M&A Transactions in Singapore - Ernst & Young T Magazine

3 November 2010
ITS in the News
Our people in the press
This article originally appeared
in the 4 October 2010 issue
of Tax Notes International
Magazine on page 45.
M&A Transactions in
Singapore
By Ching Khee Tan and Pui Ming Soh
Ching Khee Tan and Pui Ming Soh examine the key issues surrounding
mergers and acquisitions transactions in Singapore. Ching Khee Tan is a
senior manager of the Singapore tax desk at Ernst & Young LLP in New
York, and Pui Ming Soh is a tax partner and leader of transaction tax at
Ernst & Young in Singapore. The views expressed here are those of the
authors and do not necessarily reflect those of Ernst & Young LLP.
Through June 2010, Singapore’s economy grew by a staggering
17.9 percent, and the outlook for Singapore and other growing Asian
economies, such as China and India, remains positive for the rest of 2010.
Investor interest in Singapore is buoyant because companies often base
their regional operations in Singapore because of its proximity to other
Asian countries, excellent business infrastructure, and good tax treaty
network.
This article highlights key Singaporean tax issues on merger and
acquisition transactions and is organized into three sections: deal
structure, postacquisition considerations, and recent tax developments
affecting M&A activities in Singapore.
Deal Structure
Buyers generally prefer an asset acquisition because it avoids the
assumption of the target company’s tax or other liabilities, including
uncertain or aggressive tax positions. An asset acquisition also:
• allows a step-up of the depreciable base for fixed assets to their fair
market values; and
• facilitates the claim for an interest expense deduction on debt raised to
finance the acquisition.

However, for some buyers, an asset
acquisition is not the best choice.
For example, in acquiring a target
whose major asset is real estate,
the 1 to 3 percent Singaporean
stamp duty for real estate transfers
is 5 to 15 times more than that
for the transfer of shares. Also,
commercial considerations, such
as special industry licenses and/or
regulatory approval, or favorable
tax attributes of the target company
(for example, tax incentives) may
swing the balance toward a share
acquisition.
Most importantly, many sellers
are not interested in asset deals
because they perceive them to
be legally and administratively
cumbersome. In countries where
there is tax on capital gains, an
asset deal may be more expensive
than a share deal from a seller’s tax
perspective.
Before entering into a deal, the
buyer should understand the
tax implications and develop an
acquisition plan that meets both
its needs and the seller’s needs.
A win-win acquisition structure
can put the buyer ahead of other
bidders in a competitive bid
situation. Antiavoidance provisions
should be taken into account in all
planning. There should be bona fide
commercial reasons for entering
into any transaction.
For any M&A transaction in
Singapore, the buyer should
consider the planning opportunities
on interest that will be incurred on
the acquisition and the intellectual
property (IP) that will be acquired.
Interest Deduction
In Singapore, interest incurred on
the acquisition of shares is not tax
deductible, which could significantly
affect the after-tax return on the
investment.
A well-structured debt push-down
strategy can significantly increase
the return on investment, especially
when the target group is located
in a number of jurisdictions. Under
this strategy, appropriate amounts
of the acquisition debt are pushed
down to locations generating
operating profits to obtain a tax
deduction for the interest expense
against local profits, which could
be taxed at high corporate tax
rates. This strategy also facilitates
cash repatriation for repayment of
bridge financing and/or part of the
acquisition debt. However, there are
many factors to consider, including
local withholding tax provisions,
thin capitalization rules, and debt
registration requirements.
IP Planning
Another important step in unlocking
additional return value from the
target is IP planning.
Often the value of the acquired
business is in the IP. Share
acquisition, however, does not allow
the buyer to claim tax amortization
on the step-up IP acquired in
Singapore. Singapore’s income tax
law does not allow the buyer to step
up the tax basis of the assets in the
target to reflect the purchase price
of the shares acquired. Therefore,
the buyer should consider a
2 ITS in the News Our people in the press
two-step approach of first acquiring
the IP directly from the seller and
then the shares in the target group.
Postacquisition Considerations
The postacquisition tax work is
probably the most neglected area
in the acquisition process. After the
acquisition, it is important for the
acquiring company to monitor tax
indemnities and warranties, and
manage tax exposures.
Monitoring Tax Indemnities and
Warranties
The sale and purchase agreement
(SPA) usually provides that the
buyer must notify the seller of
all tax claims within a certain tax
period (typically two to four years
from the date of the SPA).
Usually, buyers do not monitor
this to take full advantage of the
indemnity period. A savvy buyer
should give clear instructions to
its in-house tax team to expedite
the finalization of the prior years’
tax returns to bring any tax claims
to the surface before the tax
indemnity expires.
Managing Tax Exposures
A good way to manage existing
tax exposures is through the
due diligence report. Follow-ups
include meeting withholding tax
obligations, putting in place transfer
pricing documentation, reexamining
and possibly renegotiating
commercial contracts regarding tax
gross-up clauses, and addressing
permanent establishment issues
with appropriate secondment
arrangements.

Recent Tax Developments
A new tax framework for
amalgamation and an increased
focus on economic substance in
Asia may affect how M&A deals in
Singapore are structured.
Tax Framework for
Amalgamation
The ability to restructure and
integrate the various operations
in a tax-efficient manner after
acquisition will be crucial to the
buyer.
New rules on the tax framework
for amalgamation were enacted
in December 2009 and apply
retrospectively to amalgamation
that takes place on or after January
22, 2009. An amalgamation is the
merger of two or more companies
into a single company. The surviving
company assumes the assets,
rights, liabilities, and obligations of
the other amalgamating companies.
The latter are then automatically
dissolved by operation of law.
Some of the benefits and
considerations under the new tax
framework include:
• Transfer of unused tax attributes:
Unused tax attributes, such as tax
losses, may be transferred from
the amalgamating company to
the surviving company, subject to
conditions.
• Deferral of tax depreciation
recapture: Tax depreciation
previously claimed on the IP,
plant, and machinery will not be
immediately recaptured on the
transfer of such assets from the
amalgamating company to the
surviving company. The surviving
company will claim the tax
depreciation based on the
remaining tax base carried over
(that is, no step-up in value).
Recapture of tax depreciation
will be triggered if the assets are
subsequently disposed of by the
surviving company.
• Exemption from goods and
services tax: The amalgamation
will automatically qualify as a
transfer of the business as a
going concern such that GST will
not be chargeable on the assets
transferred, unless the surviving
company is a member of a GST
consolidated group.
• Stamp duty relief: Unlike GST,
there is no automatic exemption
from stamp duty when the
transferred assets are dutiable
assets. Nevertheless, exemption
from stamp duty is available if
the stamp duty relief rules can be
met. Detailed discussion of the
rules
is beyond the scope of this article.
Increased Focus on Economic
Substance in Asia
Foreign investors commonly set up
a Singaporean holding company
to manage its Asian investments
for operational, financial, and
tax efficiency reasons. In an M&A
situation, the buyer could:
• use its existing Singaporean
subsidiary to acquire the target;
• incorporate a new Singaporean
subsidiary to acquire the target;
or
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• inherit the Singaporean holding
company structure from the
seller.
Tax authorities in China, India,
Indonesia, and South Korea
are focusing on the use of an
intermediate holding company.
The tax authorities often perceive
intermediate holding companies
as lacking economic substance
and as being created merely to
take advantage of treaty benefits.
The tax authorities have sought to
curb such perceived treaty abuse
through various countermeasures
to determine the beneficial
ownership and economic substance
of such intermediate holding
companies. In Singapore, it is
getting more difficult to obtain
a certificate of residency from
the tax authorities for inactive,
foreign-owned Singaporean holding
companies.
Foreign investors with an
intermediate holding company
structure for its Asian investments
(using Singapore or otherwise)
should reevaluate the holding
company’s relevance and take
active steps to ensure that the
structure can withstand scrutiny by
the tax authorities. For example,
theSingaporean holding company
could be amalgamated with its
Singaporean operating subsidiary.
Not only will there be increased
operational efficiencies, but
having an active business and key
employees will reduce the risk of
the holding company being viewed
as lacking in substance.
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Conclusion
When investing in Singapore and the region, foreign investors should plan carefully. With tax authorities turning
their attention to economic substance, it is increasingly important that any acquisition or restructuring option
adopted is aligned with business and commercial objectives, and not for the sole purpose of obtaining a tax
advantage.
For additional information with respect to this ITS in the News, please contact the
following:
Ernst & Young LLP, Singapore Tax Desk, New York
• Ching Khee Tan +1 212 773 0012 chingkhee.tan@ey.com
Ernst & Young, Singapore
• Pui Ming Soh +65 6309 8215 pui.ming.soh@sg.ey.com
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