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SINGAPORE: Emerging markets such as China have been the growth engine for many companies. But some experts said mergers and acquisitions deals in China have now become less tax efficient because Chinese tax laws have not caught up with changes to other Chinese regulations.
Leonard Ong, executive director, Tax Services, KPMG, said: "The tax regulations in some of these emerging markets may not be as developed as that in Singapore or other parts of the world. As such, there could be challenges faced by potential investors in a country that is developing or emerging."
Previously, it was common for foreign shareholders to loan funds to Chinese companies to be used as working capital or for acquiring Chinese real estate.
Under Chinese tax laws, the interest on these foreign shareholders' loans were deductible against the income of the Chinese company, thus reducing profits for tax purposes in China and increasing the returns for foreign investors.
But that changed from July 1, 2007. Now, Chinese laws do not allow foreign shareholder loans to be used for real estate investments in China. As a result, foreign investors can no longer claim tax deductions against the loan interest made from Chinese companies, making M&A deals less tax efficient.
However, experts said there are still ways to enhance the tax efficiency of M&A deals.
Mr Ong said: "The use of intermediate holding structures generally provides for more efficient flow of income from the target company's jurisdiction back to their acquirer in the most tax efficient manner.
"You should always try and do it such that the entity that is in the intermediate holding structure has sufficient substance, is a bona fide commercial company rather than one that was set up solely for the purpose of getting a tax advantage."
Tax laws are different in many jurisdictions and experts caution that different interpretations of local tax laws may lead to some frustration for companies doing mergers and acquisitions.
"In some emerging countries in the region, the tax regulations are not very clear, and sometimes tax regulations are one thing and practices are another," Mr Ong said.
Apart from being familiar with regulations and tax laws in different jurisdictions, industry watchers said acquiring firms should review their target companies to identify and highlight all potential contingent liabilities.
- CNA/so
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