Tax traps and structuring opportunities: M&A in Asia Pacific

However, conducting business in different countries and regions presents its own set of challenges. Commercial contexts vary and regulatory environments can be difficult to understand and even harder to keep up with as they change. The Mazars report, ‘Doing M&A in Asia Pacific: tax traps and structuring opportunities’ takes a closer look at these challenges and helps companies who are looking for growth opportunities outside their country of origin navigate these complex regulatory environments and identify where their investment would be the most beneficial.

Key insights and advice from the report cover the main tax traps and tax incentives encountered in due diligence and tax optimisation processes when dealing with overseas acquisitions, including:

Financial expenses deduction

Financial expenses deduction rules determine the proportion of financial expenses incurred by the corporate taxpayer that can be considered as deductible for corporate income tax (CIT) purposes. The amount of interest paid in excess of the limits is not tax deductible. Therefore, companies must monitor the level of their debt and financial expenses to achieve a full deduction of their financial expenses.

Local tax provisions most often regulate the proportion of financing of the corporate taxpayer through equity and debt and these rules vary across the region. For instance, in Australia only debt capital expenditure is deductible and thin capitalisation rules only exist when debt deductions exceed AUD 2 million. In Japan, interest exceeding 20% of the adjusted taxable profit is not allowed as a deduction, whereas in South Korea interest amounts paid to an overseas related party become non-deductible when they exceed 30%.

Transfer pricing documentation

Transfer pricing documentation remains one of the biggest tax traps in the Asia Pacific region. In most countries, the local tax authorities have adopted the ‘arm’s length principle’ implemented at OECD level, which stipulates that transactions between related parties should be carried out under the same conditions, notably in terms of pricing, as those would have been agreed to between third parties.

Companies must monitor the level of their debt and financial expenses to achieve a full deduction of their financial expenses. They must be capable of proving that the intra-group transaction they are involved in meets the arm’s length criteria and must be able to justify, based on a sound documentation, that the price or the corresponding allocation of income, assets and/or equity (when recorded in respect of a branch) at stake duly reflects the situation of a non- related party under similar circumstances (transfer pricing documentation).

Controlled foreign companies rules:

Controlled foreign companies (CFC) rules aim at avoiding the use of low-taxed jurisdictions to shelter profits that would otherwise be taxed at a substantially higher rate. These rules may vary from one country to another, and several countries - including Hong Kong and India - do not have such provisions. In place of CFCs, India has introduced the concept of Place and effective management (POEM) in its local tax laws. Essentially, if a foreign company is managed from India, its POEM provisions are triggered, and it is required to pay taxes in India and follow the released guidelines for taxpayers on determination of POEM.

When considering CFC rules in the region, companies should monitor the level of taxation locally and be able to prove the absence of abuse.

Other areas of the M&A process covered by the report include: dissuasive tax rate, tax treaties, amortisation of assets, corporate income tax/capital gain rates, group tax regime, tax exemption applied to mergers/demergers and local incentives for supporting investments.

The report sheds light on M&A tax risks and opportunities in, Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, South Korea, Singapore, Thailand and Vietnam. It helps businesses understand how to deal with traps, their root causes and their consequences, how to overcome the difficulties encountered and how to benefit from the incentives.

This is the second report in the ‘Doing M&A in’ series, which will also cover Africa, North America, Western Europe and Latin America, with a new report being released every six months. The first report in the series was ‘Doing M&A in CEE.’

To find out more about M&A in APAC, click here.