Tax issues in M&A
Tax issues in M&A
Taxation is one of the factors that needs to be considered right from the M&A transaction design stage. Depending on the transaction structure, the transferee, the participating entities, and whether the transaction is domestic or foreign, different tax obligations may arise. Accurately assessing tax obligations and risks helps the parties choose the appropriate structure, determine the transaction value, and allocate tax responsibilities accordingly.
What tax issues are involved in M&A?
Taxes in M&A transactions are not just the taxes directly arising from the transfer. Parties also need to consider existing tax obligations at the target company, potential taxes, and the impact of the transaction structure on tax obligations.
- The target company's tax obligations prior to the transaction.
- Taxes arising from the transfer of capital, shares, or assets.
- Taxes related to the transfer of operations and assets.
- Tax obligations of the buyer, seller, and related parties.
- The obligation to declare, deduct, and pay taxes.
- Risks include back taxes, late payment penalties, and fines.
- Tax impacts of Share Deals, Asset Deals, mergers, and consolidations.
- Tax issues in transactions involving foreign elements.
Tax Due Diligence in M&A Transactions
Tax Due Diligence is the process of reviewing the tax compliance, obligations, and risks of a target business before finalizing a transaction.
The areas that are typically reviewed include:
- Tax filing and payment records.
- Status of tax settlement, inspection, and audit.
- Taxes payable and other receivables.
- Transactions with affiliated parties.
- These expenses are subject to tax risks.
- Contingent tax liability.
- Risks include back taxes, late payment penalties, and fines.
- Tax issues arise from the transaction structure.
The Tax Due Diligence result can affect the purchase price, transaction structure, preconditions, commitments and warranties, and compensation mechanisms.
Taxes based on M&A transaction structure
Share Deal – Buy shares or equity stakes
In a Share Deal, the target business continues to exist after the transaction. Therefore, in addition to considering the direct tax obligations of the transferor, the buyer needs to review all remaining tax obligations and risks of the target business.
Issues to consider:
- Tax obligations of the transferor.
- The target company still has outstanding tax obligations.
- Taxes related to capital or share transfer transactions.
- Transactions with affiliated parties.
- Hidden taxes can affect a business's value.
Asset Deal – Purchase of assets or businesses
In an asset deal, it is necessary to accurately identify the assets, rights, or business activities being transferred in order to determine the corresponding tax obligations.
Issues to consider:
- The nature of the asset or right being transferred.
- Value-added tax, if applicable.
- Taxes related to income from the transfer of property.
- Invoices and supporting documents for the transaction.
- Taxes, fees, and other financial obligations related to the property.
- The seller's tax obligations.
Mergers and consolidations
Mergers and consolidations need to be considered separately because they involve business reorganization and the handling of assets, rights, and obligations of the participating businesses.
Issues requiring review:
- The tax obligation remains.
- Tax declaration and settlement.
- Handling assets and related tax obligations.
- Tax records after reorganization.
- The right or tax incentives may continue to apply if the conditions stipulated in the regulations are met.
It should not be generally assumed that mergers or consolidations are tax-exempt or automatically transfer all tax incentives. The treatment must be determined according to the type of transaction and applicable legal conditions.
Taxes to consider in M&A
Corporate income tax
Businesses may generate taxable income from capital transfers, asset transfers, or other activities subject to tax laws. In addition to the tax obligations arising directly from the transaction, it is necessary to review any outstanding tax liabilities and tax risks of the target business to fully assess its tax exposure.
Personal income tax
Personal income tax may arise when individuals transfer capital or securities, depending on the applicable circumstances. When determining tax liability, it is necessary to correctly distinguish the nature of the transaction, the subject of the transfer, and the current tax regulations.
Value Added Tax
It is not possible to conclude generally whether M&A transactions are subject to or exempt from VAT. The nature of the goods, assets, rights, or services transferred must be determined and compared with the tax regulations applicable to the specific transaction.
Taxes on foreign transactions
For transactions involving foreign parties or cash flows, consideration may be needed of tax obligations arising from cross-border transactions, including contractor tax where applicable.
Transactions with affiliated parties
When a transaction involves related parties, it is necessary to review the obligations related to the related-party transaction, determine the pricing, and ensure compliance documentation with applicable regulations.
Fees, charges, and other financial obligations
In addition to taxes, transactions may incur fees, charges, or other financial obligations depending on the type of asset, rights, and transaction structure.
Taxes in M&A involving foreign elements
For transactions involving foreign elements, tax assessment can be more complex due to its connection with Vietnamese tax law and cross-border tax issues.
Points to consider:
- The tax residency status of the parties.
- Source of funds and payment flow.
- Contractor tax when applicable.
- Related party transactions and pricing issues.
- Double taxation avoidance agreements are available if the conditions are met.
- The obligation to deduct, declare, and pay taxes.
- Documents and records proving the transaction.
How do taxes affect transaction values?
Tax exposure can directly affect the value and terms of a transaction.
Tax Exposure
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Valuation
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Transaction structure
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Contract
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The Tax Due Diligence results can be used to:
- Adjust the purchase price.
- Change the transaction structure.
- Add prerequisites.
- Adjust the seller's commitments and warranties.
- Establish a compensation mechanism.
- Retain or freeze a portion of the transaction value.
- The tax liability is divided between the buyer and the seller.
Taxes and M&A contracts
Tax issues should be reflected directly in the transaction contract instead of being dealt with only after closing.
The information that needs to be determined includes:
- Which party is responsible for the taxes arising from the transaction?.
- Which party is responsible for tax obligations arising before Closing?.
- The handling of tax obligations was discovered after the closing date.
- Mechanism for providing documents and coordinating with tax authorities.
- Compensation mechanism for Tax Exposure.
- Tax liability deadlines and limits.
- The responsibilities of the parties involved when tax audits, inspections, or disputes arise.
Clearly defining responsibilities in the contract helps to limit disputes after ownership or control has been transferred.
Taxes in M&A, categorized by stage.
Before the transaction
Determine the transaction structure, perform tax due diligence, and identify any tax obligations or risks that may affect the transaction.
Negotiation and signing
Assess the impact of taxes on pricing and transaction structure, and incorporate tax issues into commitments, terms and conditions of transactions, and liability allocation mechanisms.
Press
Fulfill all declaration, deduction, payment, and related documentation obligations as applicable.
After Closing
Monitor remaining obligations, address any tax issues discovered after the transaction, and perform post-transaction procedures as needed.
Common tax risks in M&A
Some risks that require particular attention include:
- No outstanding tax obligations were detected for the target company.
- Misjudging the tax implications of a Share Deal or Asset Deal.
- The party responsible for the tax has not been correctly identified.
- Do not include tax exposure in price negotiations.
- There is no appropriate tax compensation mechanism.
- The transaction records and documents are incomplete.
- Risks arising from transactions with related parties.
- Cross-border tax risks.
- Failure to properly fulfill obligations regarding declaration, deduction, or payment.
- Failure to update tax obligations arising after the transaction is completed.
Frequently Asked Questions about Taxes in M&A
Some common questions about tax obligations and risks in M&A transactions.
What is Tax Due Diligence?
Tax Due Diligence is the process of reviewing the tax compliance, obligations, and risks of a target company before or during an M&A transaction.
When should you file a Tax Due Diligence?
It should be done during the pre-deal preparation phase so that the appraisal results can be used when determining the company's value, selecting a structure, and negotiating the contract.
Does Share Deal involve any taxes?
Tax obligations may arise depending on the transferor, the subject of the transaction, and applicable tax regulations. Simultaneously, the buyer needs to review any outstanding tax obligations of the target company.
Are Asset Deals subject to VAT?
There is no single answer for every asset deal. The nature of the assets, goods, rights, or activities being transferred and the corresponding tax regulations must be determined.
Can M&A transactions result in personal income tax liability?
This is possible, especially when an individual earns income from the transfer of capital or securities. The method for determining tax liability depends on the nature of the transaction and applicable regulations.
What tax considerations should foreign investors be aware of when undergoing M&A in Vietnam?
It is necessary to consider the transaction structure, tax residency status, cash flow, contractor tax, related-party transactions, double taxation avoidance agreements, and related tax declaration, withholding, and payment obligations.
