31-07-2012, 01:18 PM
TAXATION IN DOMESTIC M & A’s
mergers & acquisitions.ppt (Size: 183.5 KB / Downloads: 30)
INTERNATIONAL PERSPECTIVE – POST 2000
In the context of September 11th, 2001 incident, all acquisition activities, primarily hostile ones came down initially. It is believed that the reduction of bids occurred because of public perception that such takeovers would be taking advantage of a national tragedy.
However, significant increase in acquisition activities in the recent past.
INTERNATIONAL PERSPECTIVE
Most hostile activity involved distressed telecom and technology companies.
Example : COMCASTS 72 Billion Dollars unsolicited acquisition of A T & T broadband, Northrop Grummam Corps 6 Billion Dollars unsolicited bid for TRW.
Given current economic landscape and continued stock market turbulence, the outlook reflects an increase in acquisition activities especially in industries undergoing consolidation including banking, financial services, energy and utilities. This also presents a unique opportunity for potential acquirers and increased risks for vulnerable companies attempting to remain independent.
ACQUISITION COSTS :
Acquisition costs are deductible in the year in which they are incurred in a number of countries including Germany, Japan, UK& USA. Costs incurred after acquisition are generally capitalized and added to the cost of the acquired asset or stock. However, there are numerous differences and approaches between various jurisdictions. In France a company my either deduct the cost in the year in which they are incurred or the cost is spread over a maximum period of five years. Acquisition costs that can be deducted over a five year period include registration, intermediary’s fees (notary, lawyer etc.) and legal formality costs (public notice costs).
AMORTISING INTANGIBLES
In the US goodwill may be amortized over 15 year period. In France it is not allowed to be amortized. In Germany amortization of intangible includes goodwill provided it is acquired.
UK’s tax regime provided for amortizing intangible property covering patent, trademark and other intellectual properties and goodwill. It also provided that no stamp duty would be charged on goodwill.
In the Netherlands any goodwill included in the acquisition price of shares can not be amortized. However, it can become tax deductible only if the acquisition takes place as an asset deal when it can be amortized generally over a period of 5 years.
LOSS CARRY OVERS :
In Germany, corporate income tax losses generally may be carried back one year upto a specified amount and carried forward indefinitely. Trade tax losses can be carried forward indefinitely as well. However, German Tax Laws restrict the use of loss carry overs in the event of the change of control of the corporation that has accumulated tax losses, if in a period of 5 years , after the change of control the corporation also receives more new business assets than it had at the time of change of control. In the Netherlands, similar carry forward or carry backward of losses are permitted unless there is change of control.
DEFINITIONS IN INCOME TAX ACT
Mergers and amalgamation are defined in section 2(1B) and Demergers are defined under section 2(19AA). In both thee definitions, it is mentioned that all the properties and liabilities are transferred. This really restricts the tax benefits in the event of non-compliance with this 100% stipulation. In today’s liberalized era, it is noticed in a large number of cases only those assets and liabilities relatable to the undertaking which are mutually agreed upon between the parties should be transferred and not all assets and liabilities. Moreover, it may be noted that provisions of section 72A states that at least 3/4th in book value of fixed assets of the amalgamating company is held by the amalgamated company for a period of five years.
CAPITAL LOSSES
There is no provision for carry forward of losses on capital gains. It may be noted that the Kelkar Committee in its report has suggested that “since capital gain represents accumulation of income over a period of time, these can be illusory and therefore the cost of asset adjusted over the period of holding for inflation.” As such the long term capital gains thereafter, is a real gain to be taxed at normal rates. This in turn implies that loss should also be treated at an equal footing and allowed to be adjusted subsequently. Also, it may be noted that under section 72, carry forward business losses are not allowed to be adjusted with the year’s capital gains. Thus in the case of the sick units being merged etc., if any assets/shares are sold before the takeover the capital gains tax is to be paid inspite of carrying forward huge losses. This is however permitted under the DTC – ref clause 64.