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

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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 ITS in the News Our people in the press • 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. 3
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M&A Transactions in Singapore - Ernst & Young T Magazine

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