Taxation of cross-border mergers and acquisitions 2016 edition kpmg.com/tax KPMG International © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Table of contents Executive summary Executive summary 2 Africa South Africa 7 Asia China 21 Oman 91 Hong Kong 33 Philippines 99 India 43 Saudi Arabia 107 Indonesia 55 Singapore 113 Japan 61 Thailand 123 Korea 69 Turkey 133 Kuwait 79 United Arab Emirates 143 Malaysia 81 Central and South America Argentina 147 Mexico 183 Brazil 155 Panama 191 Colombia 165 Uruguay 197 Costa Rica 175 Venezuela 201 © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Europe Austria 209 Luxembourg 361 Belgium 217 Malta 373 Bosnia and Herzegovina 227 Netherlands, The 383 Croatia 235 Norway 397 Cyprus 241 Poland 405 Czech Republic 247 Portugal 413 Denmark 255 Romania 423 Finland 265 Russia 429 France 273 Slovakia 439 Germany 289 Slovenia 447 Greece 305 Spain 453 Hungary 315 Sweden 467 Iceland 325 Switzerland 475 Ireland 333 Ukraine 485 Italy 345 United Kingdom 499 Jersey 353 North America Canada 509 United States 521 Oceania Australia 535 New Zealand 553 © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Executive summary Momentum buoys 2016 M&A markets In 2015, it was a bumper year for mergers and acquisitions — Although Brazil’s economy has slowed, venture capital (M&A), especially in the mid-market space. With the volume and early stage activity continued to gain momentum of activity similar to previous years, the value of activity across Latin America in the first half of 2015. Mexico shot up in many of the world’s markets, with standout and Argentina saw increased early stage investments as performance in the US. compared to the same period in 2014. Recent years have seen a significant amount of exit activity By sector, scientific advances and disruptive technologies are among private equity funds, with a large number of initial propelling significant M&A movement in the pharmaceutical, public offerings, especially in the first 3 quarters of the year, biotechnology, high technology and media industries. There as funds successfully sold off portfolio investments to reap is also activity among companies involved in infrastructure substantial returns. development, especially in Australia (e.g. energy and power generation) and Asia (e.g. water security). Depressed oil and Strategic buyers returned to the market in force in 2014 commodity prices continue to challenge companies in the and into 2015. Following the lengthy post-financial crisis energy, natural resources and mining industries. As these downturn and ongoing uncertainty due to economic companies focus more on their core businesses, assets are struggles on Europe, strategic buyers are getting back on coming available for good prices, opening opportunities for their feet and their ability to price in synergies has made it buyers looking to invest in these sectors. harder for private equity funds to compete. The environment shows promise not seen since the pre- B y sector, scientific advances and financial crisis markets of 2007, with private equity funds having lots of accumulated capital but difficulties in deploying disruptive technologies are propelling it, as resurgent strategic buying keeps prices above the levels significant M&A movement in the that institutional investors need for above-market returns. pharmaceutical, biotechnology, high Markets return to strength technology and media industries. This momentum is expected to continue to build in 2016, although markets will vary due to a number of factors: Drive to curb BEPS creates uncertainty — While the US market is expected to continue to outpace Perhaps the biggest tax developments affecting cross- other areas in terms of deal flows, interest rates in the border M&As globally — now and for years to come — country are inching up, increasing the cost of M&As stem from the Organisation for Economic Co-operation financed with external debt. and Development’s (OECD) project to encourage global — Ongoing political uncertainty in Europe and Africa — due cooperation to address tax base erosion and profit to the refugee crisis, geopolitical tensions, and fears of shifting (BEPS). In the fall of 2015, the G20 approved a UK exit from the European Union (EU), among other the OECD’s final guidance on domestic legislative and factors — may continue to dampen strategic buyers’ administrative changes to address all 15 points of Action enthusiasm for deals in this region. Plan on BEPS. — Markets in the Asia Pacific region vary widely and deal Now companies with cross-border transactions and makers are watching China’s economic struggles closely, structures face a period of uncertainty as governments but the outlook seems relatively bright for the region figure out how the guidance affects current rules, and overall. Australia, China, India and Korea are showing then work to design and enact domestic tax changes — particular strength in raising funds, and Singapore, Hong a process that could take years. While these developments Kong and Sydney continue to develop as important hubs unfold, some potential buyers may avoid transactions for facilitating deals in the region. involving sophisticated international tax planning structures. 2 | Taxation of cross-border mergers and acquisitions © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Even where such structures are onside with today’s tax — Country-by-country reporting: Many countries legislation, it is difficult to predict whether they can be have already mandated country-by-country sustained over the longer term. reporting for 2016 tax periods, with the first sets of reports due in 2017. These reports require detailed Already, the international drive to curb BEPS — both as disclosure by location of a company’s tax payments part of the OECD project and through countries’ unilateral and related data. While the OECD has not proposed moves — is altering the tax environment for cross-border that the reports be made available for public scrutiny, M&As in important ways: the EU is consulting on this possibility as part of — Focus on substance: Tax authorities are increasingly its tax transparency package. As a result, buyers looking into whether there is sufficient business could gain access to more detailed information substance in offshore business structures, especially about potential targets for due diligence purposes, those involving low- or no-tax jurisdictions, and they and sellers should be mindful of the reputational are denying preferential rates for dividend and interest implications of this increased transparency. withholdings where insufficient substance exists. Patent Within Europe, the European Commission’s (EC) box regimes for intellectual property holdings will likely investigations into the tax rulings of EU member states continue to be available, but with changes to restrict have caused some of the chill in local M&A markets. In patent box benefits to the claimant company’s contribution October 2015, the EC determined that Luxembourg and to the development of the IP in question (i.e. through the the Netherlands granted illegal state aid to a Luxembourg- so-called ‘nexus’ approach). resident and a Dutch-resident company by granting a — Interest deductibility: The denial of deductions for selective tax advantage. The EC ordered both countries to interest has emerged as a common legislative means recover the alleged advantage from the taxpayers. Then in of eliminating the tax benefits of cross-border debt January 2016, the EC found that selective tax advantages financing structures: granted by Belgium under its ‘excess profit’ tax scheme were also illegal under EU state aid rules, and at least — Germany and Denmark were among the first countries 35 multinationals (700 million euros in total) who benefited to challenge tax deductions for interest paid on loans must now return unpaid taxes to Belgium. that were effectively taken up by companies to finance their own acquisition by applying earnings-stripping The EC’s rulings are having effects beyond the EU, and not regulations, and other countries have followed suit, just for those multinational companies caught up in the such as Finland. investigations. Significant concerns have been raised in the US Senate that US-based companies are being unfairly targeted — Countries such as Sweden are tightening rules by the EC’s investigations and the BEPS project more broadly. for interest on related-party debt by requiring the It remains to be seen whether the US will take a legislative or beneficial owner of the interest to be subject to a administrative response. For example, the Internal Revenue certain level of tax. Service could invoke a provision of the Internal Revenue Code — The UK and US, among others, are considering a that allows the US to double tax payments due from another proposed fixed ratio rule (FRR) to limit tax relief of country that is seen as systematically discriminating against net (including third-party) interest of 10–30 percent US companies on tax matters. of net earnings before interest, dividends, taxes and Meanwhile, in 2014 and 2015, the US saw a record number amortization (most countries expect 20–30 percent), of cross-border M&A inversion transactions involving US which will affect all international investors and companies becoming foreign corporations. The US Treasury especially highly leveraged groups. Department issued a notice (Notice 2014–52) of its intent Taxation of cross-border mergers and acquisitions | 3 © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. to issue regulations to take “targeted action to reduce the planning. During the tax due diligence phase, it is also tax benefits of — and when possible, stop — corporate important to consider local country tax rulings obtained by tax inversions.” In 2015, the Treasury Department the target company, if any, in various jurisdictions. issued an additional anti-inversion notice. Although Once BEPS exposures are identified, it is important for both the regulations described in these notices may make the acquiring company and target company to determine a inversion transactions more difficult in some cases and course of action. One approach may be for the seller of the reduce some of the tax benefits of these transactions, the target company to give the acquiring company a purchase inversion trend has continued into 2016. price reduction in anticipation that the acquirer will incur In addition, in 2014 and 2015, a number of bills were future ‘BEPS unwind costs’. Another approach may involve introduced in the US Congress that would further restrict the target company addressing the BEPS exposures through inversion transactions or limit their tax benefits. Due to pre-acquisition structuring. As a general matter, acquirers lack of bipartisan support for such targeted approaches to should consider any BEPS exposures specific to both the inversion transactions, however, none of these proposals target and acquiring companies’ structures during the has so far been enacted into law. Many members of acquisition integration-planning phase. Congress think inversions should be addressed through Once a deal has been made, companies should seek broader US tax reform. Consideration by Congress of whatever tax certainty they can over their post-transaction both broad reform of the international tax rules and the integration plans. Companies can reduce their tax exposure targeted approaches is likely to continue, with the timing by taking advantage of voluntary disclosure, horizontal and outcome uncertain. monitoring and advance compliance programs and by locking in tax positions with tax authorities through tax rulings and BEPS concerns critical for tax due advance pricing agreements. diligence reviews In summary, M&A activity has bounced back, especially Given the current drives by governments to increase tax in the US, after sustained global economic uncertainty. collections and the uncertainty over future international M&A tax professionals with KPMG’s members firms are tax reforms, sellers are advised to ensure they can optimistic that M&A deal volumes will continue to increase. demonstrate full tax compliance to potential buyers. But intensifying scrutiny of M&A transactions from tax Potential buyers should conduct thorough due diligence authorities and the potential for major international tax regarding their targets’ tax affairs. The details and clauses reforms will continue to influence deal flows. of legal agreements should be planned in advance in order to avoid detrimental tax consequence, with special attention to clauses referring to price, contingent prices, O nce BEPS exposures are identified, liabilities, indemnification and warranties. it is important for both the acquiring Consideration of BEPS exposures is especially important company and target company to when completing tax due diligence reviews, defining tax indemnities, and undertaking acquisition integration determine a course of action. 4 | Taxation of cross-border mergers and acquisitions © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Arco Verhulst Global Head of Deal Advisory, M&A Tax KPMG International Fascinatio Boulevard 250 3065 WB Rotterdam The Netherlands T: +31 88 909 2564 E: [email protected] Devon M. Bodoh Global Head of Complex Transactions Group, KPMG International, and Principal in Charge, Latin America Markets, Tax KPMG in the US 200 South Biscayne Boulevard Miami, FL 33131 USA T: +1 202 533 5681 E: [email protected] Angus Wilson Asia Pacific Regional Leader for Deal Advisory, M&A Tax KPMG in Australia 10 Shelley Street Sydney, NSW 2000 Australia T: +61 2 9335 8288 E: [email protected] Taxation of cross-border mergers and acquisitions | 5 © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 6 | Taxation of cross-border mergers and acquisitions © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. South Africa Introduction Withholding taxes WHT on interest The environment for mergers and acquisitions As of 1 March 2015, a 15 percent WHT is imposed on (M&A) in South Africa is far less clement than in interest received by or accrued to a non-resident (that is not previous years due to the harsh current economic a controlled foreign company — CFC). An exemption applies climate and the global credit and liquidity crunches. for any amount of interest received by or accrued to a non- These constraints have reduced the economy’s resident in respect of: growth and led to a sharp decrease in M&A — government debt instruments activity. The fundraising appetite for domestic — listed debt instruments financial investments is increasing, however, — debt owed by a bank, the South African Reserve Bank leading to more opportunities for the growth in the (SARB), the Development Bank of South Africa (DBSA) or small and medium-sized business market, which the Industrial Development Corporation (IDC) remains relatively active. Larger players are still — debt owed by a foreign person or a headquarter company. on the lookout for quality assets with long-term growth potential. South Africa is in the process of renegotiating its existing tax treaties in light of the new 15 percent WHT on interest. WHT on service fees Recent developments Current legislation provides for a 15 percent WHT to be levied Recent changes to the South African legislative framework on service fees paid to a foreign person, to the extent paid have significantly affected the M&A environment. from a source within South Africa (subject to treaty relief). The Historically, there was some uncertainty regarding effective date of the legislation has been delayed to 1 January the appropriate method of dealing with these types of 2017 (from 1 January 2016) and may be repealed in its entirety transactions from a tax and legal perspective. The South in the 2016 amendments. African legislator has taken steps to address this uncertainty. WHT on dividends While some uncertainty remains, the recent changes are A WHT on dividends applies regarding all dividends declared steps in the right direction. and paid to non-residents on or after 1 April 2012. The Among recent developments, the most pertinent for M&As dividend WHT is levied at a rate of 15 percent, subject to are as follows: treaty relief. — a permanent, formula-driven restriction on interest WHT on royalties deductibility for certain M&A transactions, which replaces Royalties paid by a South African entity to a non-resident the prior pre-approval process in which the tax authorities are subject to a WHT of 15 percent as of 1 January 2015 regulated the deductibility of interest costs for leverage (previously 12 percent). buy-outs Deductibility of interest on debt used to acquire equity — the introduction of a withholding tax (WHT) on interest As of 1 January 2013, interest incurred on debt to finance — the introduction of limitations on interest deductions for the acquisition of the shares is deductible for tax purposes, interest paid to, among others, non-residents where a South African company acquires at least a 70 percent equity shareholding in another South African — provisions permitting the deduction of interest on operating company. An ’operating company’ includes any debt used to acquire equity shares, where specific company that carries on business continuously by providing requirements are met. Taxation of cross-border mergers and acquisitions | 7 © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. South Africa goods or services for consideration. Recent amendments The limitations also will apply between a debtor and to the provision require at least 80 percent of the receipts creditor who are not in a controlling relationship where a and accruals of the operating company to be ‘income’, that creditor advances funding to the debtor and the funding is, non-exempt amounts. Where the shares in the operating was obtained from a non-resident person in a controlling company are acquired indirectly through the acquisition of relationship with the debtor (i.e. back-to-back funding). shares in a controlling company, the interest is deductible Essentially, where section 23M applies, the interest only to the extent that the value of the controlling company deduction by the debtor cannot exceed: shares is attributable to the operating company. — the sum of: Interest deductibility in respect of M&A transactions Previously, interest on debt used to fund certain — interest received transactions (discussed below) was not automatically — a formula-based percentage of ’adjusted taxable deductible. Approval from the South African Revenue income’ (which is essentially the company’s earnings Service (SARS) was needed in order to deduct the interest before income taxes, depreciation and amortization expenditure in question. (EBITDA)). The percentage of the adjusted taxable This approval process has been replaced by section 23N, income varies based on the average South African which essentially limits the deductibility of interest where repo rate during the year of assessment and is limited debt is used: to a maximum of 60 percent. — to fund the acquisition of a business or assets from a related — less: group entity on a tax-neutral basis — interest incurred on debts other than debts falling — to fund at least a 70 percent equity shareholding in a South within section 23M; where the interest falls within African operating company. both section 23M and section 23N, the portion of the interest disallowed under section 23N is not taken In these cases, the amount of interest deductible in the year of into consideration in the calculation. the transaction and the following 5 years cannot exceed: Any interest disallowed under section 23M may be carried — the sum of: forward to the following year of assessment, and deemed as — interest received interest incurred in that year. — a formula-based percentage of ’adjusted taxable income’ The provisions do not apply where the creditor funded the (which is essentially the company’s earnings before debt advanced to the debtor with funding granted by an income taxes, depreciation and amortization (EBITDA)). unconnected lending institution and the interest charged The percentage of the adjusted taxable income varies on the loan does not exceed the official rate of interest for based on the average South African repo rate during purposes of the Income Tax Act plus 100 basis points. the year of assessment and is limited to a maximum of 60 percent. Asset purchase or share purchase — less: The following sections address those issues that should be considered when contemplating the purchase of either — the amount of interest incurred on debts not falling within assets or shares. The pros and cons of each option are the section. summarized at the end of this report. These rules apply to transactions entered into on or after 1 April Purchase of assets 2014, and also to the refinancing of transactions that were subject to the pre-approval process discussed above. The decision of whether to acquire the assets of a business or its shares depends on the details of the Where such interest is disallowed, the disallowed portion of transaction. The advantages and disadvantages of both interest is lost and cannot be carried forward. purchase mechanisms need to be understood in order Limitations on interest paid to non-residents to effect the acquisition efficiently while complying with legislative requirements. As of 1 January 2015, section 23M imposes a general limitation on interest deductions where payments are made Asset purchases may be favored due to the interest to offshore investors (i.e. creditors), or local investors who deductibility of funding costs and the ability to depreciate are not subject to either income tax or IWT in South Africa, the purchase price for tax purposes. However, other that are in a controlling relationship with a South African considerations may make an asset purchase far less resident debtor. favorable, including, among other things, an increased 8 | Taxation of cross-border mergers and acquisitions © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated.