By Aimée Dushime and Okechukwu Onyenyeonwu
Aimée Dushime and Okechukwu Onyenyeonwu of KPMG look at the relevant tax considerations for companies involved in mergers and acquisitions in Nigeria.
The Covid-19 pandemic has caused unprecedented disruption and a severe economic downturn for many businesses across the globe. The pandemic not only plunged Nigeria into a health emergency but also caused a sharp decline in the revenue of businesses, which has resulted in many companies filing for bankruptcy. This situation has moved companies to adopt effective business restructuring strategies such as mergers and acquisitions (M&A) in order to remain competitive as well as enhance growth and profitability.
It has been observed that companies often invest more in the corporate finance and legal aspects of M&A, while paying less attention to the tax considerations of such arrangements. It is in this context that this article seeks to examine the scope of M&A in Nigeria and the potential tax implications for M&A arrangements in the country.
Although the words “merger” and “acquisition” are often used interchangeably, they are in fact different in meaning. A merger is an arrangement involving the combination of two or more existing companies in order to form a larger company for economic or strategic reasons.
An acquisition, on the other hand, is the process where one company (the acquirer) takes over another company (the target) by purchasing a controlling interest in the share capital or all or substantially all of the assets and liabilities of the target. In most cases, the acquired company ceases to exist while the acquiring company absorbs the business and folds it into its operations. However, sometimes the acquisition may only place the business of the acquired company under the indirect ownership and control of the acquirer’s management.
In Nigeria, the Federal Competition and Consumer Protection Act (FCCPA) is the principal legislation on M&A and the most recent effort to bring the country’s competition and merger control regime in line with global best practices. Prior to the enactment of the FCCPA, the review and evaluation of M&A activities in Nigeria was regulated by the Investment and Securities Act (ISA), the Rules and Regulations of the Securities and Exchange Commission (SEC Rules) and the Companies and Allied Matters Act (CAMA).
The FCCPA defines mergers as “when one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking.” The FCCPA further provides that the merger may be achieved in any manner including through (a) purchase or lease of shares, interests or assets of the other undertaking in question; or (b) amalgamation or combination with the other undertaking in question; or (c) a joint venture.
Although the term “acquisition” was not defined by the FCCPA, the SEC Rules define it as “the take-over by one company of sufficient shares in another company to give the acquiring company control over that other company.”
From the above definitions, it is safe to submit that there exists a thin line between mergers and acquisitions. While merger involves combining two entities to form one single entity, with the other losing its identity, acquisition only allows one company to take over controlling shares in another company for the purpose of giving the acquiring company control over the acquired company, with the latter still retaining its identity, though as a subsidiary of the former.
In light of the economic situation in Nigeria as a result of the Covid-19 pandemic, it is necessary for companies to undertake strategic measures for the purpose of increasing their resource base, reducing their tax risks, and expanding their market share in order to remain competitive, as well as enhancing growth and profitability. M&A is considered to be a critical restructuring tool that has the potential of ensuring and optimizing efficiency for companies.
In implementing an M&A arrangement, it is imperative that the parties involved (also taxpayers) consider the potential tax considerations that may impact the transaction in order to improve tax certainty and efficiency. These considerations are discussed below.
First, before a merger or an acquisition can occur, the direction of the Federal Inland Revenue Service (FIRS) in respect of tax impact must be obtained. This is pursuant to Section 29(12) of the Companies Income Tax Act (CITA) which provides that “no merger, take-over, transfer or restructuring of the trade or business carried on by a company shall take place without having obtained the Service’s direction under subsection 9 of this section and clearance with respect to any tax that may be due and payable under the Capital Gains Tax Act.”
In order to file an application for the direction of the FIRS, the merging companies are required to submit copies of the relevant transaction documents including the merger plans and audited accounts of the companies involved. The FIRS issues an “approval-in-principle” letter once it is satisfied with a proposed M&A arrangement.
It is also important to note that where parties involved in M&A transactions are not related, the old and new businesses are seen as distinct; thus the commencement and cessation rules provided for under Section 29 of the CITA (as revised by the Finance Act 2019) become applicable to the surviving and ceasing company, respectively.
Similarly, with regard to an acquisition arrangement, cessation rules shall also be applicable to the acquired company which ceases to exist and cessation tax returns must be filed in respect of this. However, where the acquisition is between related parties, Section 29(9) of the CITA stipulates that the FIRS may direct that the business of the acquired or merging companies be deemed as continued by the acquired company. Consequently, the commencement and cessation rules would be inapplicable in this regard.
In addition, since the surviving company in an M&A transaction involving unrelated parties will be deemed to have started a new business, the company will be entitled to all capital allowances including initial, investment and annual allowances in line with the provisions of Section 32 and Schedule of the CITA. This therefore implies that the new company cannot take over any unutilized capital allowances, tax losses or withholding tax credit of the former entities.
However, in line with the provisions of Section 29 (9)(b) and (c) of the CITA, where the M&A arrangement deals with related parties, the commencement and cessation rules are not applicable and the surviving entity will only be entitled to annual allowance and not to any initial and investment allowance.
In most M&A arrangements, the shareholders of the acquired or merging entities are settled with the issue of shares in the surviving entity or payment of cash or a combination of both. In the event where the shareholders dispose of their shares, capital gains tax arises. Section 30 of the Capital Gains Tax Act however provides that “gains accruing to a person from disposal by him of Nigeria Government securities, stocks and shares shall not be chargeable gain under the Act.”
As companies invest resources in the financial, legal and technical aspects of M&A arrangements, it is also essential to pay attention to tax in order to eliminate tax risks and uncertainty, as well as improve tax efficiency for parties involved in the M&A transaction.
Since M&A arrangements involve many tax issues and complexities, inadequate consideration of tax can significantly reduce the benefits to be gained from the arrangement, as the emerging company may face excessive tax exposure. In light of the continuous change in government policies and tax laws in Nigeria, companies may find it helpful to engage professional advisers on the tax considerations in an M&A and other forms of business restructuring strategies for the purpose of making informed decisions in this regard.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Aimée Dushime is a Senior Associate and Okechukwu Onyenyeonwu is an experienced Staff Analyst in the Transfer Pricing Services practice of KPMG Advisory Services in Lagos, Nigeria.
The authors may be contacted at: aimee.dushime@ng.kpmg.com; okechukwu.onyenyeonwu@ng.kpmg.com
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