Cross-border M&A deals cause unsolved tax issues

Cross-border headaches

In recent years, along with the general rise in mergers and acquisitions (M&A) deals in Vietnam, overseas companies have been conducting more high-profile deals among themselves for assets based in the country. And, most of the time, tax confusion and controversies follow these transactions.

The latest example is ConocoPhillips and Perenco, which do not want to pay nearly $180 million in taxes levied on the sale of its assets in Vietnam to Perenco six years ago. ConocoPhillips argued it cannot be taxed because the transaction was conducted between two foreign entities “with no taxable presence in Vietnam”.

This case harkens back to the controversial Uber and Grab merger in April this year. Singapore-based Grab, the buyer of Uber’s Southeast Asian business, said it would not be responsible for taxes owed by Uber to the Ho Chi Minh City government, which reached $2.3 million.

Going back further, supermarket Big C was also ordered to pay $93 million in capital profit assignment tax (CAPT), after France’s Casino Group sold the Vietnam-based supermarket to Thailand’s Central Group. This is the highest amount of levies that Vietnam has ever collected from an M&A deal.

Previously, German company Metro Group submitted $85.25 million in taxes to Vietnam after the sale of hypermarket Metro Cash & Carry Vietnam to Thailand-based TCC Holdings.

In August 2017, the Ministry of Finance proposed a bill on a new 1-per-cent CAPT, which is calculated according to gross sales proceeds instead of capital gains, as was done previously. This draft bill has since gathered significant buzz in the market, as investors claimed that some cross-border M&A deals were conducted at a loss, making levying CAPT on any M&A deal unreasonable.

Nguyen Van Phung, director of the Department of Tax Administration and Large Enterprises under the General Department of Taxation, told VIR that the sellers are obliged to pay value-added tax (VAT) and corporate income tax (CIT), while individuals are subject to personal income tax.

Phung said that with off-shore transactions, it is sometimes difficult to tax the right entity, as foreign buyers and sellers usually conduct their deals via a myriad of subsidiaries or holdings in other countries. For example, in the Big C-Central Group case, Casino Group actually transferred Big C Vietnam’s shares via its Hong Kong affiliate Cavi Retail.

“We have to hold our ground with the deal participants: No matter where the sellers and buyers are incorporated, if their assets, equipment, and network still operate in Vietnam following the transaction – they have to pay taxes. This is a prerequisite for the buyer’s takeover of the assets,” said Phung.

Things to consider

Of course, collecting taxes on cross-border transactions remains a tedious and controversial process, subject to not only Vietnamese laws but also international trade agreements and rules set by the World Trade Organization (WTO).

For instance, many countries have signed treaties to avoid double taxation of M&A transactions, and such a treaty will override any domestic law. Vietnam currently has such agreements with 50 countries around the world. However, tax treaties or offshore holdings are not a magic way out for foreign investors. According to an April report issued to investors by KPMG Vietnam, cross-border M&A tax laws in Vietnam are improving, but interpretations are increasingly skewed in favour of Vietnamese tax authorities. KPMG alerted investors that use of an offshore holding company may provide opportunities for tax mitigation, but companies remain subjected to anti-avoidance rules by the Vietnamese government.

“Tax treaties may offer some protection [from CIT or VAT], but anti-avoidance rules apply, with broad interpretation by the local government. Furthermore, tax treaty claims are not reviewed or approved by the local tax authorities until a tax audit is undertaken, which can happen years later,” said the KPMG report.

Vinh Nguyen, tax partner at Baker McKenzie (Vietnam), told VIR that off-shore M&A deals, involving indirect share transfers, often face vague tax policies, since there has been no practical implementation guidance following Vietnam’s tax regulations since 2015. “This causes a certain level of uncertainty when it comes to tax impacts of transactions,” said Nguyen.

Another issue, according to lawyer Vu Ngoc Dung of Bac Viet Law Firm, is the possibility of foreigners conducting M&A deals in Vietnam to dodge taxes – called a “tax inversion deal”. Dung said that a profitable company may decide to buy into a loss-making one to reduce its tax payment responsibilities. Some countries, such as the US and the UK, allow this practice, which can make it hard for the Vietnamese government to tax these deals.

“Vietnam is still new to M&A activities and complicated tax issues arising from cross-border deals. Thus, I suggest we learn from more developed countries to minimise loopholes in our laws, and we have to collaborate with them and the World Trade Organization,” said Dung.

Meanwhile, Vinh Nguyen advised that both parties in an M&A deal need to properly address tax concerns and risks in the transaction documents, especially regarding tax issues of the Vietnamese target companies.