TODAY, we shall continue our discussion the current/emerging tax issues by focusing on the other aspects of Tax planning and incentives to guide corporate and individual taxpayers of the impacts on their businesses.
Other Tax Planning Issues
Mergers and Acquisition
A merger is a form of business combination where two or more companies come together to become one enlarged surviving company.
Tax implication of amalgamation, absorption and takeovers, depend on the particular type of arrangement effected by the companies and the result of such arrangement. The common possibilities are as follows:
New company taking over another
Where a new company takes over an existing company, the trade or business of the existing company ceases. Thus, cessation provisions will apply to that company that has been taken over.
The new company commences a new business. Commencement provisions of the Act will apply to the new company accordingly.
A company absorbs another
Where an existing company acquires or absorbs another company, the operation of the company acquired or absorbed ceases. Therefore, the cessation provisions of the Act will be applied to that company.
In respect of the company that takes over, consideration will be given to the nature of the company’s trade or business both before and after the takeover. If the trade or business carried on by the company is the same before and after the takeover, the company cannot be said to have commenced a new trade or business. This will be the case if the trade or business of the company that is taken over is essentially the same as the trade or business of the company that acquires it. In such circumstance, commencement provisions will not be applied.
However, if the trade or business of the absorbed company is different from that of the company that acquires it, the company acquiring will be deemed to have commenced a new trade or business. In such a situation, the commencement provisions of the Act will apply to the new trade or business while the existing business of the company will be assessed on a continuing trade basis.
Mergers and Take-over
The consent of the Revenue Service, including clearance on any Capital Gains Tax that may be due and payable, must be obtained before any merger, take-over, transfer or restructuring of a trade or business carried on by a company can take place.
Trade or business sold or transferred. Section 25 (9)
If a trade or business is sold or transferred to a company together with any asset employed therein and the Revenue Service is satisfied that one of the companies has control over the other or that both are controlled by some other person or are members of a recognised group of companies, the Revenue Service may at its discretion direct that:
(a) The commencement and cessation provisions are not applied;
(b) For Capital allowances purposes, the assets sold or transferred shall be deemed to have been sold for an amount equal to the residue of qualifying expenditure thereon on the day following such sale or transfer; and
(c) The company acquiring the assets shall not be entitled to any Initial Allowance thereon and shall be deemed to have received all allowance already granted to the vendor company up to the date of the sale or transfer.
There is no reference to unutilised losses incurred in the old trade. Such losses cannot be transferred to the new business and may not be relieved in any other way. Any company planning a reorganisation that will involve transfer of business from one subsidiary to the other within the group, will need to consider this fact. That is, the unabsorbed losses on the date of the transfer or sale of the business cannot be transferred to the new business. A way out is to leave some business in the old trade that will produce small profits yearly which will gradually offset the losses over a number of years, before that part of the trade is transferred to the new trade.
Finance Act 2019 and its implication on commencement and Cessation Rules
The Finance Act 2019 has replaced the commencement and cessation rule such that a company that newly commenced operation shall be assessed to tax on preceding year basis right from the date of commencement of business while it shall be assessed to tax on cessation from the commencement of the accounting period for the year of cessation to the date of cessation.
Tax Issues to be Merger
Tax implication of the various taxes should be comprehensively considered before merging of businesses. Such relevant taxes are Corporate Tax, Value Added tax, Capital Gains Tax, Withholding tax and Stamp duties.
We shall continue with the other aspects of tax planning and incentives in the next publication.
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