Cross Border M&a-Mr.ashutosh Chaturvedi
-
Upload
varnika-goel -
Category
Documents
-
view
43 -
download
0
Transcript of Cross Border M&a-Mr.ashutosh Chaturvedi
PWC
CROSS BORDER MERGERS &
ACQUISITIONS
Presented by
Ashutosh ChaturvediExecutive Director
PWC 1
PWC
• Perspective
• Outbound Structuring
• Funding
• Acquisition & Restructuring
• Foreign Exchange Regulations
Agenda
2
PWC
Scenario and OverviewPerspective
3
M&A Deals*No Particulars 2009 2008 2007
No. Value(USD bn)
No. Value(USD bn)
No. Value (USD bn)
I. Domestic Deals 142 5.8 172 5.21 321 2.85
II.(a)
(b)
Inbound
Outbound
61
64
3.11
1.12
86
196
12.55
13.19
112
243
15.5
32.76
Cross Border (a +b) 125 4.23 282 25.74 355 48.26
III. Total M&A’s (I+II) 267 10.03 454 30.95 676 51.11
IV. Average Outbound Deals (US$ MN)
17.5 67.3 134.8
* Source: The Financial Express
PWC
Perspective
4
Zylog System acquires Brainhunter in
Canada for Candian $ 35 Mn
Marico acquires
Colgate Palmolives
Code 10 brand in
Malaysia
MSSL acquired a global Company for 26.5 Mn Euros
Hindustan Dorr –Oliver acquires UK based Company
Apollo Tyre acquisi
tion
of stake in French
company for USD 10.2
Mn
Banco Products acquires a Dutch company for 17.7 Mn Euro
Kiri Dyes and Chemicals Ltd.
acquires German multinational for Rs
1,300 crore
Shree Renuka Sugars Ltd acquires a Brazilian entity
for USD 240 Mn
PWC
OutboundStructuring
5
PWC 6
Imperatives of efficient tax structure
Flexibility of tax efficient entry &
exit from a business ventureTax efficient
repatriation of dividend by mitigating withholding taxes
Overall tax efficiency of the
Group
Capture tax credit
Fund raising
Efficient Promoters
holding structure
Consolidation of offshore results at
desired levelHoldingStructure
Enhances control and addresses
dilution
Overall Business Strategy – Verticals
/ Manpower Management / IP
PWC
Indian Co
Overseas
India
Target
Outbound Investment Structures
Indian Co
SPV
Target
SPV1
Indian Co
SPV2
Target
Direct Investment
SPV StructureTwo – Tier
SPV Structure
Tax inefficientTax efficient and Flexibility in fund movement
Optimal structure from tax and funding perspective
PWC
SPV Considerations• Corporate tax rate
• Taxation of dividend/ interest
• Withholding tax on dividend/ interest
• Capital gain tax on transfer of investments / shareholding
• Thin Cap rules
• Ease of access to debt and equity capital
• Black listed Countries
• Treaty network
• Cost of setting up and administration
• Other non‐tax considerations like political stability, banking facility etc.
Mauritius
Singapore
Netherlands
Luxembourg
Cyprus
UAE
Tax Havens –BVI/ Cayman
PWC
Funding
9
PWC 10
Considerations for Fund Raising
Appropriate Jurisdictions
Maximise Interest deduction
Facilitates family reorganisation and
succession
Leveraging and flexibility in raising funds in India and overseas levels
Listing in India and overseas
Tax efficient instrument
CapitalStructure
Nil/ lower withholding on
interest
PWC
Indian Company
Option I ‐ Debt in India
SPV 1
Target
SPV 2
Loan
Loan Structures
Indian Company
SPV 1
Target
SPV 2
Loan
Indian Company
SPV 1
Hold Co
SPV 2
Loan
Target
Loan at India Level Loan at SPV Level Loan at Target Country
Outside India
India
Interest cost deductible in India Tax inefficient
Interest deduction against Target’s
Profits
PWC
Option I ‐ Debt in India
Maximise Interest Deduction
• Interest cost deductible in India
• Interest cost deductible at Target country level through tax consolidation or Merger
• Indian TP regulations to be considered in case of RPS/ Loan instrument used by Indian Company
Indian Company
SPV 1
Hold Co
SPV 2
Target
Loan
Equity/ RPS/ Loan
Equity
Low Equity/ Maximum loan
PWC
Investing outside IndiaParameters Equity Preference Shares Loan
Return on
income
Dividend Dividend/ Capital Ggains Interest
Taxability in
India
Dividend taxable at 33.99% Dividend taxable at 33.99%
Capital gains taxable at
33.99%/ 22.66%
Interest taxable 33.99%
TP
regulations
No arm’s length pricing
conditions
Arm’s length Pricing Arm’s length pricing
Repayment Usually by way of Buy back
of shares subject to host
country regulations
Depending upon the terms
of the instrument
As per terms of loan
agreement
Tax Benefit Dividend not tax
deductible
Dividend not tax deductible Interest is tax deductible
subject to thin cap rules
Funding Instruments
PWC 14
Delhi Tribunal in Perot Systems TSI (India) Limited and Mumbai Tribunal in VVF Limited held that:
– Interest free loan to foreign subsidiary is not in accordance with Transfer Pricing
– Such transaction has a result of shifting profits from India to company situated in tax haven countries which would bring down the tax burden of the group.
– Whether such loan is considered as equity in the recipient country or not is not relevant
– RBI’s approval does not put a seal of approval on true character of transaction from TP perspective
Cross Border Financing
PWC
Acquisition & Restructuring
15
PWC 16
Acquisition Strategy
Acquisition of
Shares Assets
To be held from India or from overseas jurisdiction?
At SPV level or Operating Company
level?
PWC 17
Acquisition Strategy
Shares Assets
Purchase of entire business
Purchase of identified Assets
Cost of acquisition not reflected in Target financials
Enhanced depreciation benefit to the Purchaser
Usually no VAT implications
VAT implications may arise
Consideration directly received
by owner
Consideration payable to Target
PWC 18
Acquisition Structure
Target
Indian CoIndian Co
India
Overseas
Target is a French Company, with assets in
various regions
Asset 2
Asset 1
Asset 3
Post Acquisition restructuring required
PWC 19
Why Restructuring?
SPV 1
Indian Listed CoIndian Listed Co
India
Overseas
SPV 2
Overseas Company 2
Value of International Business not captured under one offshore Company for listing
overseas
OverseasCompany 1
Flexibility of Indian and/ or Overseas Listing
PWC 20
Why Restructuring?
SPV
Indian ParentIndian Parent
India
Overseas
Existing structure not flexible for expansion or
future acquisitions
OverseasCompany
Target
PWC 21
Why Restructuring?
SPV
Indian Listed CoIndian Listed Co
India
OverseasListing/ Fund raising of
Business verticals separately
OverseasCompany 1
OverseasCompany 1
OverseasCompany 1
Oil & Gas
Power EPC
PWC 22
Why Restructuring?
Indian ParentIndian Parent
India
Overseas
Use of SPV for investment in JV
Joint Venture JV Partner
PWC 23
• Limitation of Benefit (LOB) provisions in most of the US Treaties
― Restricts the flexibility of structuring investments into US
― Treaty benefits to companies without active trade or business not available
― DTAA with Hungary also amended recently to include LOB Clause
• Consolidation benefits – Group consolidtion permitted allowing tax shelter on interest cost
• No thin cap rules but Earning Stripping regulations restricting the interest deduction
• Detailed Controlled Foreign Corporation (CFC) regulations
• Interest deduction to group companies permitted only in the year of payment
• State level taxes
• Shares owned in a US SPV subject to FIRPTA rules – real estate companies
Investment in US
PWC 24
• EU Saving Directives on dividend, interest, royalty
― No taxation in source country if payment to a EU member country, subject to prescribed conditions
• Domestic anti‐abuse regulations in the source country to be considered before allowing the benefit of EU directives
• Netherlands/ Luxembourg are commonly used jurisdictions
• EC‐Switzerland agreement – similar benefits as to EU country
• Common Currency – automatic foreign exchange fluctuation hedging
Investment in Europe
PWC
Foreign ExchangeRegulations
25
PWC
Some Historical Changes to ODI Regulations• Investment in WOS/JV abroad permitted under automatic route
• Value of investment not to exceed 400% of net worth
• Setting up Step down companies/ SPV allowed
• Foreign entity not to be engaged in real estate or banking business
• Loan ‐ equity participation in WOS/JV required
• Divestment subject to restrictions including one year lock in period and no write off
• Investment in existing WOS/ JV ‐ valuation requirements
– If investment > US$ 5 mn ‐ Category I Merchant banker
– In all other cases ‐ CA / CPA
Foreign Exchange Regulations
26
PWC
Option I ‐ Debt in India• Guarantee can be issued on behalf of WOS/ JV only if there is equity participation by Indian party – direct or indirect?
• Can be given by Promoter Company, Group Company, Sister concern or Associate company
• Guarantee can be Corporate or Personal, Primary or Collateral
• No Guarantee can be open ended – amount and period of guarantee to be specified upfront
• Limited to a overall cap of 400% of net worth
• Is Performance guarantee covered?
Guarantees
PWC
Some Historical Changes to ODI Regulations• Setting up Multiple SPV
• Loan/ Guarantee directly to Step down subsidiaries – hinder the flexibility of funding arrangements
• Exit involving write off
• Remittance towards share application
• Can two SPV set by Indian party for acquisition
28
Issues
PWC
Some Historical Changes to ODI Regulations• Valuation guidelines to be seen at which level?
– At company in which investment is made by Indian company – Could be SPV
– Valuation of the ultimate Target company
• Further remittance of funds not available until receipt of UIN – planning of remittances
• All funding to follow the SPV route – no direct funding
• Reporting requirements for step down subsidiaries or any alteration in shareholding
29
Practical Problems
PWC
Some Historical Changes to ODI Regulations• Consolidation of overseas financials in the books of Indian Company
• Acquisition of a loss making entity – impact the consolidated balance sheet
• Post acquisition impairment ‐Mitigation through Scheme of arrangement
• IFRS from April 1, 2011 – how does it impact the existing consolidated financial statement?
30
Accounting
PWC 31
• Control and Management of WOS/ JV to be outside India
• Control & management not defined ‐means de facto control and not day to day control
• All Board meetings should be outside India
• Even part control & management is situated outside India, then foreign company is not a resident of India
Control & Management
Delhi Tribunal in case of Radha Rani Holdings
PWC
• General Anti‐avoidance Rule provides sweeping discretionary powers to the Commissioner to treat an arrangement impermissible, if main purpose of the arrangement or any part of it is to obtain a tax benefit and– in a manner not bonafide for business purpose; or– lacks commercial substance.
• Foreign company may be resident of India if part control and management is situated in India during any time of the year
• Cross border mergers may not be allowed
Direct Tax Code
32
PWC
Thank you
33