mergers & acquisitionssmpslegal.com/uploads/1559864011905_en_archivo_1.pdf · tax opportunities...
TRANSCRIPT
Published in association with SMPS Legal
T A X R E F E R E N C E L I B R A R Y N O 1 2 7
Mergers &Acquisitions
E D I T O R I A L
W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M 1
8 Bouverie StreetLondon EC4Y 8AX UKTel: +44 20 7779 8308Fax: +44 20 7779 8500
Managing editor Anjana [email protected]
Editor Joe [email protected]
Senior reporter Josh [email protected]
ReportersAlexander Hartley [email protected] Mehboob [email protected]
Commercial editor Dan [email protected]
Production editor João [email protected]
Head of business development Margaret [email protected]
Business development executivesRaquel Ipo [email protected] Strick [email protected]
Subscriptions manager Jack [email protected]
Head of editorial David Braid
Editorial director Tom Young
Managing director Timothy Wakefield
CEO, Specialist Information Jeff Davis
© Euromoney Trading Limited, 2019. The copyright of all editorialmatter appearing in this Review is reserved by the publisher. No matter contained herein may be reproduced, duplicated orcopied by any means without the prior consent of the holder ofthe copyright, requests for which should be addressed to thepublisher. Although Euromoney Trading Limited has made everyeffort to ensure the accuracy of this publication, neither it nor anycontributor can accept any legal responsibility whatsoever forconsequences that may arise from errors or omissions, or anyopinions or advice given. This publication is not a substitute forprofessional advice on specific transactions.
Directors Leslie Van De Walle (Chairman), Andrew Rashbass(CEO), Wendy Pallot, Jan Babiak, Kevin Beatty, Tim Collier,Colin Day, Tristan Hillgarth, Imogen Joss, Lorna Tilbian
International Tax Review is published seven times a year byEuromoney Trading Limited.
This publication is not included in the CLA license.
Copying without permission of the publisher is prohibitedISSN 0958-7594
Customer services:+44 20 7779 8610
UK subscription hotline:+44 20 7779 8999
US subscription hotline:+1 800 437 9997
T he question on everybody’s lips follow-ing US tax reform in 2017 was just howmuch this would further buoy global
deal making.In both the US and Europe, interest rates
already sit at historic lows, dry-powderremains at a record high, and positive eco-nomic fundamentals in the OECD have allaided corporate liquidity in a more than $3trillion global deal-making market since 2015,according to data by Morningstar. What’s more, ‘mega-deals’ (those greater
than $10 billion), have only been getting larger,with 2018’s Monsanto/Bayer, Linde/Praxair and Time Warner/AT&Ttie-ups all propelling the transatlantic M&A market’s lead over Asia.With geopolitical risk factors including Brexit, the rise of nationalist
governments, and the US-China trade war all potentially hamperinginvestor confidence globally, with the latter already slashing Chinese out-bound investment by 23% in 2018, the US, of all markets, still remains thedeal-market of choice, with $1.4 trillion of deals in 2018 tied to the US. Only Europe came close, scratching the $1 trillion mark.While all these economic vitals invariably point to an M&A market
already favouring the US, it would seem the 2017 Tax Cuts and Jobs Actonly makes the US a more enviable market for deal making.In this guide, International Tax Review presents the insights of a
number of tax advisors on how changes in tax laws and regulations willimpact buyer/seller sentiment, deal-structuring, financing and invest-ment/divestment, among others, in 2019.While US tax reform and its changes to cash repatriation laws figures
commonly, these are also to be observed in tandem to the many globaldevelopments spearheaded by the OECD.We hope you enjoy this guide.
All deals lead to the US
Dan BarabasCommercial editorInternational Tax Review
M E X I C O - T A X
W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M 2 3
Tax considerations regardingM&A with Mexican companies
The method a firmemploys to merge oracquire a corporationin Mexico carries withit a complex array oftax opportunities andchallenges. SMPSLegal’s Ana PaulaPardo and Jorge SanMartín Elizondoexplore how local andinternational firms canbest positionthemselves withMexico’s varied taxframework.
I t is important when merging or acquiring shares or assets of a Mexicancompany that several methods are discussed and the varied tax conse-quences for each option are considered. For instance, if the acquisition
of a target company is structured as a stock deal, the purchasing actorcould benefit from existing tax concessions by not being subject to avalue-added tax (VAT). However, if the target is brought in an asset deal,the specific assets the buyer purchases may draw its own unique tax con-siderations. While this only represents two key major merger and acqui-sition (M&A) avenues, this article explores the varied tax implications ofthis and several other acquisition strategies in Mexico.
Stock purchases In situations where a target company is acquired in a stock transaction, haspending tax losses to be carried-forward, and its income in the previousthree years is less than the amount of its listed tax losses, relevant tax lossescan only be carried forward in order to offset tax profits that correspond tothe same business activities from which the tax loss is derived.
Asset dealsThe acquisition of a Mexican target company could also be structured asan asset deal. This strategy would allow the purchasing actor to handpickthe assets deemed to be valuable for the operation of the target company,while discarding assets considered undesirable. In an asset deal, deduc-tion and amortisation rules apply to the purchasing actor, with certainexceptions. In situations where the target still has ongoing business, the purchas-
ing actor involved in an asset deal could be held jointly liable for any andall tax liabilities existing prior to the acquisition for an amount that totalsup to the entire businesses value.Furthermore, existing tax concessions cannot be transferred in such
deals, while VAT also applies on most transfers whenever real estate isinvolved.
MergersThere are a number of considerations when a Mexican target company isbought as a consequence of a merger.Firstly, provided the entities involved in the merger are Mexican tax
residents and that certain requirements are met, the transaction could betreated as tax-neutral.
M E X I C O - T A X
2 4 W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M
Secondly, the tax attributes of the merged companycould be incorporated into the newly formed company.However, there are certain limitations that should beobserved in this case. For instance, tax losses generated at the level of the
merged company would not be transferrable to the survivingentity. Likewise, tax losses of the surviving company couldonly be applied against profits deriving from the same type ofbusiness activities from which the first were generated. In addition, anti-abuse rules apply on the acquisition of
Mexican target companies where the only purpose is to takeadvantage of the tax losses.
Structuring M&A in MexicoBased on the above considerations, regardless of the methodin which an acquisition is structured, it is of the utmostimportance to conduct thorough due diligence to identifythe strengths and potential liabilities of the transaction. Furthermore, agreements should have adequate war-
ranties in order to minimise the purchasing actor’s exposureto potential liabilities and to entitle the purchasing actor toseek indemnity. Depending on the structure of the transaction, it is also
important to consider the step-up basis in stock deals, whereno step-up in the tax basis can exist in the assets of the targetcompany. A step-up could only occur regarding the consid-eration paid for the relevant stock (the price of the assets ifthe target company is not altered).The tax basis in asset deals could be offset by certain deduc-
tions such as fixed assets, certain intangible assets, deferredcosts or charges, preoperative expenses, technical assistance, orroyalty fees set forth in Mexico’s Income Tax Law.Regarding corporate restructures, Mexican tax authori-
ties may grant foreign residents authorisation for the defer-ral of the tax payable from the transfer of shares amongcompanies belonging to the same group of interest. For thispurpose, companies belonging to the same group are thosewhere at least 51% of the voting stock belongs, either direct-ly or indirectly, to the same parent. This authorisation has to be obtained prior to the corpo-
rate restructure. The consideration stemming from thetransfer consists solely of an exchange of shares issued by thelegal entity that purchases the shares transferred.
Foreign investor considerationsForeign investors should also consider the potential taxconsequences that could arise depending on whether theacquisition is completed directly or indirectly. This islargely dependent on the vehicle used to acquire the tar-get company.If a non-resident investor decides to directly acquire a
domestic target company, or uses another foreign legalentity or vehicle to do so, the wide range of tax treaties con-
cluded by Mexico could provide relief for the allocation ofresources between the holding legal entity and the targetcompany. This may be applicable when dividends or inter-ests are paid by reduced withholding rates, tax credits oreven certain exemptions depending on the relevant treaty. Regardless of the aforementioned considerations, it is
important to note that in cases where a foreign investordirectly purchases the assets that are essential for the targetcompany, and decides to continue the merger or acquisi-tions, a permanent establishment (PE) for the non-residentcould be set up nationally. Consequently, all income attrib-utable could be subject to income tax in Mexico.In cases where a foreign investor uses a Mexican legal
entity to acquire stock in the target company, the cost of thetransaction would firstly be generated at the level of theholding company. This is because the capital increase forpurposes of the purchase would be generated at the level ofthe target company.Such a transaction could either result in a positive of neg-
ative tax outcome, which is ultimately dependent on severalfactors including the financial position of the domestic targetcompany. Therefore, the importance of conducting thoroughlegal and tax due diligence is once again emphasised.
Income tax considerationsWhen designing an investment strategy, non-residentsshould bear in mind that while Mexican tax residents (indi-viduals or legal entities) are subject to income tax on aworldwide basis, foreign tax residents could be subject toincome tax in Mexico for any income whose source isdeemed to be located in Mexico, as well as any incomeattributable to a PE established nationally. It is important to note that Mexican tax laws provide
special tax treatment whenever real estate is involved in atransaction, triggering both federal and local taxes.Additionally, real estate in Mexico is subject to property taxin many states.As a result, a transaction could be deemed to be sourced
in Mexico whenever shares or securities are directly or indi-rectly derived from real estate nationally. This is the caseeven in situations where a transaction takes place betweennon-resident parties. Consequently, the relevant transactioncould be subject to income tax in Mexico.Furthermore, trusts whose purpose consists of acquiring
and constructing real estate to be leased, or acquiringincome derived from such leases, could be subject to a taxincentive under Mexican Income Tax Law. For instance, areal estate developer could deduct acquisition costs for landor lots used in the same year in which they are acquired. Since 2016, the legal provisions that regulate these
investment vehicles have been amended to address previouslimitations, transforming it into an attractive option toinvest in Mexico.
M E X I C O - T A X
W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M 2 5
However, there are a few other real estate considerations.Mexican tax residents or even PE’s of non-residents could berequired to withhold income tax on transactions with non-res-idents. Additionally, individuals and legal entities that sellgoods, render independent services, lease goods, or importgoods or services on home territory could be subject to a VAT.
VATIn certain cases, VAT ought to be withheld. For instance,whenever Mexican tax residents (individuals or legal enti-ties) acquire or lease goods from a non-resident without aPE in Mexico, the relevant Mexican tax resident could berequired to withhold. This is the same whenever a legal enti-ty receives services from an individual.Concerning withholding income tax, the corresponding
rates can vary greatly depending on the transaction.Nonetheless, non-residents entering into transactions witha Mexican party should bear in mind that the broad rangeof tax treaties executed by Mexico could provide relief inthe form of reduced tax rates, exemptions or tax credits.
With respect to VAT, the general tax rate is 16%.However, certain operations could be subject to a 0% taxrate or simply just exempt. Distinguishing between suchoperations is highly important given that only the firstoption would allow VAT crediting. Non-residents should also be aware of the fact that specific
legal presumptions are set forth in Mexico’s VAT Law in orderto determine when a transaction should be considered execut-ed within Mexican territory, and thus subject to taxation. In this regard, goods could be presumed to have been sold
within Mexican territory under the following conditions: i) If the relevant goods are located therein at the time whenthey are shipped to the purchaser;
ii) If no shipment has been made, and the seller materiallydelivers the relevant goods to the purchaser withinnational territory; or
iii)Goods subject to Mexican certifications or registrationssold by a Mexican resident seller or by a foreign residentwith a PE in Mexico could be deemed to have been sold ondomestic territory in spite of them actually being sold abroad.
Ana Paula Pardo Tax partnerSMPS Legal
Ana Paula joined SMPS Legal in 2015 as tax partner. Her main practice is domestic and international, corporate
and individual taxation.She regularly advises clients on matters involving commercial
transactions, tax advisory, start-up businesses, joint ventures,investments, acquisitions, mergers, spin-offs, dispositions, tax-free reorganisations, and transfer pricing.
Ana Paula has extensive experience with international trans-actions, corporate law, in representing multinational anddomestic groups, tax controversy and litigation, and in taxaudits and negotiations.
Ana Paula has a law degree from Universidad Panamericana(2002), and a postgraduate degree from the University ofSalamanca (2004). She also has an LLM from the University ofFlorida (2007).
Jorge San Martín Elizondo Tax lawyerSMPS Legal
Jorge San Martín Elizondo is both a lawyer and a certified pub-lic accountant.
Jorge’s practice is focused on tax and business advisory, andincludes mergers and acquisitions (M&A) and corporate reor-ganisations with particular focus on permanent establishmentsand other tax-related international matters.
Jorge assists his clients in structuring tax-efficient systems,including the tax treatment of acquisitions and investments.
His practice includes the representation of clients before theMexican tax authorities in a broad range of national and inter-national tax controversies and litigation, in addition to advisingon tax matters covering cross-border operations, investmentsand transactions.
Jorge obtained his juris doctor from the National University ofMexico (UNAM), and is a certified public accountant fromUniversidad Anahuac del Norte from Mexico City. He is a mem-ber of Mexico’s Public Accountants School and of the MexicanInstitute of Public Accountants. He is also a member of theCanadian Chamber of Commerce and the American Chamber ofCommerce in Mexico City.
M E X I C O - T A X
2 6 W W W . I N T E R N A T I O N A L T A X R E V I E W . C O M
Concerning intangible goods, the transaction would bedeemed to have taken place within Mexican territory if boththe seller and purchaser reside therein.Based on this framework, any transaction not performed
within national territory would not be subject to VAT inMexico. Consequently, VAT could be mitigated or avoidedbased on the terms agreed upon by the parties. As a caveat,specific industries such as the Maquila industry could besubject to VAT.
Acquiring liabilities In general terms, the acquiring party could be exposed to thetax liabilities of a target company, so it is of paramount impor-tance for adequate warranties to be incorporated into the rel-evant agreement in order to mitigate such contingencies. In this regard, it is common for acquiring parties to nego-
tiate indemnity clauses and in some cases, for such indemnitiesto be backed-up with collateral or guarantees by the seller.Furthermore, indemnity payments received both by
Mexican tax residents and PEs of non-residents set upnationally could be considered taxable income. For foreignentities that receive indemnity payments, income tax duewould be determined in consideration of the total amountof indemnity payments made in their favour by Mexican res-idents or non-residents’ PEs located nationally. It is also worth mentioning that indemnification pay-
ments are not deductible for income tax purposes, howeverspecific exceptions apply.
International regulatory impactsIt is important to take into consideration internationaltrends and regulations. Mexican tax authorities have beenaddressing profit shifting in accordance with the OECD’sBEPS Action Plan, with Mexican authorities playing closerattention to thin capitalisation, back-to-back and transferpricing (TP) rules in any transaction. Additionally, stringent requirements concerning interest
payments have been incorporated. As a result, it is commonfor tax authorities to try to re-characterise interest paymentsas dividends in order to yield the tax treatment of the latter. Mexico is also an active member of the OECD, and
closely follows TP regulations given that tax authorities caninitiate audits in cases where arms-length standards are notcomplied with, and discrepancies are believed to existbetween the fair market value of a transaction. Mexico also has an extensive tax treaty network and is
constantly expanding it. Apart from tax treaties concerningthe exchange of information, Mexico has executed morethan 60 tax treaties for the avoidance of double taxation. Finally, it is important to bear in mind that the general
statute of limitations for tax liabilities in Mexico is five years. However, if tax authorities consider that a taxpayer has
deliberately failed to comply with certain formal tax obliga-tions such as registering with the Federal TaxpayersRegistry, keeping accounting records, or giving notice ofany change of tax domicile, the statute of limitations couldbe extended to 10 years.
