ATC 2012: M&A issues in Africa
Embarking on any cross border merger or acquisition will raise a host of complex legal, regulatory, labour and tax issues. When it comes to Africa, however, the complexity level can increase significantly because the legal and regulatory framework may not be clear, current or uniformly adhered to. While a stomach for uncertainty is a pre-requisite for investing in most African countries, it is nevertheless possible to identify - and plan around - certain key matters that can assist in rendering an African acquisition tax effective, says Craig Miller, Director, Transactions Tax at Ernst and Young.
Speaking at the firm’s annual Africa tax conference, Miller said these include planning for withholding taxes, capital gains tax on exit and where possible the use of interest deduction techniques.
One such technique is “debt push down”, which refers to the process of placing the operating company in the position to deduct from its profits the cost of the acquisition debt. “Because most African countries do not have group relief rules or rules which provide for tax consolidation or group taxation, debt push down is generally difficult to achieve. Rather, consideration should be given to extraction of value in an efficient manner including minimising any tax upon disposal of the interest in the investee,” Miller said.
At the very least, said Miller, an investor should aim to be able to extract, at its discretion (and clearly subject to commercial requirements) the amount actually invested free of in-country taxes, which can be high. Failure to plan correctly could conceivably diminish the value of the investment by up to 20%.
Miller adds that given the risk/reward conundrum which any investor needs to consider when making an investment in an African jurisdiction; it is possible that the tax implications, if careful planning does not take place, adversely impact the economics of actually making the investment. It is crucial that the tax effect of extracting value from the respective African investee jurisdiction is included in the models and proposals presented to boards when contemplating the viability of the foreign investment.
Careful planning is always key to the success of an M&A transactions, but the dynamic nature of the regulatory climate in many African countries calls for a continual monitoring of the chosen structure.