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SINGAPORE : Despite interbank lending rates in Singapore coming off their recent highs, liquidity remains tight amid weak investor confidence.
This has made it especially difficult for players in the mergers and acquisitions (M&A) market, who rely heavily on borrowed funds to finance their deals.
Industry players said banks are beginning to place more emphasis on how deals are structured and focusing on the ability of borrowers to repay their debt.
Banks are also taking it one step further - by looking at how a company's tax obligations will affect its future cashflow. This is where industry watchers said Singapore's tax laws can be further developed to stimulate growth in the M&A market.
Chris Woo, partner, Corporate Tax Advisory (M&A), PricewaterhouseCoopers, said: "We already have it, in terms of funds obviously - the setup of funds, private equities trying to encourage funds to setup here.
"But in terms of the actual transaction itself, a lot of the rules just aren't evolved, and just aren't focused in terms of what the concerns are for the deal-makers."
One such concern is the taxation of interest costs incurred when using bank loans to fund acquisitions.
Industry experts said current Singapore tax laws do not allow interest costs to be deducted from a company's profits, and this potentially makes it more expensive for M&A deals to be transacted in Singapore.
Woo said: "When company A is buying company B, company A borrows to purchase company B. That interest cost which company A incurs is presently not deductible against the profits of the target company B.
"As a result, the profits which are made in company B get taxed at that level, and then the costs sit on company A. When you put it all together, the profits is actually a lot less, but the tax still remains at the level of company B, and therefore you effectively pay a lot more tax."
According to PricewaterhouseCoopers, as a rule of thumb, the effective tax for M&A deals in Singapore could be as high as 30 per cent.
Woo explained: "If you just think about it, for every dollar you have of profits before you pay your interests, if that interest is not deductible for example, you are still going to pay 18 cents to every dollar you earn.
"And if you've got interest costs to pay, which takes away like 50 cents for every dollar, you're not left with much after that."
Already Singapore may be facing competition from other jurisdictions such as Hong Kong, whose corporate tax rate is now 16.5 per cent. So, industry experts said further expanding Singapore's tax legislation to specifically address M&A deals will help make the country a more attractive and cost-effective hub for M&A deals in the region.
There could also be positive spillover effects on local lenders, if conditions are introduced to require acquiring companies to borrow from Singapore banks to receive tax deductions on their interest costs. - CNA /ls
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