BDO ADVISORY LIMITED Tax Due Diligence and Tax Planning for M&A PAUL ASHBURN 8 AUGUST 2012
PRESENTATION OVERVIEW Overview of tax issues for inbound M&A Tax due diligence review M&A tax planning Page 2
ACQUISITION CASE STUDY Background of the purchaser. Purchaser is a foreign company with no business operations in Thailand Intends to acquire 100% interest in Thai business i.e. absolute control Page 3
ACQUISITION CASE STUDY Background of the seller Co A. Co A is a Thai company with foreign and Thai owners The company s business is promoted by the Board of Investment and receives tax incentives The company has transactions with related parties Page 4
The M&A TRANSACTION PROCESS Corporate Corporate strategy strategy Predeal Predeal evaluation evaluation Negotiation Negotiation Financing Financing Detailed Detailed investigation investigation Completion Completion Integration Integration Tax issues should be considered carefully at the predeal evaluation and detailed investigation stages Page 5
PREDEAL EVALUATION a short list of important tax issues Asset deal v share deal Acquisition vehicle Utilizing tax losses of the target Funding Tax incentives retained Page 6
ASSET DEAL V SHARE DEAL summary of taxes Asset Deal Share Deal Corporate Income Tax Value Added Tax Specific Business Tax Stamp Duty Real estate taxes Corporate or Personal Income Tax Stamp Duty Page 7
SHARE ACQUISITION some pros and cons Purchaser Seller Pros Cons Pros Cons Can access tax losses in the target Can access BOI tax incentives Inherits preacquisition tax liabilities Assumes tax liabilities on unrealized gains in the company Goodwill locked up in the share price Simpler to structure Owner gets paid directly Transfer taxes are generally low Not liable for company s taxes in the future All businesses will be sold; may need to restructure Page 8
ASSET PURCHASE step up in cost base example In an asset purchase, there can be two advantages: 1. The purchase price of assets are depreciable; in a share purchase onshore the basis for depreciation is unchanged. 2. Purchased goodwill can be amortised and claimed as a tax deduction. Share Purchase = 100 Asset Purchase = 100 Depreciation basis Book value Purchase price Buildings 30 35 Equipment 15 15 Stock 10 15 Goodwill 35 Total 55 100 Page 9
POTENTIAL ACQUISITION ACQUISITION Asset deal Thai acquisition company Branch of foreign company Share deal Direct holding offshore Local holding company Third country intermediary Page 10
WHY CARRY OUT DUE DILIGENCE...many transactions fail simply because the risks and opportunities are not properly evaluated beforehand due diligence an extensive and thorough assessment of the risks and opportunities of the transaction emphasis on identifying and managing transaction issues identifying important valuation, risk and negotiating issues Page 11
DUE DILIGENCE Issues Operational Issues Business Risks Products/Marketing Strategy Structuring, Financial, Accounting & Tax Issues Legal, Environmental, Insurance and Contract Issues The Due Diligence Process Management and Integration Issues Contingent & Unrecorded Liabilities Management Information Systems Employee Benefits Page 12
DUE DILIGENCE CYCLE Overview Preliminary actions Fieldwork Reporting Finalising the report Page 13
TAX DUE DILIGENCE A quick checklist Unrecorded tax liabilities Tax audit history Tax losses Tax credits Tax incentives Page 14
POTENTIAL ISSUES Transfer pricing related party transactions International transactions Employee fringe benefitslocals and expatriates Hire of work contractswht and stamp duty VAT input tax credits VAT on exported services 0% or 7% Expenses deductible Page 15
POTENTIAL TAX EXPOSURES Additional taxes Penalties of up to 200% of the additional tax payable Surcharges of 1.5% per month Numerous fines for failing to comply with the law Page 16
FIELDWORK Fact finding not an audit sufficient evidence to substantiate report content and conclusions although not merely fact gathering either Page 17
TAX DUE DILIGENCE Items found in a due diligence change the deal structure Avoid successor tax liabilities Preserve tax attributes Clarifies stepup tax basis Plan for repatriation Debt push down Management fees Royalty fees Page 18
SHARE SALE Foreign co taxation of gains Foreign co sells to offshore purchaser Foreign co sells to onshore purchaser No Thai tax payable on any gain made if sale executed and consideration paid offshore 15% withholding tax on gains paid from or within Thailand Exemption or reduction under some Double Tax Agreements Page 19
SHARE SALES offshore Countries with DTA protection include. Belgium Canada Pakistan Denmark France UK Germany India Singapore Indonesia Sweden South Africa Mauritius Norway Italy Page 20
SALE OF SHARES offshore tax planning Can an offshore shareholder with no DTA protection minimise his exposure to 15% Thai withholding tax? Step up in the cost base of shares Allocation of sales price to other assets e.g. restraint of trade Receive dividend rather than gain? If cost base of shares is same or greater than the sales price no withholding tax Page 21
WITHHOLDING TAX pre deal structuring Offshore Cost 70 Foreign Co Sales price 100 Foreign Co #2 Thailand Sales price 100 Sales price 100 Purchaser 15% Thai tax saving on gain Page 22
DIVIDEND TAX PLANNING offshore seller Points to consider. 10% dividend withholding tax is gain otherwise taxable? Exemption for BOI projects No reductions or exemptions under a double tax agreement ( DTA ) Direct and underlying tax credits available Page 23
SALE OF SHARES onshore Thai corporate sellers No special tax regime for capital gains Gains or losses from sale of shares include in taxable net profit Individuals 5% 37% progressive rate for gains for Thai individual seller (not SET listed) Page 24
DIVIDEND TAX PLANNING onshore corporate seller Shareholder in a Thai company (non BOI) WHT Exemption SET registered Thai company Nil 100% Thai company owning at least 25% of voting shares and the paying company is not a shareholder in the receiving company Nil 100% Thai company other cases 10% 50% Shares on which the dividend is paid must be held for 3 months or more before and 3 months or more after the dividend is paid for exemption to apply. Page 25
DIVIDEND TAX PLANNING pre deal structuring Purchaser Purchaser Sales price 100 Sales price 70 Cost 70 Thai seller Thai seller Dividend 30 Thai Co Gain 30 Gain 0 30% Thai tax saving on gain Page 26
DIVIDEND TAX PLANNING onshore individual Points to consider. 10% dividend withholding tax Can elect to exclude dividend or include and receive tax credit Exemption for BOI projects Page 27
ASSET ACQUISITION land & buildings Direct acquisition of land & buildings attracts high transfer taxes Reduced transfer tax rates no longer apply in many cases Acquisition of shares in land holding company can appear a cheaper alternative on paper Page 28
ASSET ACQUISITION land & buildings worth Baht 100 m Transfer of Land& Building Transfer of Shares Tax Rate Amount (Baht) Rate Amount (Baht) WHT SBT 1% 3.3% 1,000,000 3,300,000 Stamp duty Transfer fee 2% 2,000,000 0.1% 100,000 Total 6,300,000 100,000 Page 29
ASSET DEAL Thai acquisition company Tax advantage of debt push down explained 1. Thai acquisition company borrows from offshore parent to acquire the business 2. Interest on the debt repaid to offshore parent profit repatriated as interest rather than dividends 3. Interest is tax deductible on accrual basis 4. Interest deductions can be offset against the profits of the acquired business Page 30
THAI ACQUISITION COMPANY debt funding Profit before interest Interest Net Profit Net Profit after tax Dividend Total Non BOI BOI No Debt Debt No Debt Debt Inc 200 200 140 140 Tax 60 60 14 74 Inc 200 100 100 70 70 Tax 60 (15) 45 7 52 Inc 200 200 200 200 Tax Inc 200 100 100 100 100 Tax 15 15 Is debt funding better than equity in all cases? Page 31
LOCAL HOLDING COMPANY STRUCTURE Offshore Thailand Foreign Company Thai Holding Company Company A Tax issues to consider 1.No tax consolidation if holding company is debt funded 2. Dividends from Thai Company could be exempt e.g. at least 25% owned and other conditions met for exemption 3. It may not be suitable for BOI projects with tax free dividends 4. Could be useful for investments in multiple entities Page 32
THAI HOLDING COMPANY debt push down Background 100% share purchase of Coy A shares. Purchase price of shares is 100. Book value of net assets is 55. Difference between book value and purchase price is goodwill of 45. 100% debt funded acquisition. Page 33
THAI HOLDING COMPANY debt push down Offshore Foreign Company Possible alternative Set up a Thai holding company to purchase the shares Thailand Thai Holding Company Coy A Invest. 100 Debt 100 Net assets 55 Fund the Thai holding company by debt no tax consolidation so interest is not deductible against Coy A profits Page 34
THAI HOLDING COMPANY debt push down Offshore Foreign Company Entire business transfer Transfer Coy A business to the Thai Holding Company Thai Holding Company Invest. 100 Net assets 55 Transfer at book value Coy A can be dissolved Thailand Debt 155? Consider transfer taxes Coy A Receivable 55 Page 35
THIRD COUNTRY INTERMEDIARY Parent Company Investment Company Thai Target Company Home Country Third Country Thailand Tax issues to consider 1. How will the Parent Company be taxed in its home country on a direct investment 2. Can the Parent Company utilize a double tax agreement? 3. Full credit for Thai taxes? 4. How will returns from the Thai investment be repatriated to the Parent Company Page 36
ASSET ACQUISITION VAT If a business transfer is subject to VAT Identify the assets subject to VAT Allocation of consideration can effect the VAT payable if non VAT assets transferred Gross value of taxable assets subject to VAT liabilities not deducted Purchaser can carry forward VAT as tax credit or seek refund subject to tax audit VAT clawback on buildings less than 3 years old may apply Page 37
BUSINESS TRANSFER VAT treatment Business Transfer NO VAT VAT unless exempt Entire business transfer Partial business transfer Page 38
ASSET DEAL entire VAT business Transfer of entire VAT business is not a sale for VAT purposes under Section 77/1(8) (f) provided that the transferee is liable to VAT Care should be taken in determining if entire VAT business has been transferred Page 39
VAT ON TRANSFER OF ASSETS Taxable assets Nontaxable assets Stock Machinery and equipment Motor vehicles Trade receivables Intangibles e.g. lease rights, goodwill Land and buildings Shares Financial assets e.g. loans, bonds Trade receivables Assets used entirely in nonvat businesses Page 40
Q & A
BDO THAILAND Tax & Legal Contacts PAUL ASHBURN Senior Partner Tax & Legal Services paul.ashburn@bdothaitax.com Telephone: +662 260 7290 Direct: +662 661 9781 Mobile: +6681 499 5707 Fax: +662 260 7297 Qualifications Bachelor of Commerce, UNSW Australia; Member of the Institute of Chartered Accountants of Australia Fellow of the Securities Institute of Australia Experience Paul has over 22 years experience providing tax advisory services, including more than 14 years in Thailand. Paul s specialities include mergers & acquisitions, international taxation and tax structuring of crossborder transactions.
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