Asia-Pacific

Australia China Hong Kong India Indonesia Japan Malaysia New Zealand Singapore South Korea Taiwan Thailand

Europe, Middle East and Africa

Austria Belgium Cyprus Denmark Finland France Germany Greece Gulf Cooperation Council Ireland Israel Italy Luxembourg Malta Netherlands Norway Poland Portugal Russia South Africa Spain Sweden Switzerland Turkey UK

Latin America

Argentina Brazil Chile Colombia Mexico Peru Venezuela

North America

Canada US

The world has changed for taxpayers since September 2008. No longer are they looking at the tax implications of merging with or acquiring companies. Unless a company has built up a lot of money, there is no opportunity to wheel and deal. The struggle to obtain credit has seen to that.

Managers are commanding tax executives to generate cash and preserve it, rather than spend it on deals the tax benefits of which are doubtful. And because tax departments are having to demonstrate different skills, the transactional advisers they use are having to do the same. Advice in these times is centred on making recent purchases work in a more tax-efficient way instead of making new acquisitions.

In Asia, the authorities have used tax incentives, such as exemptions and other reliefs, to stimulate investment, but the M&A market is still only inching forward. Deals are being done but for much lower amounts than before

At the same time, governments in the region have shown some muddled thinking in their tax policy moves recently. On the one hand, Taiwan is looking at proposals for thin-capitalisation rules, which would penalise any company seeking to use debt to invest. On the other, Japan's tax package for 2009 included a measure that gives an exemption for foreign profits.

North America has also seen a decline in M&A volume in the last year or so. Raising finance by now a familiar problem for investors, such as private-equity funds, that rely on it to fund their deals. Much of the transactional work at the moment is dealing with distressed companies. Canada is rare among developed economies in that it has not had a bank failure yet. More and more Canadian companies are investing south of the border.

Corporate refinancing and restructuring of previous acquisitions has become a feature of tax transactional work in Europe. A concern for investors that can afford acquisitions is finding that a year down the line, what they bought is worth less than they paid for it. Taxpayers see the compliance burden associated with controlled foreign company rules as an obstacle to investment in many European countries.

Political instability and the relative lack of sophistication of the tax rules are affecting the investment climate in Latin America. Taxpayers are concerned at governments' habit of changing regularly and instituting tax measures that only cause uncertainty.

Venezuela has become well known for unpredictable tax rules. The government of President Hugo Chavez does not make life easy for foreign investors.

At the same time, tax authorities are trying to encourage companies to spend more. Argentina, for example, is introducing an amnesty that will mean that taxpayers involved in disputes will pay a reduced rate of tax.

It is in this context that International Tax Review presents the results of its second annual poll to find the world's leading tax transactional practices. The poll to find the leading tax planning firms around the world will be published in the May issue.

The initiative for the poll arose from the annual awards dinners International Tax Review hosts on three continents and World Tax, the directory of the leading tax law and accounting firms, that the magazine publishes annually.

Both of these seek to reward firms for their work and reputation over different periods of time.

The awards dinners recognise complexity and innovation in a portfolio of work over the previous 12 months.

World Tax identifies the world's leading tax firms on the basis of complexity and innovation of their work, overall depth of practice, number of partners, international network and reputation over a period of years.

Neither of these give prominence to every firm in the market. Some firms operate in a niche area that does not get the same recognition as others, have a small number of staff or do not have an international network, but still provide a valuable service for their clients.

In January, readers of International Tax Review, which include tax executives from multinational companies, tax officials and advisers. voted in an online poll for their top three tax planning and top three tax transactional firms in 47 jurisdictions, on the basis of three points for the firm they considered the best, two points for second best and one point for third best. The votes were added up to produce the survey results. The 47 jurisdictions were those for which there was a commentary and tiers in World Tax 2009.

Votes from advisers for their own firm were disqualified and firms could not send submissions to improve their chances of being ranked.

The methodology was kept simple. The survey was framed to be a snapshot of the best transactional and planning firms. Firms did not need to bring together large amounts of facts and figures to put them in a submission. In fact, they were discouraged from doing so. A submission would not help them. This was not a submission-based exercise because we felt we had a good idea from our World Tax research who the best planning and transactional firms were.

The objective was to find out: were there other firms that did not appear in World Tax, for whatever reason, that the market regarded highly because they had a particular specialty.

Or were there firms that appeared in World Tax and were known as dependable groups of tax advisers without having any star practitioners? Would they be rated for their excellence in tax transactional and planning work?

This survey should be seen as complementary to World Tax, which looks at the whole profile of a firm, not just its size and its deal flow. This survey is a more specific about a firm's advisory strengths.

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ASIA-PACIFIC

David Stevenson looks at the tax incentives jurisdictions are using to keep M&A deals flowing

The M&A market in the Asia-Pacific region faces different challenges to other jurisdictions in the global financial crisis.

The region contains robust economies such as China, Japan, India, Singapore and Hong Kong. In other parts of the world the M&A market has been affected by a shortage of cash. Not enough cash has not been the problem in Asia-Pacific.

The Asia-Pacific region came back from financial hard times in 1997 and now finds itself caught up in a global economic slowdown. The M&A market has been badly affected. There are fewer deals and those that are completed tend to be on a much smaller scale compared to a year ago. However, in a region as economically diverse as Asia-Pacific, the way countries are dealing with the decline in M&A varies greatly. For instance, in jurisdictions such as China, Japan and Taiwan there has been a shift away from private equity firms funding deals because of the problems facing investment banks. Other countries have been introducing tax incentives in an attempt to stimulate transactions. Many tax practices across the region have seen a drop in due diligence services as clients are adopting a 'wait and see' policy before using external advisers.

Singapore has one of the most open economies in the Asia-Pacific region and so perhaps has been the country most affected by the global troubles. It was one of the first countries in the region to officially sink into recession.

Deal activity is down starting last quarter in 2008 and the slowdown has continued into 2009 according to commentators in Singapore. Financial and tax due diligence activity has dropped off materially in the last eight months or so. Both private equity and corporate strategic buyers seem to be deferring decisions to engage due diligence services until the transaction is fairly certain. Despite M&A activity being down in Singapore, the country is still seeing some deals being completed. "We continue to see good mid-market M&A deal flow, although potential vendors/acquirers also appear to be deferring buying transaction support services," says Soo-Earn Keoy, head of M&A transaction services at Deloitte in Singapore.

Singapore does not have detailed legislation dealing with the tax treatment of acquisitions. Whether a deal is structured as an asset deal or a stock deal will largely be governed by commercial considerations. Interest incurred on funds used to acquire a business under an asset deal may be tax deductible. As in many jurisdictions, the buyer will tend to favour asset deals. whereas the seller prefers stock deals. However, in this economic climate these considerations are less important as deals are struggling to get off the ground.

In South Korea two big M&A targets have been in the news: Obi Beers and Daewoo Shipyards. Unfortunately the W6.3 trillion ($4.2 billion) deal for Daewoo Shipyards fell apart when potential purchaser Hanwha could not fund the transaction.

"Foreign invested companies may be entitled to tax incentives if they are involved in attracting advanced technologies or industry supporting services as defined under the Special Tax Treatment Control Law," says Jeong Soo Tak, M&A partner at Deloitte in South Korea.

"These incentives include exemption from or reduction in income tax, acquisition tax and exemption on withholding tax on payment of dividends and royalties to a foreign supplier of technology," he added

In Malaysia, commentators are quick to differentiate between the Asian financial crisis and the current economic situation. "It is a different scenario from the 1997 Asian crisis when banks and financial institutions needed to be capitalised and their non-performing loan portfolios were taken over by a special purpose vehicle," says Veerinderjeet Singh, managing director of Taxand Malaysia.

There have been no changes to the tax treatment of M&A deals in Malaysia as it is felt that there is no need for change. However, this is not suggest that the M&A market is in a healthy state.

"Due to the poor markets, raising funding in the capital markets is at a low. Takeovers may pick up later if values are really low and future earnings potential is good, of course provided that existing shareholders want to exit," said Singh.

The Indonesian M&A market is not only affected by the financial crisis but also by unhelpful government policy. "Indonesian companies are put at a disadvantage due to incredibly harsh CFC [controlled foreign companies] rules. Government thinks that investing abroad is unpatriotic and has put major barriers in place to stop companies doing so," says Ben Koesmoeljana, M&A partner at Ernst & Young in Indonesia.

The M&A market in Indonesia is much quieter and the size of deals is smaller, most are about $20 million and those more than $100 million are rare. The government has been offering tax incentives to certain industries, including refineries and power stations, to stimulate investment. They have also been offering incentives to companies operating outside of the capital Java. In Thailand, the government has produced proposals aimed at improving the M&A market. "There are currently ideas to introduce benefits for listed companies," says Kitipong Urapeepatanapong, head of tax at Baker & McKenzie in Thailand.

The proposals include a capital gains exemption from group companies and VAT and stamp duty relief for transactions between subsidiaries. "The tax system for acquisitions is very basic in Thailand, 'you sell, you pay'," says Urapeepatanapong. As with other jurisdictions in the Asia-Pacific region, there are companies with surplus cash who wish to make foreign acquisitions but are hindered by an unfavourable tax system. "You have to pay a lot of tax if you invest directly, therefore we advise companies to structure deals through a holding company and use a nominee exempt from capital gains tax if the country has a tax treaty with Thailand," he added. India is one of the dominant economies in the Asia-Pacific region. The appeal of the country as an investment destination comes from its large and growing market, cost effective and highly skilled labour, abundant natural resources, a large English-speaking population and an independent judiciary. However, India is not immune to financial difficulties. "There has been a slowdown in the number and size of M&A deals due to the economic environment," says Sunil Shah, international tax partner at Deloitte in India

"Due to the current climate there are easier exit options for investors. Indian companies could be more interested in foreign acquisitions as the economic crisis has not hit us as bad as others. However, due to the dollar appreciation against the rupee this has not happened," says Shah. The exit route in the case of a share deal, is the transfer of shares of an Indian company. The profit derived from a transfer of shares are subject to capital gains tax. In determining the tax, the cost of the acquisition and expenses incurred in connection with the transfer are all taken into account. However, no capital gains tax is imposed on transfers of shares by one foreign company to another in a scheme of amalgamation, if at least 25% of the shareholders of the amalgamating company continue to remain as the shareholders of the amalgamated company and the transfer is exempt from capital gains tax in the country where the amalgamating company is located.

This is not to be confused with the issues that arose in the recent purchase of Hutch Essar by Vodafone. In the litigation that followed the purchase, Vodafone argued that no tax was due because it was a non-resident. However, the rules are different when they concern the transfer of shares of a foreign company having the effect of transferring the controlling interest in an Indian company. In these circumstances, tax is due. Practitioners are not changing how they advise clients on M&A transactions because the fiscal framework has not changed.

In Taiwan, the credit crunch has slowed the M&A market considerably especially for private equity firms. "However, in the last two months, stock market prices of companies is so low and companies are so cheap that foreign investors are coming back," says Al Chang, tax partner at Deloitte in Taiwan. The reason foreign investors are looking at Taiwan again is largely to do with tax. The Ministry of Finance (MOF) issued a ruling on December 8 2008 that further clarifies how taxable income of a non-resident corporate shareholder without a permanent establishment (PE) in Taiwan is calculated in merger transactions. With this ruling, all relevant taxpayers (resident and non-resident individuals and non-resident corporations) can challenge their tax bill related to dividends received as consideration in a merger transaction in Taiwan.

"There is a greater degree of certainty given to M&A deals stemming from the December ruling which came into force earlier this year and I am quite optimistic about the future," said Chang.

However the MOF is also discussing the introduction of thin-capitalisation rules, which if implemented, would hurt private equity firms because they rely heavily on debt to fund their deals. Officials are also looking at CFC rules that would impede Taiwanese companies investing abroad. China is one of the economic powerhouses in the Asia-Pacific region and unlike other countries across the globe is not faced with a shortage of cash hindering it's M&A market. "The size of inbound deals is getting smaller but the size of outbound deals is actually increasing," says Alan Tsoi, M&A partner at Deloitte in China.

"Private equity funds are in suspension as they cannot get loans. There is a lot of cash in Chinese funds at the moment and they are looking abroad to invest it," says Tsoi. Recent rulings from the Chinese tax authorities are causing concern for the M&A market. "The tax authorities have attacked intermediate companies who set up off-shore holding companies to escape taxation," says Tsoi.

However, commentators are optimistic about the long-awaited changes to M&A taxation. "The changes to M&A taxation will probably make things easier for corporate buyers to acquire companies on a tax deferral basis," he added. Japan is in a similar position to China in that the market is now dominated by outbound deals. "The M&A market has changed, there is almost no private equity or real estate," says Tobias Lintvelt, M&A partner at Ernst & Young in Japan. "There is quite a lot of activity with Japanese multinational companies making acquisitions abroad and domestically. This is partially due to the strong Japanese Yen," says Lintvelt.

The 2009 tax package that has been proposed by the government and is subject to congress' deliberation may also aid the M&A market. "An introduction of a foreign dividend exemption is being proposed. It is proposed to encourage Japanese multinationals to get back money that is sitting in subsidiary. This is quite a new concept in Japan. There has also been a proposal that will allow companies to trade in debt," says Lintvelt. Hong Kong has close economic ties to China but enjoys lighter regulation. "In terms of advising on M&A deals, we are instructing clients to use the Luxembourg treaty," says Kam Poon, a senior tax manager at Deloitte in Hong Kong. The Luxembourg treaty has opened a new avenue for China to invest in the EU via Hong Kong. Companies based in the EU can also use the treaty to invest in China. It is set to become popular for European investors interested in M&A targets in Hong Kong and China.

Tier 1

Ernst & Young

Greenwoods & Freehills

KPMG

PricewaterhouseCoopers

Baker & McKenzie

Tier 2

Allens Arthur Robinson

Blake Dawson Waldron

Henry Davis York

Mallesons Stephen Jaques

Pitcher Partners (Baker Tilly International)

Shaddick & Spence

Tier 1

Baker & McKenzie

Deloitte

PricewaterhouseCoopers

Tier 2

Hendersen Consulting

KPMG

Shanghai Richard Wang & Co Law Office

White & Case

Tier 1

Baker & McKenzie

Deloitte

Ernst & Young

KPMG

PricewaterhouseCoopers

White & Case

Tier 1

BMR & Associates

Ernst & Young

PricewaterhouseCoopers

Tier 2

Nishith Desai & Associates

Seth Dua & Associates

KPMG

Bansi S Mehta & Co

TP Ostwal & Associates

Tier 1

Hadiputranto Hadinoto & Partners (Baker McKenzie)

PricewaterhouseCoopers

Lubis Ganie Surowidjojo

Tier 1 PricewaterhouseCoopers Tokyo Kyodo Accounting Tier 2 Anderson Mori & Tomotsune Ernst & Young Kojima Law Offices Nishimura & Asahi White & Case

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Tier 1

Arjunan & Associates

Shearn Delamore

Taxand Malaysia

Tier 1

Bell Gully

Buddle Findlay

Chapman Tripp

Deloitte

Minter Ellison Rudd Watts

PricewaterhouseCoopers

Russell McVeagh

Tier 1

Allen & Gledhill

Baker & McKenzie

Deloitte

Drew & Napier

Ernst & Young

PricewaterhouseCoopers

Tier 2

Choi Lim Stone Forest

Khattar Wong

KPMG

Tier 1

Samil PricewaterhouseCoopers

Yulchon

Tier 2

Kim & Chang

KPMG

Deloitte Anjin

Ernst & Young

Sojong Partners

Tier 1 Baker & McKenzie Deloitte Lee & Li PricewaterhouseCoopers Tier 2 Alliance International Law Offices Ding & Ding Ernst & Young Formosa Transnational Jones Day KPMG LCS & Partners Pamir Law Group Tsar & Tsai Winkler Partners Yuan, Chen & Partners

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KPMG

Deloitte

Law Alliance

PricewaterhouseCoopers

Tier 2

Baker & McKenzie

Tilleke & Gibbins International

White & Case

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EUROPE, MIDDLE EAST AND AFRICA

At a time when large deals have all but vanished, corporations are stopping to assess what they already have and taking more time when doing the deal. Jack Grocott finds out what role tax professionals will play in this new strategy

The onset of the global recession has seen the end of the substantial M&A that was a feature of the market in Europe until very recently. This has forced corporations to stop and reassess their priorities as how best to achieve their goals during the downturn. Now tax professionals are being called upon to help clients take advantage of the dwindling market and preserve asset values. Banks unwilling to give out credit, increased debt buy back and the desire to carry losses forward have all led to tax professionals having a busy time ahead as they tackle the many issues involved in these transactions.

The market in Europe has shifted away from pure transactions towards more corporate refinancing and restructuring of previous acquisitions. And it is these reorganisations that tax professionals are finding hard to cope with as the ever-changing market is creating more and more uncertainty.

"The focus of our advice is changing," said Conor Hurley of Arthur Cox in Ireland. "We are not telling people how to change the world, but we are offering simple advice on how to survive."

After years of boom in the tax transactions market, the question is how European countries will adapt to the new market and whether they will emerge at the end of the downturn stronger than before.

Taxpayers believe Europe is a good place to invest as they see it as a stable location and where there is an increased level of certainty. And it is this security that has become more important for tax professionals who are shifting their focus to deal protection whereas in the past they worked on doing the transaction itself.

The number of transactions across Europe has slowed as companies face liquidity issues as the values of their assets drop drastically. Clients are reassessing their situations and do not want to be in a position where 12 months down the line they own an asset that is now worth considerably less. "People just aren't sure of the market price yet and so are waiting for someone to make the first move. Both sellers and buyers are nervous," said Reece Jenkins, transaction tax partner of Ernst & Young in Russia.

This hesitancy to make the first move is leading tax professionals to use tax in more innovative and creative ways that are tailored to the changing market.

"We are saying to clients to take a hard look at where there might be tax losses or tax gains. They need to match up," said Keith O'Donnell, partner, ATOZ, Luxembourg.

One of the biggest issues that tax professionals are facing is the ability to carry a company's losses forward when carrying out tax transactions. More companies are now recording losses and so the ability to use them tax efficiently will leave them in a better position for any profit they potentially make.

Advisers around Europe are hoping the tax authorities will extend loss carry forward rules. "At the moment [in the Netherlands], there is a nine year carry forward and a one year carry back rule for all company losses," said Marco de Lignie of Loyens and Loeff in the Netherlands. "Businesses want this period to be indefinite so that they can operate with a bit more flexibility.

"The main difference is that the question is more often about how you can make deductions on losses whereas in the past the main question was how you can reduce tax and make sure that capital gains are exempt," de Lignie added. "We are looking at the same issues but from a different angle. We are looking at tax attributes in order to create a situation that prevents tax leakage."

As tax plays a greater part in transactions, transactions are taking longer to close because more time is being spent on getting the tax aspects right. More scrutiny of the deals, especially regarding due diligence issues, has led to deals often taking three of four times longer to complete.

"The importance attributed by the clients to tax due diligence services has increased mainly because of the desire to understand the tax environment in general and to incorporate the information into their business plans together with the tax applications of the target business, to eliminate any future surprises," said A Gunes Sogutluoglu, an M&A partner at Deloitte in Turkey.

Investors often require the use of escrow accounts and warranties provided by vendors in share purchase agreements to address the tax exposures in the target business. In some cases shortcomings in the tax arrangements halted the deal, sometimes they turned out to be deal breakers or in some others used as a legitimate reason to change the purchase price.

"The tax methods have not changed but we are just looking at them in a different way than we did before. We are adapting our tax methods to suit the changing times," said Fulvia Astolfi, head of international tax practice at Lovells in Italy.

The funding of these transactions has also become a problem for companies looking to make acquisitions. Private equity funds across Europe are either too nervous to invest because of the continual fall in prices or they are feeling the pressure from stronger thin-capitalisation rules such as those that are being enhanced in Sweden.

Despite the gloom surrounding the market, deals in Europe are still being completed, but at a much smaller level. The flow of transactions is continuing, with a number of deals involving multinationals taking advantage of the slow market by picking up businesses from across Europe. "The market is not dead but it is pretty slow," said Karen Hughes of Lovells in the UK. "We are still doing work for long-standing clients but they are not huge acquisitions. What we are finding is that the profile of our work has changed over the past few months. We have to look at tax in unusual arrangements and that involves applying them in more unusual situations. There is no such thing as a straightforward corporate deal at the moment," Hughes added.

This attitude of being creative and taking a lateral approach to transactions is making the tax authorities across Europe more aware of the impact of tax planning techniques. "I think that the tax authorities will be turning the temperature up on any transaction that smells a bit like tax avoidance has taken place," said Murray Clayson, head of tax practice group at Freshfields Bruckhaus Deringer. "It is quite likely that governments will get more aggressive because they are desperate for revenue and the other reason is that it is politically easy to target big companies."

With the authorities looking at transactions as a source of extra revenue and companies looking at corporate reorganisation and restructuring as more economically viable, taxpayers and advisers expect more debt to equity swaps across Europe. These swaps entail a variety of tax issues including the requalification of debt into equity, taxes applicable of financial instruments, taxation on share capital increases and convertible bonds, stamp tax and transfer pricing implications. As these swaps include a significant amount of tax issues, governments have had to rely on their disclosure rules to prevent abusive methods. One country that has recently introduced such rules is Portugal. Passed into law in May 2008, the new disclosure rules state that the authorities must be notified 20 days after the month that the tax planning was used in such swaps.

Though governments have introduced incentives to boost the number of transactions, tax professionals believe one piece of legislation that will hinder transactions in the future. Controlled foreign-companies rules (CFC) are seen as a restriction to carrying out business overseas as credit systems for overseas income will be replaced with exemption rules. One country that is set to introduce such regulations is the UK. The rules are anticipated to be introduced in 2010 and are set to target two issues that can be features of transactions: debt-dumping and upstream loans.

Debt dumping can particularly arise in a transaction when excessive debt is "pushed down" into the [UK] target. Traditionally, one would have assessed "excessiveness" by referring to the arm's length standard and debt:equity ratios of transfer pricing and thin capitalisation principles; it is not a new concept as such. But the new proposals raise the prospect of an interest cap by reference to external debt recognised in the consolidated accounts of the group.

Upstream loans represent another side of transactions. Typically upstream loans will arise in the UK where a group's foreign subsidiary has surplus profits. Instead of sending this money to the UK as taxable income to the UK, the cash is lent to Britain. That of course implies an interest charge. So again the new worldwide debt cap rules aim to restrict deductions. "The compliance aspects of these rules are seen as quite a nightmare for multinationals," said Clayson.

Denmark adopted similar measures two years ago. It introduced interest deduction rules which meant that a Danish company could achieve a 0% interest rate when setting up a new company. Despite an efficient tax authority, loopholes quickly appeared in the rules as companies sought to use a number of tax avoidance schemes. "When loopholes were found, they were shut very quickly by the government who introduced new legislation quickly," said Susanne Nørgaard, M&A partner of PricewaterhouseCoopers in Denmark. "This affects everyone, even those who had used the loopholes in good faith. The aggressive nature of these rules makes Denmark a less interesting place and less attractive to investment," Nørgaard added.

Sweden, Germany and Italy are all introducing similar provisions to tighten the rules on interest deductibility or restrict the ability to load target companies with debt after anacquisition .

Many predict that as companies struggle to gain access to credit and private equity funds prove reluctant to invest in a declining market, tax transactions across Europe will be affected by the global economic slowdown for the next 12 months at least. And questions are being asked about what the future holds for transactions in Europe.

However, tax is set to play an important role in the deals that will be done in Europe over the next few years. Against the odds, some investors, especially private equity funds, are still continuing with pre-acquisition studies and taking action on some determined targets.

Although, the deal times are lengthening and the due diligence process is becoming more stringent; some movements in the transaction market are still making progress. In the meantime, while managing relatively low levels of activity, the tax professionals are deepening their expertise through learning, training, researching and revisiting the previous projects until M&A activity picks up in the future.

As Daniel Eyre, of Ernst & Young in the UK, said: "Tax does not stay still, and neither do tax advisors."

Tier 1

Cerha Hempel Spiegelfeld Hlawati

Deloitte

KPMG

Freshfields Bruckhaus Deringer

Wolf Theiss

Tier 2

Arnold Rechtsanwälte OEG

BPV Hügel Rechtsanwälte OEG

Leitner & Leitner

PricewaterhouseCoopers

Schönherr Attorneys

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Deloitte

Liedekerke

Linklaters

Loyens & Loeff

Tier 2

Baker & McKenzie

Eubelius

Freshfields Bruckhaus Deringer

Loyens & Loeff

PricewaterhouseCoopers

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Bech-Bruun

Deloitte

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Accura

Advokatfirmaet Tommy V Christiansen

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Lett Law Firm

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PricewaterhouseCoopers

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Deloitte

Hannes Snellman

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Bredin Prat

CMS Bureau Francis Lefebvre

Cleary Gottlieb Steen & Hamilton

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Taj

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Arsene Taxand

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Clifford Chance

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Shearman & Sterling

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Flick Gocke Schaumburg

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Lovells

Tier 2

Clifford Chance

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KPMG

Luther

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Streck Mack Schwedhelm

WTS

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Deloitte

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Dryllerakis & Associates

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Photopoulos & Associates

Zepos & Yannopoulos

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Cragus Group

Deloitte

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KPMG

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A&L Goodbody

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KPMG

PricewaterhouseCoopers

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Deloitte

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Shekel & Co

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Capuano & Partners

Chiomenti

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BDO

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Advokatfirmaet Harboe & Co

Selmer

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Abreu Advogados

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Morais Leitão, Galvão Teles, Soares da Silva & Associados

PLMJ

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Abreu & Marques Vinhas & Associados

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KPMG

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Deloitte

Ernst & Young

Linklaters

Mannheimer Swartling

Setterwalls

Tier 2

Advokatfirman Bill Andréasson

KPMG

PricewaterhouseCoopers

Skeppsbron Skatt

Vinge

Tier 1

Ernst & Young

Homburger

Lenz & Staehelin

PricewaterhouseCoopers

Tier 2

Altorfer Duss & Beilstein

Oberson

Tax Partner

Tier 1

Deloitte

Gide

White & Case

Tier 2

BDO

Erdikler

Ernst & Young

KPMG

Mazars/Denge

Ozel&Ozel Salans

PricewaterhouseCoopers

Sigma YMM

Tier 1

Allen & Overy

Clifford Chance

Freshfields

Herbert Smith

Linklaters

PricewaterhouseCoopers

Skadden Arps Slate Meagher & Flom

Slaughter and May

Tier 2

Ernst & Young

Latham & Watkins

Lovells

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LATIN AMERICA

Transactions are declining in Latin America and are suffering because of the global economic downturn., David Stevenson looks at what specific problems the region faces and what governments are doing to combat the slowdown in M&A

Latin America's economies are at different stages of development and the same can be said for the M&A market in the region.

Political stability and the sophistication of tax systems are two significant influences on the buying and selling of companies in the continent. Most Latin American countries rely on significant foreign investment to drive their M&A markets and given the financial crisis many governments are looking at ways to attract the dwindling funds available.

In Mexico political stability has had an impact on foreign investment. "There has been some issues concerning security in certain areas in Mexico. This has dissuaded some foreign investors," said Enrique Rios, head of transaction tax at Ernst & Young in Mexico.

The need for governments in the region to stay in power for a set period and not to rule capriciously has long been a concern of foreign investors. The socialist government's participation in the M&A market in Venezuela has been causing problems. "Since Chávez got into power, the level of foreign investment has been steadily falling," says Carlos Fernández, a partner at Macleod Dixon in Venezeula.

Venezuela has harsh taxation rules aimed at making foreign investment difficult. For instance the foreign exchange control regime limits the free access to foreign currency and consequently currency exchange operations are subject to restrictions. "In the bidding rounds for crude oil foreign companies have not been treated well," added Fernandez.

The government drives most of the M&A activity in Venezuela. "Chávez looks to buy up strategic enterprises such as the food industry," said Fernandez.

Although foreign investors come to Venezuela, sometimes they are not paid for their services because of political expediency. "When a drilling company intended to sue the government, the minister for oil and gas, who happens to be Chávez, simply took over the drilling platform," says Fernandez.

Private companies are paid by the government to invest in nationalised industries. However, Chávez has made it clear that helping the poor is his priority. This means that income due to foreign investors is often diverted into social programmes such as food and shelter. Peru has become more stable politically over the last seven years and the number of foreign investors from countries such as Brazil, Mexico and Chile and from outside the region has increased. Once seen as a market pariah for defaulting on their debts, the country now has a government that embraces free-market economics.

Public listed companies have to comply with a considerable number of regulations. If a buyer wants to acquire at least 50% of a company, they have make the offer to all shareholders. And asset, as opposed to stock, deals are rare. Unlike in other jurisdictions where asset deals are free from the seller's liabilities, in Peru investors through asset deals have liability for tax and labour. Stock deals have a special exemption from VAT and are not liable for capital gains if the enlarged company is listed in the Lima stock exchange. Capital gains tax is payable on asset deals. Buyers will sometimes only acquire a percentage of a company and adopt a 'wait and see' policy before deciding whether to acquire the rest.

"Legally this is making matters more interesting," says Gustavo Miro Quesada, a partner at Estudio Ferroro.

A legal stability agreement is good for investors as it guarantees the framework in which the deal is done for 10 years. This means that the level of income tax and dividend tax will remain at the same level for 10 years. Many jurisdictions have introduced tax incentives in an attempt to lure foreign investment. In Argentina, the government has announced plans for a tax amnesty, where companies involved in disputes can pay a reduced rate. Vendors will also benefit from the amnesty. It is also providing an incentive to hire new workers and has proposed the introduction of a tax holiday for eight years

"The most relevant change in the taxation system has been the introduction of stamp duty at 0.8% of the total cost of the deal," says Andres Edelstein M&A partner at PricewaterhouseCoopers in Argentina. These measures will be available from March and last for six months. "Many measures adopted by the government were not well received by foreign investors," says Edelstein.

Argentina has had domestic problems that have been affecting the M&A market. "There was a problem with inflation, the pension fund system and problems in the agricultural sector including widespread strikes, this resulted in a loss in confidence from foreign investors," said Edelstein. Countries in the region have also looked to tax treaties as a tool to attract investment. Colombia's agreement with has Spain contains some elements which are attractive to companies acquiring targets in Colombia.

Investments in hotels carry a 30 year tax exemption. Private equity firms are eligible for important tax benefits including special government loans tax credits. And investors can get certainty about stable tax rules for 20 years. This means that the tax rates are set at the same level for 20 years after the deal is completed. Free trade zone benefits include an exemption on customs and VAT on exports and a reduced corporation tax rate of 15%. The most popular incentive is the 40% capital allowance fixed productive asset which is available in the year of investment. Buying assets instead of an entity has benefits as there are no labour liabilities and tax liabilities. With stock deals the buyer will inherit all of the companies' liabilities.

Sellers of companies in Colombia often use structures, such as holding companies located outside of the country, to avoid paying tax. The government has reduced taxes to facilitate deals in certain industries such as the mining and coal industry.

"At the moment, Colombia is full of people investing," says Juan Guillermo Ruiz, tax partner at Posse Herrera & Ruiz in Colombia.

"The trends that are affecting Colombia are also affecting other Latin American countries with the obvious exception of Venezuela. Peru, Chile, Mexico and Brazil are all seeking foreign investment and the governments are encouraging investment into infrastructure with tax incentives for private investors," says Jose Romero, director of tax at Brigard & Urrutia in Colombia.

In Chile the authorities have abolished stamp duty on M&A deals. This means the financing of deals has been much cheaper since December 2008. This should help with attracting foreign investment.

Brazil is in a fairly strong position in the region as there are good investment opportunities due to the relative strength of the dollar to the Brazilian Real. "We have a lot of investment in gas and oil and bio ethanol. Firms are looking to acquire big companies for future profitability," said Ronaldo Xavier, a tax manager at Deloitte in Brazil.

Tax legislation is complex in Brazil. Firms that work on M&A deals have to understand all the tax liabilities for different companies. "When we advise on a deal we try to assist the buyer in avoiding statutory contributions and labour rights," says Xavier. In Brazil, private equity firms make up for 70% of the M&A market while the remaining 30% consists of operational companies.

When advising Brazilian companies making foreign acquisitions, the tax advice differs. "When advising Brazilian companies we have to take account of transfer pricing legislation and double tax treaties," says Xavier. In Brazil, buyers generally prefer asset deals rather than a stock acquisition because in an asset transaction the buyer is generally free of all tax liabilities arising from the target company.

In Mexico, government tax initiatives have seriously impacted on the M&A market. "In the beginning of 2008 a flat tax was introduced. It levied a 17.5% tax on a net cash basis as a opposed to income tax on net gains," says Rios. This tax was fine when the Mexican economy was growing but in the current economic climate it is having a negative effect. "The flat tax is impacting asset deals and is discouraging inbound transactions," he added. There have been a number of large Mexican companies making outbound investments although the Mexican economy should be attracting more inbound investors.

"The Mexican Peso has suffered a 50% devaluation against the dollar. This means that Mexican companies are extremely good value to foreign investors. However, the flat tax is preventing inbound investment," says Rios. The M&A market in Latin America is not immune from the global economic downturn. Most jurisdictions have seen a reduction in both the size and number of deals. However, many countries have reacted positively to the downturn by offering incentives to foreign investors and some commentators claim to be 'optimistic' about the future of the M&A in their respective jurisdictions. However, other commentators think that worse is still to come and do not expect the M&A market to recover until at least 2010.

Tier 1

Asorey & Navarrine

Deloitte

Ernst & Young

Marval O'Farrell & Mairal

Negri & Teijeiro

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Tier 2

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KPMG

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Deloitte

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KPMG

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Ernst & Young

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Deloitte

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Tier 2

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Claro & Cía

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Tier 1

Deloitte

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KPMG

PricewaterhouseCoopers

Tier 2

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Quiñones Cruz Abogados

Baker & McKenzie Colombia

Tier 1 Calvo, Gonzalez Luna, Revilla y Moreno Chevez, Ruiz, Zamarripa y Cia Ernst & Young PricewaterhouseCoopers Tier 2 Baker & McKenzie Basham Ringe y Correa Deloitte Ortiz, Sainz Erreguerena Ortíz, Sosa, Ysusi

ernst-young-mexico120x60.gif

Tier 1

Estudio Echecopar

Estudio Ferroro

Miranda & Amado

Muniz Ramirez Perez Taiman & Luna Victoria

Tier 1

Fraga, Sanchez y Asociados

Macleod Dixon

Torres Plaz & Araujo

Tier 2

Candal Taxand

DESPACHO DE ABOGADOS MIEMBRO DE HOGAN & HARTSON

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NORTH AMERICA

Following the onset of the economic downturn, both the US and Canada have seen their tax transactional market all but disappear. Jack Grocott asks tax professionals how they are coping and what they think the future holds

The global economic slowdown has had a significant impact on M&A in North America. There has been a substantial reduction in the volume and value of transactions and activity has plummeted to 2003 levels. And a struggling credit market means the outlook is bad. The market has become so temperamental that even after a contract is signed, it is not clear that the transaction will close on the agreed terms, or at all.

The decrease in transactions has prompted taxpayers to shift focus to short-term tax solutions that aim to preserve losses and avoid tax wastage. Gone are the heady days of long-term tax planning and satisfying tests for interest deductibility. Now is the time when tax is of upmost importance.

Increased uncertainty in the tax systems, as well as a volatile market, has made participants reluctant to make a move and many transactions have been postponed or even cancelled.

The US's decision to plough billions of dollars into helping kick-start the domestic economy shows intent from the new administration that a solution can be found that can fend off the serious recession. But, high levels of uncertainty exist among tax professionals, who are concerned that the transactions market will all but come to a halt until the market becomes more predictable.

"As a result of the global economic recession and decline in market valuations, the transactional focus has turned to hostile, undervalued and distressed investing," said Ernesto Perez, a managing director, Alvarez & Marsal, in US. "Many of the tax issues we are seeing today centre around troubled and distressed companies."

It is this change of focus that has developed out of the demands from clients that are keen to secure their liquidity. Tax advisors are assisting them with strategies that will maximise cash and minimise taxes. These arrangements include planning for profit repatriation, transfer pricing, sales and use tax opportunities, accounting method reviews and the carry back of net operating losses (NOL).

Governments have used regulatory activity and legislation to boost the market. In some cases these are inter-related. Some of these developments may help increase activity, while others may actually increase tax costs and reduce deal flow.

On the regulatory front, the US Treasury issued a highly publicised Revenue Notice (Notice 2008-83) in September 2008, which essentially allowed banks to use built in losses on loan portfolios to offset income in future years, even after a change of ownership. This notice has been particularly controversial because it is not clear if this treatment is in accordance with existing tax law. The economic stimulus legislation (The American Recovery and Reinvestment Act of 2009) reverses this position for future transactions, although it does not apply to certain signed or announced deals.

Other guidance has also been issued on NOL preservation and the calculation of limitations upon a change of control. Further guidance is expected, but this may be delayed while the new staff at the Treasury and the IRS settle in and evaluate pending regulatory projects.

The recently enacted stimulus act also contains provisions that revise the rules on the recognition of cancellation of indebtedness or "COD" income. The new law allows even a solvent company to defer recognition of cancellation income from a debt forgiveness or restructuring for five years, and to pay back the deferred income over the ensuing five years.

The act also allows corporations to carry NOLs back for five years, instead of two; however, this relief is limited to companies with gross receipts of $15 million or less.

In the US, in the leveraged buyout arena, fewer deals are getting done, and the ones that are being done involve much larger equity contributions, in some cases all equity. "At the same time, strategic transactions have been reduced by many factors as well, not the least of which is the unwillingness of companies to issue shares at current valuations," said Chet Wood, chief executive officer of Deloitte Tax in the US.

But there is activity, involving not only distressed companies but also strategic opportunities, such as Pfizer's recent acquisition of pharmaceutical firm Wyeth. "Overall, it seems market participants are reluctant to act until the government's position is clarified and the market is more predictable," Wood added.

The new approach of managing cancellation of indebtedness income in debt buy-backs and preserving tax attributes in change of control transactions is in stark contrast to two years ago when transactions were concerned with achieving tax basis step-ups that were driven by high valuations and positive projections.

Canada seems to be fairing better than their US counterparts south of the border. "To date, Canada is the only developed country that has not had a bank failure and is actually poised to become even stronger," said Jeffrey Trossman, of Blakes, Cassels & Graydon, Canada. "Canada did not deregulate their banks in the same way the US and Europe did and so they are well capitalised and the market is quite stable at the moment," Trossman added.

Regardless of Trossman's optimism, Canada has fallen foul of the old adage that 'if America sneezes, then Canada catches a cold' and this has resulted in a dramatic slowdown in the number of tax transactions over the past 12 months.

Just like in the US, large transactions have all but come to a standstill in Canada but there still seems to be activity on a medium-scale. Banks are still lending and the flow of transactions and investments have shifted and more Canadian companies are investing south of the border more than ever before.

"We are in a relatively secure position, but we have seen the end of irrational exuberance in these transactions as the focus of the tax issues is all about loss preservation," said Trossman.

This rather cautious approach to tax transactions is a practice being adopted by both countries' tax professionals. "Whenever you work on a complicated transaction you have to make sure that you have not missed something that does not make the deal tax efficient," said one Canadian tax lawyer.

"From a structure point of view, while the technical focus may have shifted, the basic need to understand expected tax rates and cash flows remains the same, perhaps with the added need to preserve tax attributes that may not be useful until future years," the lawyer added.

Tax professionals in North America will have to alter their approach to help their clients take advantage of a changing transactions market and legislation that is reformed regularly. The growth in private equity firms over the past few years has led tax advisers to adapt existing methods to the new challenges that face these clients. "Their [private equity funds] growth has led to a whole stream of issues associated with the structure and ownership of the funds," said Sheldon Alster, a US tax partner in the London office of Cleary Gottlieb Steen & Hamilton, a law firm. "When these funds look at making an acquisition, we have to consider the tax impacts of the multiple investors in these funds," Alster added.

But with advisers looking to reduce the tax burden in these transactions, the tax authorities are also targeting the transactions to see whether they are as compliant with the rules as possible.

"As the budget gap in the US keeps growing, the IRS is looking at cross-border, especially transfer pricing, controversy," said one American tax lawyer. "The IRS is becoming a lot more aggressive than they were in the past. They are spending a lot more time training their agents to spot tax evasion."

The day of tax advisers working on multi-billion dollar M&A is over for now. Companies are assessing their strategies for when the economy improves, while at the same time looking to generate as much cash as possible. Tax will always follow the market and the new challenge for everyone involved in tax is locating that perfect transaction. "It is a challenging and exciting time for us at the moment, but not for our clients." Alster proclaimed.

Tier 1

Blake Cassels & Graydon

Davies Ward Phillips & Vineberg

Deloitte

Osler Hoskin & Harcourt

Stikeman Elliott

Tier 2

Aird & Berlis

Goodmans

Gowlings

McCarthy Tétrault

Tier 1

Alvarez & Marsal Taxand

Baker & McKenzie

Cleary Gottlieb Steen & Hamilton

Deloitte

Ernst & Young

Fenwick & West

Mayer Brown

PricewaterhouseCoopers

Skadden Arps Slate Meagher & Flom

Tier 2

Baker Botts

Caplin & Drysdale

Cravath Swaine & Moore

Dewey & LeBoeuf

DLA Piper

Gibson Dunn & Crutcher

Irell & Manella

Kirkland & Ellis

McDermott Will & Emery

McKee Nelson

Morrison & Foerster

Fulbright & Jaworski

O'Melveny & Myers

Latham & Watkins

Pillsbury Winthrop Shaw Pittman

Shearman & Sterling

Sidley Austin

Simpson Thacher & Bartlett

Sullivan & Cromwell

Sutherland Asbill & Brennan

Vinson & Elkins

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White & Case

Wilson Sonsini Goodrich & Rosati

=US>US

Tier 1

Alvarez & Marsal Taxand

Baker & McKenzie

Cleary Gottlieb Steen & Hamilton

Deloitte

Ernst & Young

Fenwick & West

Mayer Brown

PricewaterhouseCoopers

Skadden Arps Slate Meagher & Flom

Tier 2

Baker Botts

Caplin & Drysdale

Cravath Swaine & Moore

Dewey & LeBoeuf

DLA Piper

Gibson Dunn & Crutcher

Irell & Manella

Kirkland & Ellis

McDermott Will & Emery

McKee Nelson

Morrison & Foerster

Fulbright & Jaworski

O'Melveny & Myers

Latham & Watkins

Pillsbury Winthrop Shaw Pittman

Shearman & Sterling

Sidley Austin

Simpson Thacher & Bartlett

Sullivan & Cromwell

Sutherland Asbill & Brennan

Vinson & Elkins

Weil Gotshal & Manges

White & Case

Wilson Sonsini Goodrich & Rosati

=US>US

Tier 1

Alvarez & Marsal Taxand

Baker & McKenzie

Cleary Gottlieb Steen & Hamilton

Deloitte

Ernst & Young

Fenwick & West

Mayer Brown

PricewaterhouseCoopers

Skadden Arps Slate Meagher & Flom

Tier 2

Baker Botts

Caplin & Drysdale

Cravath Swaine & Moore

Dewey & LeBoeuf

DLA Piper

Gibson Dunn & Crutcher

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Kirkland & Ellis

McDermott Will & Emery

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Morrison & Foerster

Fulbright & Jaworski

O'Melveny & Myers

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Shearman & Sterling

Sidley Austin

Simpson Thacher & Bartlett

Sullivan & Cromwell

Sutherland Asbill & Brennan

Vinson & Elkins

Weil Gotshal & Manges

White & Case

Wilson Sonsini Goodrich & Rosati

=US>US

Tier 1

Alvarez & Marsal Taxand

Baker & McKenzie

Cleary Gottlieb Steen & Hamilton

Deloitte

Ernst & Young

Fenwick & West

Mayer Brown

PricewaterhouseCoopers

Skadden Arps Slate Meagher & Flom

Tier 2

Baker Botts

Caplin & Drysdale

Cravath Swaine & Moore

Dewey & LeBoeuf

DLA Piper

Gibson Dunn & Crutcher

Irell & Manella

Kirkland & Ellis

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McKee Nelson

Morrison & Foerster

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O'Melveny & Myers

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Shearman & Sterling

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Simpson Thacher & Bartlett

Sullivan & Cromwell

Sutherland Asbill & Brennan

Vinson & Elkins

Weil Gotshal & Manges

White & Case

Wilson Sonsini Goodrich & Rosati