Download 1 Syed Naved Andrabi April 16, 2008 Taxation

Taxation Aspects of International
Mergers & Acquisitions.
Syed Naved Andrabi
April 16, 2008
Andrabi & Gabriel
Advocates Solicitors & Tax Attorneys’
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Areas of Interest Visited.
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Why Merge?
Mergers & Acquisition.
Strategic Management Process.
Global Mergers & Pakistan Mergers.
Historical Trends.
Mergers & Acquisition Pakistan Legislation.
Stakeholders’ Point of view.
Tax Consequences.. Acquirer & Acquire.
Role of Tax Advisors.
Going Forward.
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Merger & Acquisition.
The significant corporate activity has made the
market truly global. Once the preserve of local
deals, the mid-market is now the source for
growth in cross border transactions that are
increasingly the norm in both acquisition and
disposals activity. Entrepreneurial businesses
have ever higher expectations of their advisers,
demanding the ability to deliver ideas,
expertise, relationships and resources in a
seamless manner throughout the world’s major
corporate centers.
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Why Merge?
Financial Motives:
•
to reduce risk (the portfolio effect).
•
to increase operating efficiency.
•
to improve access to financial markets.
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to obtain a tax carry-forward benefit.
•
to eliminate competition & enhance profitability.
Other Motives:
•
to expand marketing and management capabilities.
•
to allow for new product development through R & D.
•
to provide synergistic benefits (the “2+2=5” effect).
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To revive sick industry and render accelerated economic growth.
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Types of Merger
 Horizontal – between business competitors.
 Vertical – Moving up or down the value chain.
 Conglomerate – Unrelated sectors.
 Forward – Merger of target into the acquirer.
 Reverse – Merger of acquirer into the target.
 Triangular – Use of an SPV for undertaking.
 Demerger – Hive-off of an undertaking into a separate
company.
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Modes of Mergers & Acquisitions.
M&A
Amalgamations
Merger
Acquisitions
Asset
Purchase
De-merger
Slump
Sale
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Stock
Purchase
Itemized
Sale
Mergers & Acquisitions Defined.
Mergers
Acquisitions
Two firms are combined on a
relatively co-equal basis.
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Parent stocks are usually retired
and new stock issued.
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Name may be the original or a
combination.
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One of the partners take over the
dominant management
One firm buys another firm.
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Can be by means of controlling
share, a majority, or all of the
target firm’s stock.
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Can be friendly or hostile.
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Usually done through a tender
offer.
Business Combinations.
According to International Financial Reporting Standard 3
(IAS 22-Withdrawn)
Business Combination.
“The bringing together of separate entities or businesses into one reporting
entity.”
Where the result of business combination is that one entity, the acquirer,
obtains control of one or more other businesses , the acquiree.
Business Combination Involving entities or businesses under common
control.
“A business Combination in which all of the combining entities or businesses
ultimately are controlled by the same party or parties both before and
after the combination, and that control is not transitory.”
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Corporate Mergers & Acquisition.
Direct Stakeholders.
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Enterprises / Companies.
•
Shareholders.
Other Stakeholders.
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Customers.
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Employees.
Creditors/Suppliers.
Government Authorities, e.g., Tax Authorities.
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The Strategic Management Process.
External
Analysis
Mission
Strategic
Choice
Objectives
Internal
Analysis
Strategy
Implementation
Competitive
Advantages
Which Business to Enter
1) Vertical Integration
Corporate Level
Strategy
2) Diversification
Mode of Entry
Strategic Alliances
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Merger & Acquisitions
Top Ten Mergers-2008
Target Name
Acquirer Name
Deal Date
$ Value of
Deal (M)
Yahoo! Inc (YHOO)
Microsoft Corp (MSFT)
02-01-2008
43,711.60
Inmobiliaria Colonial SA
Investment Corp of Dubai {ICD}
01-31-2008
15,213.20
Rio Tinto PLC
Shining Prospect Pte Ltd.
02-01-2008
14,284.20
Alcon Inc (ACL)
Novartis AG
04-07-2008
10,547.50
Bolsa de Valores de Sao Paulo {Bovespa}
Bolsa Brasileira de Mercadorias
{BM&F}
02-20-2008
10,309.10
Millennium Pharmaceuticals Inc (MLNM)
Mahogany Acquisition Corp
04-10-2008
8,734.10
Citigroup Inc (C)
Government of Singapore
Investment Corp Pte Ltd {GIC}
01-15-2008
6,880.00
Weyerhaeuser Co-Containerboard
Packaging & Recycling Business
International Paper Co (IP)
03-17-2008
6,000.00
MMX Mineracao e Metalicos SA-Certain
Assets
Anglo American PLC
01-17-2008
5,500.00
Scania AB
Volkswagen AG
03-03-2008
4,377.50
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Deal Wise Mergers.
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Prominent Mergers in Pakistan.
2006
Sr.
No
Name of Company
New name of the
company/merged with
Date of
Merger
Paidup
Capital
Ratio
1
Second Tri Star Modaraba
First Tri Star Modaraba
10/04/2006
128.700
[ 1.817:1 ]
2
ABAMCO Growth Fund
UTP Growth Fund
06/06/2006
275.625
[ 1.845001:1 ]
3
ABAMCO Stock Market Fund
UTP Growth Fund
06/06/2006
875.000
[ 0.970229:1 ]
4
ABAMCO Capital Fund
UTP Growth Fund
06/06/2006
2,029.420
[ 0.898072:1 ]
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WORLDCALL Multimedia Ltd
WORLDCALL Telecom Ltd
09/06/2006
530.000
[ 1 : 1.27 ]
6
WORLDCALL Broadband Ltd
WORLDCALL Telecom Ltd
09/06/2006
1,500.000
[ 1 : 1.09 ]
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WORLDCALL Communication Ltd
WORLDCALL Telecom Ltd
09/06/2006
1,831.702
[ 1 : 1.42 ]
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Modaraba A1-Tijarah
Modaraba A1-Mali
11/07/2006
75.778
Certificate
[ 91 : 2 ]
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Atlas Investment Bank Limited
Atlas Bank Limited
26/07/2006
506.024
[ 1 : 3.14 ]
10
Pakistan Papersack Corporation Ltd
Thal Limited
04/08/2006
68.993
[ 3.07 : 1 ]
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First Allied Bank Modaraba
Allied Bank Limited
25/08/2006
350.000
[ 1 : 024 ]
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Colony Textile Mills Limited
Colony Mills Limited
28/08/2006
250.000
[ 1 : 9.50 ]
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Union Bank Limited
Standard Chartered Bank
Ltd
29/12/2006
3,387.505
[ 1 : 2.50 ]
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Jahangir Siddiqui Inv.Bank Ltd
JS Bank Limited
30/12/2006
853.125
[ 1 : 3.24 ]
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Prominent Mergers in Pakistan.
2008
Sr.
No
Name of Company
New name of the
company/merged with
Date of
Merger
Paidup
Capital
Ratio
1
PICIC Commercial Bank Limited
NIB Bank Limited
01/01/200
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2,734.875
[ 1 : 2.27 ]
2
Pakistan Industrial Credit &
Investment Corp. Ltd (PICIC)
NIB Bank Limited
01/01/200
8
4,152.720
[ 1 : 3.18 ]
2007
Sr.
No
Name of Company
New name of the
company/merged with
Date of
Merger
Paidup
Capital
Ratio
1
Guardian Modaraba
B.R.R. International
Modaraba
25/05/200
7
244.695
[ 1 : 1.22 ]
2
Crescent Standard Investment
Bank Ltd
Innovative Housing Finance
Limited
20/07/200
7
1,257.610
[ 0.005 : 1 ]
3
Dewan Hatter Cement Limited
Dewan Cement Limited
22/10/200
7
2,565.000
[ 1 : 0.75 ]
4
Suzuki Motorcycles Pakistan Ltd
Pak Suzuki Motor Company
Ltd
29/10/200
7
438.989
[ 21 : 1 ]
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International Housing Finance Ltd
KASB Bank Limited
22/11/2007
450.000
[ 1 : 1.30 ]
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India
France
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United Kingdom.
United States of America.
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Historical Trends.
FIRST WAVE (1893-1904).
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Time of the major horizontal mergers.
Major mergers were in Steel, Telephone, Oil, Mining, Railroad
etc.
The First World War caused end of the first wave.
SECOND WAVE (1919-1929).
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The period in which vertical integration started.
The major automobile manufacturers emerged in this period. For
example, FORD.
The 1929 Crash and the Great Depression ended this wave.
THIRD WAVE (1955-1973).
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In this period the conglomerate concept took hold.
Major conglomerates were IT&T (Harold Geneen) LTV
(Jimmy Ling) Teledyne (Henry Singleton) Litton (Tex
Thornton).
The conglomerate stocks crashed
in 1969-70.
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Historical Trends.
FOURTH WAVE (1974-1989).
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Generally referred to as the merger wave, or takeover wave.
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It ended in 1989-90 with the collapse of the junk bond market,
along with the collapse of the savings and loan banks and the
serious loan portfolio and capital problems of the commercial
banks.
FIFTH WAVE (1993-2000).
This was the era of the mega-deal.
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Mergers of Citibank and Travelers.
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Chrysler and Daimler Benz.
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AOL and Time Warner.
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Vodafone and Mannesmann.
It ended with the bursting of the Millennium Bubble and the
great scandals, like Enron, which gave rise to the revolution in
corporate governance.
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Historical Trends.
SIXTH WAVE (2002 Onwards).
Principle factors are:
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Globalization.
Encouragement by the governments of some countries (e.g.,
France, Italy and Russia) to create strong national or global
champions.
The rise in commodity prices.
The availability of low-interest financing.
Hedge fund and other shareholder activism.
Tremendous growth of private equity funds.
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Controlling Authorities.
NBFI’s
SECP
Banks
SBP
Other
High Court
The Competition Commission of Pakistan
(CCP-Monopoly Control Authorities) has
oversight in respect of all mergers.
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Legislation Dealing Mergers in a
Particular Sector.
For Banking Companies.
For N.B.F.Cs
For Insurance Companies.
Section 48 of the Banking Companies
Ordinance, 1962
282L of Companies Ordinance, 1984
Section 67 to 71 of the Insurance Ordinance,
2000 and application to High Court
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Specific Laws Dealing Mergers.
Section 287 to 289 read with Section 282L & 284 of the
Companies Ordinance, 1984 applies to mergers involving
companies incorporated under the laws of Pakistan.
Section 2 (1A); 20 (3); 57A, 97; 97A & Clause 62 of Part
IV of Second Schedule to the Income Tax Ordinance,
2001.
Section 11 of Competition Ordinance, 2007.
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Legislation on Foreign Investment.
Board of Investment and Foreign Exchange
Regulation contain certain exceptions and
restrictions for non-residents for which
general or special permission is required.
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Section 2 (1A) of the Income Tax Ordinance, 2001
Amalgamation
1.
2.
3.
4.
5.
means the merger of one or more
banking companies or
non-banking financial institutions, or
insurance companies, or
companies owning and managing industrial undertakings or
companies engaged in providing services and not being a trading company or
companies.
In such manner that –
The assets of the amalgamating company or companies immediately before the
amalgamation become the assets of the amalgamated company by virtue of the
amalgamation, otherwise than by purchase of such assets by the amalgamated
company or as a result of distribution of such assets to the amalgamated
company after the winding up of the amalgamating company or companies; and
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Section 2 (1A) of the Income Tax Ordinance, 2001
The liabilities of the amalgamating company or companies immediately before
the amalgamation become the liabilities of the amalgamated company by virtue
of the amalgamation
Requisite criterion
One company must be a public company or
A company incorporated under Companies Ordinance,1984 or under any
other law for the time being in force,
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Merger/Amalgamation.
From
Members/Shareholders
Point of View
From the Point of View of
Company to be
Merged/Amalgamating.
From the Point of View of
Amalgamated
Company.
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From Members/Shareholders Point of View
Is exchange of shares treated as Dividend?
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Taxability regarding exchange of shares?
[S. 2(19)(a)] - “Dividend” includes
distribution of accumulated profit
entailing release of assets of the
company possessing profit.
[S. 2(19)(c)&(d)] - Distribution on
liquidation or reduction of capital
In merger / amalgamation, no
distribution of accumulated profit takes
place thus no release of asset.
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Section 37 (5) - Shares are Capital Asset
No “Disposal” i.e. sale / transfer /
exchange / relinquishment etc. involved.
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If exchange / relinquishment is treated as
“Disposal” even then no gain / loss arises
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From the Point of View of Company to be
Merged/Amalgamated.
Taxability of gain on transfer of assets and
liabilities?
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S 97 & 97A - No gain or loss is taxable
subject to certain conditions.
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Amalgamating companies are resident
and belong to wholly owned group.
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In case of Section 97 the condition of
both companies to be resident shall not
apply in light of clause 62 of Part IV of
2nd Schedule.
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Gain of amalgamating companies are
taxable if the above criteria is not
fulfilled under the Income Tax
Ordinance, 2001
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From Amalgamated Company Point of View.
Tax value of assets / liabilities acquired?
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S 76 - Relating to cost of purchase.
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S 98C, concerning succession.
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The tax value of assets in the hands of
amalgamating company (immediately
before amalgamation) shall be taken
as the tax value for amalgamated
company
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From Amalgamated Company’s Point of View.
What about goodwill taxation?
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Goodwill an intangible or capital asset
– a dilemma?
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Treatment of goodwill?
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Difference between ‘Tax-value’ and
‘Accounting value’ of assets?
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From the Amalgamated Company’s Point of View.
What is the treatment of merger related
expenses?
S 20(3) - Only expenditures incurred
under following heads are tax
deductible –
•Legal Advisory Services
•Financial Advisory Services
•Administrative expenses –
Planning and Implementation of
amalgamation
What about carry forward and set-off
of losses sustained by the
amalgamating company ?
S. 57A - In the year of amalgamation only
assessed loss of the amalgamating
companies for the tax year is available
for the set off. The facility to set off
accumulated losses of amalgamating
companies has been taken away from
July 01, 2007.
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Tax Consequence in Case of
Acquisitions.
Acquirer point of view
Acquiree point of view
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Acquirer Point of View.
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In case of non-arm’s length transaction the fair market
value may be treated as consideration as cost of
acquisition [S. 76 & 78]
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Tax treatment for payment of goodwill.
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Tax deductibility of consideration paid under restrictive
covenants ?
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Acquiree Point of View.
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Transfer of assets and liabilities have tax implications
depending on the basis of nature of asset.
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Consideration may be taken at higher of the actual selling
price or Fair Market Value [S. 77]
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Slump sale principle – Applicability ? [S. 77]
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Consideration under restrictive covenant – whether capital
or revenue?
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Role of tax Advisor in Mergers &
Acquisitions.
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International mergers and acquisitions require
appropriate planning.
Planning will end after consideration of domestic
laws effect on home country & other country
laws.
Effective consideration will be whether to merge
or acquire.
If to acquire consideration to be given to manner
of acquisition.
To acquire the business as a whole, slump
transaction or through shares or as an asset
purchase.
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Going Forward.
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Consistency in Policies.
Facilitate & Encourage Regional Mergers.
Level Playing Field.
Conducive Industrial Environment for Intra
Regional Investment.
Common Legislation.
Removal of Trade Barriers.
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Thank You
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