Despite continuing economic uncertainty in many developed markets, M&A activity is still a priority for large businesses. Ninety-one percent of the tax directors surveyed for Ernst & Young's (EY) Global M&A tax survey and trends, said that their companies were likely to consider a deal within the next three years, and more than one-third reported that they’d been involved in more deals over the past year.
The complex VAT challenges that arise in structuring international M&A transactions are an important issue. This article examines some of the common VAT challenges encountered by Ernst & Young (EY) in the UK during recent international share and asset transactions.
Types of transactions and some common VAT issues
Many M&A transactions involve the transfer of shares. The VAT treatment of the sale of shares depends on a number of factors (including the buyer’s location), but, in many cases, the disposal is treated as a financial transaction that is exempt from VAT. In this type of transaction, the VAT taxpayer generally continues even though the shares have changed ownership.
In the UK, and largely across the EU, the main VAT buy-side issues faced in relation to a share acquisition include due diligence, VAT recovery on transaction costs, and VAT structuring.
Trade and asset acquisition
The starting point when considering trade and asset acquisition deals is that VAT is chargeable on the assets transferred, subject to any exemptions and reduced rates that apply to the specific assets.
In the UK, and in many other jurisdictions worldwide, a simplification measure allows the acquisition of trade and assets to qualify as a VAT-free transfer of a going concern (TOGC), provided that a number of conditions are met. The qualifying conditions for TOGC status can vary widely from country to country, particularly if the assets are moving from one country to another.
As a consequence, it is not possible to take a “one size fits all” approach when structuring global transactions. Inconsistencies in the availability of relief and the conditions for the relief can lead to unexpected VAT costs or may require the transaction to be structured in a particular way to qualify for VAT-free treatment.
Common VAT issues of international trade and asset transactions:
- VAT registration: generally, in order to qualify as a TOGC, the acquiring company must be registered for VAT in the country where the transfer is taking place. As acquisitions often involve the formation of a new company (Newco) to acquire the assets, the timing of this local VAT registration is particularly crucial. In many jurisdictions, the formation of a Newco and the subsequent VAT registration can take a significant amount of time and resources. As the VAT registration should be in place before the acquisition’s completion for any possible reliefs to apply, this issue could delay the transaction’s completion or result in unexpected VAT costs. Additionally, in some countries, new taxpayers may be required to register for all taxes at the same time. Global coordination is imperative for international transactions to monitor and satisfy the very specific and local jurisdiction VAT registration administrative requirements in each country involved in the deal.
- Local invoicing requirements: local VAT invoicing requirements must be followed to ensure that any available reliefs can apply and, if VAT is chargeable, to protect any input VAT credit that may be available for the VAT charged. This can be a time-consuming exercise prior to completion.
- The VAT recovery position of the company: in the UK, taxpayers who are in a VAT credit position generally receive a cash repayment from the tax administration. However, in some jurisdictions, the tax administration does not repay excess VAT credits to the acquirer; instead, the administration will hold the VAT repayment on account as a credit against future VAT payments. In contemplating an acquisition, therefore, it is important to accurately estimate the costs involved at an early stage. If the Newco is likely to never be in a VAT payment position, even though a VAT credit is on the account of the purchaser, it is possible that the VAT credit will be held indefinitely and it may become a cost.
- Protective clauses in contracts: careful consideration must be given to the clauses in contracts. The buyer may seek to include relevant clauses in the contract to protect itself from any VAT caused by the seller’s actions, particularly with respect to TOGC transactions that may be subject to subsequent inquiries from the tax administration.
- Valuation of assets: the correct valuation of the assets being transferred must be reflected on the invoice and be in line with the contracts and agreements. If the final price allocation values change at a later stage, “true-up” invoices or credit notes may be required at final closing to correct the invoice value to reflect the actual price paid for the assets transferred. It is important to understand the compliance requirements in each jurisdiction to account for any required VAT adjustments in the correct VAT return period.
- The profile of VAT in relation to M&A activity has increased in recent years due to higher global VAT rates, countries introducing VAT systems for the first time and tax administrations enforcing VAT rules more aggressively.
- Global M&A transactions need careful VAT planning to take full benefit from any potential reliefs available for trade and asset transfer transactions.
- In relation to share transactions, while some aspects of the VAT treatment are still uncertain, VAT incurred on transaction costs may still be able to be recovered, given careful structuring and timing.
- It has become increasingly important to give greater attention to VAT issues earlier in the transaction cycle to reduce the impact of transaction costs and expenses.
- Finally, given the uncertainty surrounding VAT and global transactions, specialist advice should be sought when structuring deals.
Read the full version of this article in the Ernst & Young (EY) Indirect Tax Briefing, issue 7 (pdf, 7.13 MB).
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