quoted in whole or in part or otherwise referred to in any documents PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers, a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Motives and Innovative ways of Structuring and Accounting for Business combination

Motives and Innovative ways of Structuring and Accounting for Business combination Presenter: Amrish Shah January 20, 2017 *Intended for general guidance only Content Modes of M&A in India Indian laws