This article originally appeared in the 4 October 2010 issue of Tax Notes International Magazine on page 45.

M&A Transactions in SingaporeBy Ching Khee Tan and Pui Ming Soh

Ching Khee Tan and Pui Ming Soh examine the key issues surrounding mergers and acquisitions transactions in Singapore. Ching Khee Tan is a senior manager of the Singapore tax desk at Ernst & Young LLP in New York, and Pui Ming Soh is a tax partner and leader of transaction tax at Ernst & Young in Singapore. The views expressed here are those of the authors and do not necessarily reflect those of Ernst & Young LLP.

Through June 2010, Singapore’s economy grew by a staggering 17.9 percent, and the outlook for Singapore and other growing Asian economies, such as China and India, remains positive for the rest of 2010. Investor interest in Singapore is buoyant because companies often base their regional operations in Singapore because of its proximity to other Asian countries, excellent business infrastructure, and good tax treaty network.

This article highlights key Singaporean tax issues on merger and acquisition transactions and is organized into three sections: deal structure, postacquisition considerations, and recent tax developments affecting M&A activities in Singapore.

Deal Structure

Buyers generally prefer an asset acquisition because it avoids the assumption of the target company’s tax or other liabilities, including uncertain or aggressive tax positions. An asset acquisition also:

• allowsastep-upofthedepreciablebaseforfixedassetstotheirfairmarket values; and

• facilitates the claim for an interest expense deduction on debt raised to financetheacquisition.

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However, for some buyers, an asset acquisition is not the best choice. For example, in acquiring a target whose major asset is real estate, the 1 to 3 percent Singaporean stamp duty for real estate transfers is 5 to 15 times more than that for the transfer of shares. Also, commercial considerations, such as special industry licenses and/or regulatory approval, or favorable tax attributes of the target company (for example, tax incentives) may swing the balance toward a share acquisition.

Most importantly, many sellers are not interested in asset deals because they perceive them to be legally and administratively cumbersome. In countries where there is tax on capital gains, an asset deal may be more expensive than a share deal from a seller’s tax perspective.

Before entering into a deal, the buyer should understand the tax implications and develop an acquisition plan that meets both its needs and the seller’s needs. A win-win acquisition structure can put the buyer ahead of other bidders in a competitive bid situation. Antiavoidance provisions should be taken into account in all planning.Thereshouldbebonafidecommercial reasons for entering into any transaction.

For any M&A transaction in Singapore, the buyer should consider the planning opportunities on interest that will be incurred on the acquisition and the intellectual property (IP) that will be acquired.

Interest Deduction

In Singapore, interest incurred on the acquisition of shares is not tax deductible,whichcouldsignificantlyaffect the after-tax return on the investment.

A well-structured debt push-down strategycansignificantlyincreasethe return on investment, especially when the target group is located in a number of jurisdictions. Under this strategy, appropriate amounts of the acquisition debt are pushed down to locations generating operatingprofitstoobtainataxdeduction for the interest expense againstlocalprofits,whichcouldbe taxed at high corporate tax rates. This strategy also facilitates cash repatriation for repayment of bridgefinancingand/orpartoftheacquisition debt. However, there are many factors to consider, including local withholding tax provisions, thin capitalization rules, and debt registration requirements.

IP Planning

Another important step in unlocking additional return value from the target is IP planning.

Often the value of the acquired business is in the IP. Share acquisition, however, does not allow the buyer to claim tax amortization on the step-up IP acquired in Singapore. Singapore’s income tax law does not allow the buyer to step up the tax basis of the assets in the targettoreflectthepurchasepriceof the shares acquired. Therefore, the buyer should consider a

two-stepapproachoffirstacquiringthe IP directly from the seller and then the shares in the target group.

Postacquisition Considerations

The postacquisition tax work is probably the most neglected area in the acquisition process. After the acquisition, it is important for the acquiring company to monitor tax indemnities and warranties, and manage tax exposures.

Monitoring Tax Indemnities and Warranties

The sale and purchase agreement (SPA) usually provides that the buyer must notify the seller of all tax claims within a certain tax period (typically two to four years from the date of the SPA).

Usually, buyers do not monitor this to take full advantage of the indemnity period. A savvy buyer should give clear instructions to its in-house tax team to expedite thefinalizationoftheprioryears’tax returns to bring any tax claims to the surface before the tax indemnity expires.

Managing Tax Exposures

A good way to manage existing tax exposures is through the due diligence report. Follow-ups include meeting withholding tax obligations, putting in place transfer pricing documentation, reexamining and possibly renegotiating commercial contracts regarding tax gross-up clauses, and addressing permanent establishment issues with appropriate secondment arrangements.

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Recent Tax Developments

A new tax framework for amalgamation and an increased focus on economic substance in Asia may affect how M&A deals in Singapore are structured.

Tax Framework for Amalgamation

The ability to restructure and integrate the various operations inatax-efficientmannerafteracquisition will be crucial to the buyer.

New rules on the tax framework for amalgamation were enacted in December 2009 and apply retrospectively to amalgamation that takes place on or after January 22, 2009. An amalgamation is the merger of two or more companies into a single company. The surviving company assumes the assets, rights, liabilities, and obligations of the other amalgamating companies. The latter are then automatically dissolved by operation of law.

Someofthebenefitsandconsiderations under the new tax framework include:

•Transfer of unused tax attributes: Unused tax attributes, such as tax losses, may be transferred from the amalgamating company to the surviving company, subject to conditions.

•Deferral of tax depreciation recapture: Tax depreciation previously claimed on the IP, plant, and machinery will not be immediately recaptured on the transfer of such assets from the

amalgamating company to the surviving company. The surviving company will claim the tax depreciation based on the remaining tax base carried over (that is, no step-up in value). Recapture of tax depreciation will be triggered if the assets are subsequently disposed of by the surviving company.

•Exemption from goods and services tax: The amalgamation will automatically qualify as a transfer of the business as a going concern such that GST will not be chargeable on the assets transferred, unless the surviving company is a member of a GST consolidated group.

•Stamp duty relief: Unlike GST, there is no automatic exemption from stamp duty when the transferred assets are dutiable assets. Nevertheless, exemption from stamp duty is available if the stamp duty relief rules can be met. Detailed discussion of the rules is beyond the scope of this article.

Increased Focus on Economic Substance in Asia

Foreign investors commonly set up a Singaporean holding company to manage its Asian investments foroperational,financial,andtaxefficiencyreasons.InanM&Asituation, the buyer could:

•use its existing Singaporean subsidiary to acquire the target;

• incorporate a new Singaporean subsidiary to acquire the target; or

• inherit the Singaporean holding company structure from the seller.

Tax authorities in China, India, Indonesia, and South Korea are focusing on the use of an intermediate holding company. The tax authorities often perceive intermediate holding companies as lacking economic substance and as being created merely to takeadvantageoftreatybenefits.The tax authorities have sought to curb such perceived treaty abuse through various countermeasures todeterminethebeneficialownership and economic substance of such intermediate holding companies. In Singapore, it is gettingmoredifficulttoobtainacertificateofresidencyfromthe tax authorities for inactive, foreign-owned Singaporean holding companies.

Foreign investors with an intermediate holding company structure for its Asian investments (using Singapore or otherwise) should reevaluate the holding company’s relevance and take active steps to ensure that the structure can withstand scrutiny by the tax authorities. For example, theSingaporean holding company could be amalgamated with its Singaporean operating subsidiary. Not only will there be increased operationalefficiencies,buthaving an active business and key employees will reduce the risk of the holding company being viewed as lacking in substance.

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For additional information with respect to this ITS in the News, please contact the following:

Ernst & Young LLP, Singapore Tax Desk, New York• Ching Khee Tan +1 212 773 0012 chingkhee.tan@ey.com

Ernst & Young, Singapore• Pui Ming Soh +65 6309 8215 pui.ming.soh@sg.ey.com

Conclusion

When investing in Singapore and the region, foreign investors should plan carefully. With tax authorities turning their attention to economic substance, it is increasingly important that any acquisition or restructuring option adopted is aligned with business and commercial objectives, and not for the sole purpose of obtaining a tax advantage.

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