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Whether M&A is a Tax Planning Tool

May 27 2016

Most M&As are not tax driven

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Driven by commercial objectives generally – choice of mechanism/vehicle is driven by tax efficiency

Very seldom M&A is done purely for tax objectives – Inversion of US companies to reduce the effective tax rate is an example

Recent instances: Eaton Corporation to Ireland, 2012, Actavis to Ireland, 2013, Liberty Global to the United Kingdom, 2013, Burger King to Canada, 2014, Medtronic to Ireland, 2015, Mylan to the Netherlands, 2015, Arris Group to the UK (2016)

Common objectives of Tax Driven M&As

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Reducing overall tax burden of the business income – ETR reduction of the group

Avoiding payment of capital gains tax on sale of business/assets

Avoiding payment of tax on migration of assets or people or capital within the group with a view to reduce future ETR

Avoiding payment of DDT on accumulated profits

Main drivers of use of M&A as tax planning tools

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Capital gains tax free/neutral treatments of mergers, demergers, conversions and parent-subsidiary transfers

Unique tax treatment of slump sale and asset salesRetrospectivity of mergersSection 56 consideration of gift of sharesAvoiding implications of transfer pricing law of ALPAvoiding VAT on sale of assets – itemized sale

Common examples of use of M&A as tax planning tools

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• Use of Tax treaties – like Mauritius, Singapore etc.Migration from places like US to Mauritius to get the benefit from grandfathering provision

• Buy-back of shares for avoiding DDT – characterizing dividend as capital gains – introduction of Buy-back tax

• Use of court sanctioned schemes for reorganization to avoid buy back tax – now plugged by the Finance Act, 2016

• Characterizing other types of income as CG – e.g. interest by issuing hybrid instruments which are debt instruments but structured as equity or vice-versa

• Avoiding Section 56 tax on gift of shares by carrying out a slump sale of the business

Income-tax dept’s role in a court scheme

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Role of the income tax dept in the court process during a court approved merger or demerger or capital reduction or buy-back of shares has often been to object to the schemeCourts’ approach in general has been to approve the scheme while retaining the right of the tax dept to impose tax during assessment proceedings

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GAAR – post April 1, 2017

Impact of BEPS recommendations of OECD

Looking Forward

Thank You

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