M & a in international perspective itf i


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M & a in international perspective itf i

  1. 1. Mergers & Acquisition in International Perspective Presented by: Mr. Paresh P. Shah P.P. Shah & Associates Chartered Accountants Email: paresh@bom3.vsnl.net.in BCA-ITF I Study Circle 3 rd February 2007
  2. 2. Scope of Presentation Cross Border M & A – A Rationale Key Tax issues Factors affecting key tax issues Key tax concepts Transaction Pattern Prototype and Issues involved Indian Scenario & Prototype Conclusion
  3. 3. Cross Border M & A- A Rationale Booming Security Market Interest rates & Exchange rates New technologies & Market Euphoria Contractions of the market - Cash is a king Limited Domestic Growth/Saturation or currency benefits, listing at multiple places Inbound Competing legal framework
  4. 4. Cross Border M & A – Indian Business Economy Foreign Investment in New Industries due to liberalisation Indian Investment overseas – A steep rise in overseas acquisition in recent time Individual’s overseas Investment - Prohibited
  5. 5. Key Tax Issues Methods of M & A Amalgamation or Merger Acquisition of Assets Acquisition by transfer of shares Demerger (A tool to Acquisition or Mergers)
  6. 6. Amalgamation or Merger Capital Gain on Transfer of Assets Capital Gain on Transfer of Shares Carry forward of Business Loss Stepped up basis of assets Carry forward of other losses like Capital Loss Depreciation of Tangibles & Intangibles Cost of reorganisation
  7. 7. Acquisition of Assets Capital Gains for the Transferor Transfer Duties on Immovable Properties Carry forward of Loss & Allowances Basis of Depreciation – Historical or Stepped up Cost of borrowed funds
  8. 8. Acquisition by transfer of shares Capital Gains for the Transferor Carry forward of Loss & Allowances Basis of Depreciation Cost of reorganisation Cost of borrowed funds
  9. 9. Demerger (A tool to Acquisition or Mergers) Capital Gains or taxes on issue/transfer of shares Capital Gains on transfer of assets Basis of Depreciation on Assets Cost of Shares to the shareholder/s Allocation/grouping of assets
  10. 10. Factors affecting tax issues Taxation Laws of Target & Acquirer’s State Key Tax Concept / Principles Prevalent tax free acquisitions Need of Pre-acquisition Structuring Post Acquisition dividend stream Transaction pattern Modes of payment of consideration
  11. 11. Key Tax Concepts / Principles Tax Exemptions for M & A Demerger – A tool to M & A Treatment of Parent Stock Substance over Form Rule Thin Capitalisation Rules Contd…
  12. 12. Key Tax Concepts / Principles Treatment of Corporate Attributes Carry Forward of Losses & Depreciation Carry Back of Losses & Depreciation Tax Credits Group Taxation Regime Minimum Alternate Tax Contd…
  13. 13. Key Tax Concepts / Principles System of Dividend Access Stock Parent Subsidiary Directive of European Union Target’s Location & Tax Credit Method Controlled Foreign Corporation Rules
  14. 14. Possible transaction pattern Foreign acquirer acquiring local target Indian acquirer acquiring foreign target Variants Target Company has subsidiary in the State of acquirer Target or any of its subsidiaries hold investment in the Acquiring Company Acquisition of Division
  15. 15. Prototype and Issues involved Foreign Target Full acquisition Partial acquisition Local target Full acquisition Partial acquisition Merger – Cross Border
  16. 16. Indian Scene & the Prototype of Acquisition Tax free amalgamation and demerger for domestic resultant company Tax free amalgamation of Foreign Companies, holding Indian Subsidiary/ies Deferral of tax for asset transfer & benefits of various corporate attributes Demerger or sale or amalgamation of Foreign Subsidiary or Joint Venture with Foreign resultant company Foreign company merges with Indian Company Sale of Undertakings Definition of Demerger vs. Amalgamation Transfer of Controlling shares by Private Companies
  17. 17. Conclusion A New World Order A Borderless Economy & Growth engine Legal & Regulatory framework should Enable Competing Economies to grow at the desired rate Be compatible with trading partners at a country level Be plain, affordable & unambiguous Free movement of goods & services with level playing field, ushering into survival for the fittest Achieve the growth to your best potential
  18. 18. Thank You
  19. 19. Tax Exemption for M & A Treatment of Asset disposal & transfer Subsidiary Stock Demerger Carry over basis of Asset cost Tax free reorganisations Local Amalgamated Company
  20. 20. Treatment of Stock of Subsidiaries Asset level increases if Corporate taxes are recognised on acquisition Subsidiary’s Asset are separate property from the stock of the subsidiary Taxation at multiple level Possible to treat sale of shares as sale of assets u/s 338 of US IRC & u/s 269 of IRC – a complicated process Tax free participation exemption, a device Generally US treats them seperately Australlia treats Stock as Asset
  21. 21. Mode of Acquisition Cash Share swap Partly cash and partly by shares or debts
  22. 22. Treatment of Parent Stock Legal framework of the Jurisdiction Treatment as treasury stock Redemption of Parent Stock Contribution “in” and “out” from partnership firms Facilitates acquisition of the subsidiary of the target
  23. 23. Substance over Form Rule “ Form” is the concept defined or provided under the tax law as the legal concept Substance refers to the Economic content in which transaction is carried out Form of transaction may be in two steps: Sale from A to B and Sale from B to A, whereas substance of the transaction is “Sale and Lease Back” Indian Courts have moved to the “literal interpretation” to purposive interpretation, however transaction cannot be disregarded only on the ground that the substance results into lower taxation
  24. 24. Cases - Substance over Form CIT vs Sakarlal Balabhai (1972) 86 ITR 2 (SC) CIT vs. B M Kharwar (1969) 72 ITR 603 (SC) CWT vs. Arvind Narottam (1981) 73 ITR 479 (SC)
  25. 25. Substance over Form Rule India except under Judge’s Law largely follows “Form of Transaction” as the Law, subject to specific Tax Avoidance Rules US observes a Substance Rule Normally treats the subsidiary shares & stock separately Under certain conditions, acquisition of shares is treated as purchase UK accepts the permitted “Form” of transactions subject to General Anti Avoidance Rules
  26. 26. Thin Capitalisation Rules Rule particularly limits the cost of borrowing and its deduction for computation of income Composition of debt to equity Rule Acquisition, due to presence of debt : equity proportion, significantly affect interest expenses for acquisition of assets or share purchase Use of Hybrid instruments & its impact Group Taxation regime allows interest deduction on consolidation
  27. 27. Corporate Attributes USA Allows loss at fixed rate on the value of the target’s price Subsidiaries loss remains with the subsidiary Transferred only if re-organisation with stringent conditions
  28. 28. Group Taxation Regime A scheme of taxation by which law permits pooling of income & losses at the Parent level for its all eligible subsidiary/ies or affiliates Group Taxation & Foreign subsidiary/ies or affiliates Common conditions to opt for Group taxation Varying form of Group taxation scheme Pooling of Income Approach Choosing a loss from the Affiliates Contribution Approach Consolidation
  29. 29. Dividend Access Stock or Stapled Stock Stock of two Corporations stappled together in one certificate It is a form of issue of shares to recognise the fact that dividend is sourced from the profits of Subsidiary or from the Parent’s profit Form vs. substance rule in the jurisdiction, in favour of form will permit such legal niceties where it attempts to treat economically different structures similarly & economically similar structures differently US does not permit such arrangement as was decided in the case of De Coppet vs. Helvering UK follows modified substance over form Rule – Duke of Westminster case
  30. 30. Controlled Foreign Corporation What is Controlled Foreign Corporation (CFC) Dividend flow has two main streams one to the parent group and other to the shareholder of the target company Dividend flow & CFC Nominal Acquirer’s decision if target has CFC regime Facilitates acquisition of subsidiary in the acquirer’s state Sale of affiliates in target’s state and CFC in the acquirer’s jurisdiction
  31. 31. Transaction Pattern Target (L) Target (L) Acquirer (F) Acquirer (F) Target (F) Target (F) Target (F) Acquirer (L) Acquirer (L) Acquirer (L) PE of T (F) PE of T (L) Subsidiary of A (F) Either through cash or Share Swap