Taxation of Cross-Border Mergers and Acquisitions
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Taxation of cross-border mergers and acquisitions 2018 edition kpmg.com/tax KPMG International Table of contents Executive summary Executive summary 2 Africa South Africa 7 Asia China 21 Oman 99 Hong Kong (SAR) 37 Philippines 109 India 47 Saudi Arabia 117 Indonesia 59 Singapore 125 Japan 67 Thailand 137 Korea 75 Turkey 147 Kuwait 85 United Arab Emirates 157 Malaysia 89 Vietnam 161 Central and South America Argentina 169 Mexico 207 Brazil 179 Panama 215 Colombia 189 Uruguay 221 Costa Rica 199 Venezuela 225 Europe Austria 233 Luxembourg 391 Belgium 241 Malta 403 Bosnia and Herzegovina 251 Netherlands, The 413 Croatia 259 Norway 427 Cyprus 265 Poland 435 Czech Republic 271 Portugal 445 Denmark 279 Romania 457 Finland 289 Russia 463 France 297 Slovakia 475 Germany 313 Slovenia 485 Greece 331 Spain 491 Hungary 343 Sweden 505 Iceland 353 Switzerland 513 Ireland 361 Ukraine 525 Italy 375 United Kingdom 537 Jersey 385 North America Canada 547 United States 559 Oceania Australia 579 New Zealand 595 Executive summary Easing uncertainty boosts M&A worldwide In the past year, the global economy turned the corner — Globally, December 2017 alone saw five deals valued at to solid growth. 2017 was the first year since the crisis almost US$200 billion. that none of the 45 countries and jurisdictions monitored — The energy, mining and utilities sector led the way by the Organisation for Economic Co-operation and globally in 2017 with deals valued at US$543.7 billion, Development (OECD) were contracting. This tailwind of followed by industrials and chemicals (US$395 billion) global growth has been supportive of M&A activity. The and consumer markets (US$380 billion). OECD’s 13 March 2018 release of its global outlook showed an upward revision of global growth to 4.1 percent in 2018 Despite a correction in global markets early this year, M&A and 4.0 percent in 2019. This optimistic forecast is reflected activity in 2018 could surpass 2017. Debt is expected to stay in almost all countries and jurisdictions, with developed relatively inexpensive in the near term globally, and high markets seeing the greatest upward revisions. accumulations of uninvested capital, or ‘dry powder’, are ready to be spent. In addition to economic momentum, several structural changes could pave the way for further M&A activity. The With a clearer idea now emerging as to the potential future implications of US tax reform are becoming clearer. An impacts of Brexit, US tax reform and international tax outline of terms of Britain’s exit from the European Union changes from the Organisation for Economic Co-operation (EU) has been mostly resolved. Elections in countries like and Development’s (OECD) base erosion and profit shifting France, Germany and the Netherlands were won by parties (BEPS) project, private investors that have been taking that generally uphold the mainstream. The upcoming a wait-and-see approach may begin moving in from the elections in Brazil is widely expected to have similarly sidelines, emboldened by consistent growth to enter positive outcomes for global markets. multiple large deals. As structural reforms and economic growth provide the backdrop, the performance of M&A markets is Private investors that have been getting stronger across the world. Following a relatively taking a wait-and-see approach may sluggish 2016, M&As got off to a slow start in 2017 but gained momentum as the year unfolded. According to begin moving in from the sidelines, Mergermarket,1 by the end of the year: emboldened by rising political stability — North America saw almost 6,000 deals valued at and consistent growth to enter 1.4 trillion US dollars (US$). multiple large deals. — With 7,235 deals, higher volumes of lower value European transactions amounted to US$929.3 billion. At the same time, strategic buyers are reviewing their mix — About 3,750 deals totaling US$673.5 billion took place of assets to help determine they are well positioned for in the Asia-Pacific region (except Japan), while over the coming years. Strategic buyers are also seeing a surge 450 deals in Japan totaled US$40.1 billion. of investor activism — a call to rationalize their asset mix through spin-offs and carve-outs of non-core assets outside — Lower but nevertheless healthy deal volumes occurred the mainstream of the business. in Latin America, with almost 600 deals worth US$80.4 billion, and the Middle East and Africa, with With interest in disposing of assets generally rising among just over 400 deals worth US$59.4 billion. both private equity and strategic buyers and growing demand 1 Mergermarket, Monthly M&A Insider, January 18, 2018, p 3–8. 2 | Taxation of cross-border mergers and acquisitions from retail investors, interest in exits through initial public Of course, such substantial reforms will create both offerings may very well continue to climb. winners and losers. Nevertheless, US tax reforms could drive significant M&A activity involving the US over the next Region by region, some of the more significant factors few years. The longer-term impact is less certain, as many influencing the world’s M&A markets are as follows. aspects of US tax reform will expire in 5 years unless further legislation is enacted to extend the time-limited changes. North America While re-negotiation of the North American Free Trade Europe Agreement between Canada, the United States and Mexico Europe seems to have emerged from a period of political continues to create uncertainty over future trade conditions, uncertainty in good shape, with projected economic US tax reform is having a bigger, more immediate impact growth of 2.4 percent in 2017,2 the fastest in a decade, on M&A activity. The reform’s US$1.3 trillion in tax cuts will the European Commission says. Growth is expected to undoubtedly free up cash that can drive domestic investment. continue at 2.3 percent in 2018 and 2 percent in 2019.3 Concerns that recent elections would produce waves The reform’s fundamental changes to of populist governments across Europe did not pan out. the taxation of multinational entities Markets in Europe and the UK have recovered from the initial shock of Brexit, and they seem to be proceeding with could particularly affect planning for ‘business as usual’ as the Brexit negotiations continue. cross-border deals. Technology is propelling US tax reform’s fundamental changes to the taxation of considerable M&A activity in multinational entities could particularly affect planning for cross-border deals. The changes include a shift from Europe with consolidation in the a system of worldwide taxation with deferral to a hybrid technology sector itself and more territorial system, featuring a dividend exemption regime technology buys from companies with current taxation of certain foreign income, a minimum tax on low-taxed foreign earnings, and new measures to in traditional industries seeking to deter base erosion and promote US production. increase their performance. In particular, the dividend exemption regime could prompt companies with offshore cash reserves to repatriate Technology is propelling considerable M&A activity in Europe these profits, and those companies may then look for new with consolidation in the technology sector itself and more opportunities for investment closer to home. In addition, technology buys from companies in traditional industries even though interest rates remain low, the new limit on the seeking to increase their performance. In some sectors, deductibility of interest expense to 30 percent of adjusted technology is increasingly entwined, as shown by recent taxable income may cause some international companies to activity in financial services (i.e. fintech) and healthcare. move debt out of the US to foreign jurisdictions. The OECD’s BEPS project and the European Union’s (EU) ATAD 1 and 2 continue to alter the landscape for M&A in 2 European Commission, Winter 2018 Economic Forecast. 3 See note 4. Taxation of cross-border mergers and acquisitions | 3 Europe and beyond. EU member states are required to — Peru and Colombia are attracting interest from private transpose minimum rules under the ATAD into domestic equity, particularly in the energy sector. Colombia law by 2019. introduced a major tax reform in January 2017 that, among other things, eases and simplifies corporation The BEPS changes restricting interest deductions based taxation while also addressing tax evasion. on a limit of 30 percent of earnings before income taxes, depreciation and amortization (EBIDTA) are among the — With corporate tax hikes and increasingly complex changes having the biggest impact since these restrictions anti-avoidance rules, Chile’s recent tax changes have are new to many European countries and jurisdictions, to some extent bucked international trends, but the including the UK, Poland and Slovakia. country’s strong social and political stability continues to attract investors. Many European countries and jurisdictions were among the first 70 countries and jurisdictions to take part in the signing — The tax-friendly countries and jurisdictions of Central ceremony for the OECD’s multilateral instrument (MLI) America remain viable, including Costa Rica despite its to combat treaty abuse in June 2017.4 The MLI provides a rising labor costs. vehicle for the swift implementation of the tax treaty-related measures for hybrid mismatches, treaty shopping, permanent Asia-Pacific region establishments and mutual agreement procedures. In the Asia-Pacific region, the near-term outlook is generally positive with adequate surplus capital and conditions for Attention to the new risks from executing transactions getting easier. Like Latin America, however, the cross-border M&A climate in the Asia Pacific BEPS-driven tax changes is especially is mixed: important when completing tax — Ongoing tax reforms in Australia continue to dampen due diligence reviews, defining the M&A environment.