Tax issues in mergers and acquisitions


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Tax issues in mergers and acquisitions

  1. 1. Tax Issues in MergersTax Issues in Mergers and Acquisitionsand Acquisitions PresenterPresenter VIKRAM SINGH SANKHALA
  2. 2.  What the present income-tax form needsWhat the present income-tax form needs is a section which would explain theis a section which would explain the explanations.explanations.  What do accountants suffer from thatWhat do accountants suffer from that ordinary people don't?ordinary people don't? Depreciation.Depreciation.  Income tax is the fine you pay forIncome tax is the fine you pay for thriving so fast.thriving so fast.  Where there's a will there's a taxWhere there's a will there's a tax shelter.shelter. Tongue in cheekTongue in cheek
  3. 3. Structure of theStructure of the PresentationPresentation  Domestic Tax ProvisionsDomestic Tax Provisions  Basics of InternationalBasics of International TaxationTaxation
  4. 4. Types of Restructuring  Organic - Capital - Business  Inorganic – Change in corporate entity - Mergers & Amalgamations - Demergers - Acquisitions
  5. 5. TaxTax IssuesIssues
  6. 6. Meaning of Amalgamation  Property  Liabilities  Shareholders
  7. 7. "amalgamation", in relation to companies, means  "amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that
  8. 8. property  (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation ;
  9. 9. liabilities   (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation ;
  10. 10. shareholders  (iii) shareholders holding not less than [three- fourths] in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary)  become shareholders of the amalgamated company by virtue of the amalgamation,
  11. 11. Exceptions  Acquisition by Purchase  Distribution as a result of winding up
  12. 12. Amalgamation is a merger
  13. 13. Deemed Dividend u/s 2(22)  The Transfer by a subsidiary company of its assets to its parent company in a scheme of amalgamation does not amount to deemed dividend
  14. 14. Capital Gains – Section 45  Section 47 (vi)- Any Transfer , in a scheme of amalgamation of a capital Asset by the amalgamating company to the amalgamated company if the Amalgamated company is an Indian company
  15. 15. Subsequent Transfer  Section 49 (1)(iii)(e)  Cost of Acquisition shall be deemed to be the cost for which the previous owner of the property acquired it ,as increased by the cost of any improvement of the assets incurred or borne by the previous owner or the assessee, as the case may be. In case the asset became the property of the previous owner before 1-4-1981 , then assessee has the option of either cost to previous owner or fair market value on 1-4-1981.
  16. 16. Period for which the asset is held  Will include the period for which it is held by the previous owner  Indexation will be from the date of holding of share in the resulting company
  17. 17. Admissibility of certain expenses/allowances incurred by the amalgamated company to the amalgamating company
  18. 18. Investment Allowance s. 32A  In case of acquisition of a ship/machinery/plant specified u/s 32A(2) there a deduction of 25% of the cost as investment allowance, subject to the fulfillment of certain conditions. This will pass through to the amalgamated company as long as the amalgamated company continues to fulfill such conditions of allowance
  19. 19. Development Allowance s. 33A(1)  In respect to planting of Tea Bushes  Concession is transferred to amalgamated company if it continues to fulfill such conditions
  20. 20. Expenditure on scientific research s. 35  Certain capital expenditure under this head was allowable  Provision shall apply to amalgamated company if it continues to fulfill such conditions
  21. 21. Provision shall apply to amalgamated company if it continues to fulfill such conditions in the following cases also
  22. 22.  Expenditure on patents and copyrights 35A  Expenditure on Know how 35AB  Capital expenditure on License to operate Telecom Services 35ABB  Amortisation of Preliminary Expenses 35D  Amortisation of expenditure in case of Amalgamation  35E – Mineral prospecting  42- Prospecting , Extraction or production of Mineral oils
  23. 23. Depreciation Allowance  WDV for the amalgamated company shall be the WDV of the block of assets as in the case of the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said previous year.
  24. 24. Benefits u/s 80IA , 10A , 10B  Would continue to the resulting company as if the amalgamation or de merger had not taken place  Would not be available to the amalgamating or de merging companies
  25. 25. Section 72A  Accumulated losses and Unabsorbed depreciated of the amalgamating company shall be deemed to be loss or depreciation of the amalgamated company and the provisions of the Act , relating to set off and carry forward shall apply.  However , to be eligible , both the amalgamating and amalgamated companies must fulfill certain conditions- 72A(2) a&b read with Rule 9C of the Income Tax Rules.  Benefit would be available for 8 years from the first year after Amalgamation.
  26. 26. Credit for tax paid  Case Law –Modipon Ltd. Vs DCIT [1995] 54ITD 433(Del)  Benefit of any tax paid as Advance Tax or Tax deducted at Source of the amalgamating company would be available for adjustment against the income of the amalgamated company consequent inclusion of such income of the amalgamating company as income of the amalgamated company after amalgamation.
  27. 27. Demerger  Defined u/s 2(19AA) of the IT Act, 1961  The companies Act allows as a part of a scheme of arrangement under sections 391 to 394 , or by process of sale of an undertaking.  The IT Act specifically excludes sale of an undertaking. This is covered under slump sale
  28. 28. Benefits under the IT Act  Not treated as transfer u/s 47 hence gains on such transfer not chargeable under capital gains.  Depreciation benefits  Section 35DD- Amortisation of expenditure incurred for demerger –one fifth  Amortisation of patents/copyrights expenditure
  29. 29.  Expenditure on knowhow  Expenditure on obtaining licence to operate Telecommunications Services – 35ABB  Amortisation of certain Preliminary expenses  Deduction of Expenditure on prospecting etc.
  30. 30. Carry forward of losses and unabsorbed depreciation  Where directly relatable to transferred undertakings – entire amount  Where not directly relatable – apportioned based on proportion of assets retained and transferred  Demerged company will get the benefit only for the balance years unlike in the case of amalgamation
  31. 31. Any Transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company , will not be treated as a transfer of capital Asset for the determination of chargeable capital gains u/s 45
  32. 32. Slump Sale s. 50B  Inserted w.e.f 1-4-2000  S.2(42C) Slump sale – sale for a lump sum consideration without values being assigned to individual assets and liabilities.  Taxed as capital gains  Cost of acquisition and improvement shall be the net worth of the undertaking
  33. 33. International Taxation  Transfer Pricing  Thin Capitalization  Offshore Financial Centres
  34. 34. Transfer Pricing  India s.92  USA Reg.482  Concept of Arms Length Price  Methods –Transactional Price based and Transactional Profit based  Advance Pricing agreements
  35. 35. Thin Capitalization  Interest versus Dividend payouts  Excessive use of debt over equity- Very high Leverage  Arms Length basis  Reclassify as constructive Dividend
  36. 36. OFC’s or Tax Havens  Account for half the world’s Financial Transactions  Low or Nil Rate of Tax  Treaty Havens  Ring Fenced Tax structure  Bermuda, Cayman Islands, Mauritius etc.  Around 70 to 80
  37. 37. The End THANK YOU