Tax challenges for investors in recent M&A transactions

From investors perspective, tax has always been a challenge in the M&A transactions.

However, several tax issues has poised challenges for foreign investors, including the complexity of tax system, interpretation of local authorities, and the unclear guidance of tax matters.

During the past two years, the unprecedented challenges from COVID-19 pandemic have urged investors and tax advisors to change the approach during the due diligence process and widen the scope of review to ensure appropriate coverage for investors.

Nowadays the tax due diligence exercise needs to go beyond the usual scope including review the Corporate Income Tax, Value Added Tax, Foreign Contractor Withholding Tax and Personal Income Tax. In specific deals, we may also consider, for example, transfer pricing, customs duty, or tax exposure from historical M&A transactions, that could ultimately impact the tax position of the investors post transaction. Moreover, apart from the off-payroll payments, we see that PIT risks can also arise from the complex Employee Stock Ownership Plan (ESOP) schemes offered by employers to employees in certain private equity deals.

As for the tax due diligence, identifying risks is one matter, assessing how to assist investors address or mitigate such risks is another no less critical task given, firstly, the 10-year statute of limit ations period for tax and late tax payment interest collection under the prevailing regulations, and secondly, the assessment of the final tax liability of the investee company is in practice to be confirmed by local tax authorities upon a tax audit.

According to Mr. McClelland Thomas, Country Tax Leader of Deloitte Vietnam, one of the approaches to minimize potential risks is to negotiate for contractual protections. Seeking an indemnity from sellers or requiring that a portion of the consideration be placed in escrow are typical. Deloitte Vietnam expert also recognizes that tax liability insurance has also been used in recent deals as an effective tool to address the concern of the investors regarding the uncertainty in claiming tax liabilities against the seller, thus facilitating the deal completion.

Depending on the nature of the deal and the motivation of either the seller or the buyer, other financial instruments such as convertible bonds, convertible loans, or exchangeable notes, could be used to provide the investors with more flexibility. Having said this, we see that the M&A environment develops at a faster pace than the regulations resulting in lack of specific guidance, especially tax treatment, for certain types of transactions.

Regarding the current legal system, Ms. Ngan Dang, Tax Director of Deloitte Vietnam noted that the market still waits for a more comprehensive management mechanism. Take indirect shares transfer as an example. Although there have been official instructions by the local as well as the central tax authorities in recent years, this issue has not been mentioned in legal documents such as Decrees, Tax Circular for both cases where the transferor is a corporate or individual shareholder. Similarly, the tax policies are also not fully developed to govern a variety of financial instruments, leading to concern for investors.

To ensure the success of the deal, tax consultants are widely considered by investors when seeking in-depth analysis with a practical approach to determine tax liability as well as risks. Furthermore, investors are also recommended to closely monitor the development of the regulations post deal to have proper adjustments or effectively management any possible tax exposures throughout the investment lifecycle.

As one of the four largest auditing and consulting firms in the world, Deloitte Vietnam has been involved in tax advice in a series of prominent M&A deals over the years. With global network and local experience in tax matters, Deloitte Vietnam was crowned Vietnam Tax Firm of the Year at the International Tax Review (ITR) Asia Pacific Tax Awards 2022. This is the second year in a row that Deloitte Vietnam has received the award, which reaffirms the influence and value that the company brings to its clients as a trusted consultant.