Taxation Aspects of International Mergers & Acquisitions.
Syed Naved Andrabi April 16, 2008
Andrabi & Gabriel Advocates Solicitors & Tax Attorneys’ 1
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Areas of Interest Visited.
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. 2
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. 3
Why Merge? Financial Motives: • to reduce risk (the portfolio effect). • to increase operating efficiency. • to improve access to financial markets. • 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). • To revive sick industry and render accelerated economic growth. 4
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. 5
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.
Parent stocks are usually retired and new stock issued.
Name may be the original or a combination.
One firm buys another firm.
One of the partners take over the dominant management 7
Can be by means of controlling share, a majority, or all of the target firm’s stock.
Can be friendly or hostile.
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.” 8
Corporate Mergers & Acquisition. Direct Stakeholders.
Enterprises / Companies.
•
Shareholders.
Other Stakeholders.
Customers.
Creditors/Suppliers.
Employees.
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
Corporate Level Strategy
1) Vertical Integration 2) Diversification Mode of Entry
Strategic Alliances 10
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) Citigroup Inc (C)
Mahogany Acquisition Corp
04-10-2008
8,734.10
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 S r.N 1o
Name of Company
New name of the company/merged with
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 ]
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ABAMCO Stock Market Fund
UTP Growth Fund
06/06/2006
875.000
[ 0.970229:1 ]
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ABAMCO Capital Fund
UTP Growth Fund
06/06/2006
2,029.420
[ 0.898072:1 ]
5
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 ]
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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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Date of Merger
Paidup Capital
Ratio
Prominent Mergers in Pakistan. 2008 S r.N 1o 2
Name of Company
New name of the company/merged with
Date of Merger
Paidup Capital
Ratio
PICIC Commercial Bank Limited
NIB Bank Limited
01/01/2008
2,734.875
[ 1 : 2.27 ]
Pakistan Industrial Credit & Investment Corp. Ltd (PICIC)
NIB Bank Limited
01/01/2008
4,152.720
[ 1 : 3.18 ]
Paidup Capital
Ratio
2007 S r.N o 1
Name of Company
New name of the company/merged with
Date of Merger
Guardian Modaraba
B.R.R. International Modaraba
25/05/2007
244.695
[ 1 : 1.22 ]
2
Crescent Standard Investment Bank Ltd
Innovative Housing Finance Limited
20/07/2007
1,257.610
[ 0.005 : 1 ]
3
Dewan Hatter Cement Limited
Dewan Cement Limited
22/10/2007
2,565.000
[ 1 : 0.75 ]
4
Suzuki Motorcycles Pakistan Ltd
Pak Suzuki Motor Company Ltd
29/10/2007
438.989
[ 21 : 1 ]
5
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).
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).
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). 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. 17
Historical Trends. FOURTH WAVE (1974-1989). Generally referred to as the merger wave, or takeover wave. 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. Mergers of Citibank and Travelers. Chrysler and Daimler Benz. AOL and Time Warner. 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. 18
Historical Trends. SIXTH WAVE (2002 Onwards). Principle factors are:
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. 20
Legislation Dealing Mergers in a Particular Sector. For Banking Companies.
Section 48 of the Banking Companies Ordinance, 1962
282L of Companies Ordinance, 1984
For N.B.F.Cs
Section 67 to 71 of the Insurance Ordinance, 2000 and application to High Court
For Insurance Companies.
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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. 22
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 3. 4. 5. 6. 7.
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 24
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?
• •
Taxability regarding exchange of shares?
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[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.
• •
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
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.
•
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.
•
Gain of amalgamating companies are taxable if the above criteria is not fulfilled under the Income Tax Ordinance, 2001
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
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?
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. •
In case of non-arm’s length transaction the fair market value may be treated as consideration as cost of acquisition [S. 76 & 78]
•
Tax treatment for payment of goodwill.
•
Tax deductibility of consideration paid under restrictive covenants ?
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Acquiree Point of View. •
Transfer of assets and liabilities have tax implications depending on the basis of nature of asset.
•
Consideration may be taken at higher of the actual selling price or Fair Market Value [S. 77]
•
Slump sale principle – Applicability ? [S. 77]
•
Consideration under restrictive covenant – whether capital or revenue?
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Role of tax Advisor in Mergers & Acquisitions.
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. 35
Going Forward.
Consistency in Policies. Facilitate & Encourage Regional Mergers. Level Playing Field. Conducive Industrial Environment for Intra Regional Investment. Common Legislation. Removal of Trade Barriers. 36
Thank You
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