Tax non-compliance doesn't need to derail an M&A process

Thailand Tax Updates - 21 February 2019

Foreign direct investment has always been an important aspect of Thailand’s economic development and the country remains to hold its position as one of the primary inbound investment destinations in the region.

Tax non-compliance does not need to derail an M&A process

A recent survey by KPMG gathered valuable insights from many of KPMG’s leading domestic and international clients who have recently undertaken M&A projects in Thailand.  According to the survey, investors consider Thailand to be more attractive than three of the ‘CLMV’ countries (Cambodia, Laos and Myanmar), with Vietnam the only emerging ASEAN country seeming to compete with Thailand on overall attractiveness.

Despite various regulations and foreign ownership restrictions that concern inbound investors, Thailand continues to hold its place in the region as one of the major countries for direct foreign investment. Thailand’s strategic location, favorable macroeconomic climate, the Government’s ‘Thailand 4.0 Economic Plan’, the Investment Promotion Act (offering incentives for investment in advanced technologies, innovation and research and development) all contribute to the overall investment attractiveness.

Multinational corporations from developed economies seeking growth, as well as Private Equity funds which consider Southeast Asia as an increasingly attractive destination, see family-owned businesses which have grown into successful medium-to-large size operations as attractive targets. However, whilst the owners have an intimate knowledge of their business, the accounting records, compliance practices and governance policies generally fail to meet the expected standards of multinational corporations. 

According to the survey, the key challenge participants faced during due diligence related to tax exposures.   

The two main considerations when seeking to purchase a historically tax non-compliant business are impact to the earnings from tax compliance and historical tax exposures.

A key output of a robust due diligence is an understanding of the expected future tax burden based on analysis of historical tax compliance, which should be incorporated into the valuation model and adjusted in the purchase price.

Historical tax liabilities can be left with the seller through an asset deal. The Entire Business Transfer (EBT) scheme allows, in certain circumstances, assets to be transferred in a tax neutral manner.

However, an asset deal is not always practical due to, for example, licensing issues, tax and transaction costs, implementation timeframe and impact on the overall deal timing. In instances where an asset deal is not possible, seeking appropriate tax indemnities that are backed by a deferment of purchase consideration is a commonly used approach. Estimating a magnitude of the exposure is a key step in sizing the deferment.

For sellers, an early understanding of tax compliance problems inherent in the business can help plan mitigation strategies as well as drive a more productive conversation with the buyer throughout the process and contribute to a successful deal outcome.

Various investment incentives provided by the Thai Board of Investment (BOI), including tax benefits granted under the International Business Centre (IBC) regime, may improve overall post-tax return of investment if structured appropriately.

Although tax exposures are one of the key concerns in M&A deals in Thailand, it does not need to become a deal breaker. Robust tax due diligence, proper deal structuring, incorporation of identified tax liabilities into the bid price and early negotiations with the seller can ensure the success of the deal.

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