Solution Manual for Financial Accounting, 11th Edition by Robert Libby, Patri...
Tax issues in mergers and acquisitions
1. Tax Issues in MergersTax Issues in Mergers
and Acquisitionsand Acquisitions
PresenterPresenter
VIKRAM SINGH SANKHALA
2. What the present income-tax form needsWhat the present income-tax form needs
is a section which would explain theis a section which would explain the
explanations.explanations.
What do accountants suffer from thatWhat do accountants suffer from that
ordinary people don't?ordinary people don't?
Depreciation.Depreciation.
Income tax is the fine you pay forIncome tax is the fine you pay for
thriving so fast.thriving so fast.
Where there's a will there's a taxWhere there's a will there's a tax
shelter.shelter.
Tongue in cheekTongue in cheek
3. Structure of theStructure of the
PresentationPresentation
Domestic Tax ProvisionsDomestic Tax Provisions
Basics of InternationalBasics of International
TaxationTaxation
4. Types of Restructuring
Organic
- Capital
- Business
Inorganic – Change in corporate
entity
- Mergers & Amalgamations
- Demergers
- Acquisitions
7. "amalgamation", in relation to
companies, means
"amalgamation", in relation to companies, means the
merger of one or more companies with another
company or the merger of two or more companies to
form one company (the company or companies which
so merge being referred to as the amalgamating
company or companies and the company with which
they merge or which is formed as a result of the
merger, as the amalgamated company) in such a
manner that
8. property
(i) all the property of the amalgamating
company or companies immediately
before the amalgamation becomes the
property of the amalgamated company
by virtue of the amalgamation ;
9. liabilities
(ii) all the liabilities of the amalgamating
company or companies immediately
before the amalgamation become the
liabilities of the amalgamated company
by virtue of the amalgamation ;
10. shareholders
(iii) shareholders holding not less than [three-
fourths] in value of the shares in the
amalgamating company or companies (other
than shares already held therein immediately
before the amalgamation by, or by a nominee
for, the amalgamated company or its
subsidiary)
become shareholders of the amalgamated
company by virtue of the amalgamation,
13. Deemed Dividend u/s
2(22)
The Transfer by a subsidiary
company of its assets to its
parent company in a scheme of
amalgamation does not amount
to deemed dividend
14. Capital Gains –
Section 45
Section 47 (vi)- Any
Transfer , in a scheme of
amalgamation of a capital
Asset by the amalgamating
company to the amalgamated
company if the Amalgamated
company is an Indian company
15. Subsequent Transfer
Section 49 (1)(iii)(e)
Cost of Acquisition shall be deemed to be the
cost for which the previous owner of the
property acquired it ,as increased by the cost
of any improvement of the assets incurred or
borne by the previous owner or the assessee, as
the case may be. In case the asset became the
property of the previous owner before 1-4-1981 ,
then assessee has the option of either cost to
previous owner or fair market value on 1-4-1981.
16. Period for which the
asset is held
Will include the period for
which it is held by the
previous owner
Indexation will be from the
date of holding of share in
the resulting company
18. Investment Allowance
s. 32A
In case of acquisition of a
ship/machinery/plant specified u/s
32A(2) there a deduction of 25% of the
cost as investment allowance, subject to
the fulfillment of certain conditions.
This will pass through to the
amalgamated company as long as the
amalgamated company continues to
fulfill such conditions of allowance
19. Development Allowance
s. 33A(1)
In respect to planting of Tea
Bushes
Concession is transferred to
amalgamated company if it
continues to fulfill such
conditions
20. Expenditure on scientific
research s. 35
Certain capital expenditure
under this head was allowable
Provision shall apply to
amalgamated company if it
continues to fulfill such
conditions
21. Provision shall apply to
amalgamated company if it
continues to fulfill such
conditions in the following
cases also
22. Expenditure on patents and copyrights 35A
Expenditure on Know how 35AB
Capital expenditure on License to operate
Telecom Services 35ABB
Amortisation of Preliminary Expenses 35D
Amortisation of expenditure in case of
Amalgamation
35E – Mineral prospecting
42- Prospecting , Extraction or production of
Mineral oils
23. Depreciation Allowance
WDV for the amalgamated company
shall be the WDV of the block of
assets as in the case of the
amalgamating company for the
immediately preceding previous
year as reduced by the amount of
depreciation actually allowed in
relation to the said previous
year.
24. Benefits u/s 80IA , 10A , 10B
Would continue to the resulting
company as if the amalgamation or
de merger had not taken place
Would not be available to the
amalgamating or de merging
companies
25. Section 72A
Accumulated losses and Unabsorbed depreciated
of the amalgamating company shall be deemed to
be loss or depreciation of the amalgamated
company and the provisions of the Act , relating
to set off and carry forward shall apply.
However , to be eligible , both the amalgamating
and amalgamated companies must fulfill certain
conditions- 72A(2) a&b read with Rule 9C of the
Income Tax Rules.
Benefit would be available for 8 years from the
first year after Amalgamation.
26. Credit for tax paid
Case Law –Modipon Ltd. Vs DCIT [1995]
54ITD 433(Del)
Benefit of any tax paid as Advance Tax
or Tax deducted at Source of the
amalgamating company would be available
for adjustment against the income of the
amalgamated company consequent
inclusion of such income of the
amalgamating company as income of the
amalgamated company after amalgamation.
27. Demerger
Defined u/s 2(19AA) of the IT Act,
1961
The companies Act allows as a part
of a scheme of arrangement under
sections 391 to 394 , or by
process of sale of an undertaking.
The IT Act specifically excludes
sale of an undertaking. This is
covered under slump sale
28. Benefits under the IT
Act
Not treated as transfer u/s 47
hence gains on such transfer not
chargeable under capital gains.
Depreciation benefits
Section 35DD- Amortisation of
expenditure incurred for demerger
–one fifth
Amortisation of patents/copyrights
expenditure
29. Expenditure on knowhow
Expenditure on obtaining licence to
operate Telecommunications Services –
35ABB
Amortisation of certain Preliminary
expenses
Deduction of Expenditure on prospecting
etc.
30. Carry forward of losses and
unabsorbed depreciation
Where directly relatable to
transferred undertakings – entire
amount
Where not directly relatable –
apportioned based on proportion of
assets retained and transferred
Demerged company will get the
benefit only for the balance years
unlike in the case of amalgamation
31. Any Transfer or issue of shares
by the resulting company, in a
scheme of demerger to the
shareholders of the demerged
company , will not be treated as a
transfer of capital Asset for the
determination of chargeable
capital gains u/s 45
32. Slump Sale s. 50B
Inserted w.e.f 1-4-2000
S.2(42C) Slump sale – sale for a
lump sum consideration without
values being assigned to
individual assets and liabilities.
Taxed as capital gains
Cost of acquisition and
improvement shall be the net worth
of the undertaking
34. Transfer Pricing
India s.92
USA Reg.482
Concept of Arms Length Price
Methods –Transactional Price based and
Transactional Profit based
Advance Pricing agreements
35. Thin Capitalization
Interest versus Dividend
payouts
Excessive use of debt over
equity- Very high Leverage
Arms Length basis
Reclassify as constructive
Dividend
36. OFC’s or Tax Havens
Account for half the world’s Financial
Transactions
Low or Nil Rate of Tax
Treaty Havens
Ring Fenced Tax structure
Bermuda, Cayman Islands, Mauritius etc.
Around 70 to 80