M&A tax payments vex authorities

How do you tax an M&A?

In an M&A deal, a company buys a stake in another company. If the owner of the stake is an individual, the person is going to be taxed according to personal income tax laws. If the owner is a company, it is going to be taxed according to corporate income tax regulations.

In short, when the equity, stocks, and the capital contribution is transferred to another organisation or individual, the seller has to pay tax. Besides, when the transfer involves assets and real estates, there are other related taxes.

Nguyen Van Phung

All this covers the direct transfer of capital. What governs the taxation of indirect capital transfers?

When a company transfers a stake or a capital contribution, it is direct transfer. It is easy to supervise the payable tax in this case because it is in the law and there are legal documents that provide detailed guidance on tax collection.

If the seller of the stake or the capital contribution is a company registered to operate in Vietnam, this company will file the tax. If it is an individual, they have to pay tax through the company before it changes the name of the stakeholder or capital holder.

In the case of indirect transfer, it is more complicated because many companies are organized in a complicated model with lots of levels.

For example, company A holds company B, company B holds company C, which in turn holds part of company D. Company A has just transferred its holdings in company B and C to another company, but C still holds its share in D and D is still operating.

In the case that a domestic company makes an indirect transfer, the most difficult thing is to determine the price of the transfer in a limited company and the price of a share of a company that is not yet listed, but generally it is still manageable because the parent and grandparent companies are in Vietnam.

It is more difficult when an indirect transfer happens with a parent company based in a foreign country.

Like in the case of Metro Cash & Carry and Big C?

Groupe Casino owns the Big C brand internationally and invested in the Big C Vietnam chain through a company that is based in Hong Kong (Cavi Retail Ltd. Hong Kong). When Casino transfers its equity in Big C Vietnam to Central Group, which is based in Thailand, it is an indirect transfer through Cavi Retail. Whoever Casino transfers the capital to and at any level, the tax authorities can request an explanation.

The facilities, machines, equipment, and the whole chain are in Vietnam and operate in Vietnam, so the owner has to pay tax before completing the transfer. This is the prerequisite to ensure that the new owner takes ownership of the assets legally.

But what if Groupe Casino says that Big C is not making a profit so they are not paying tax?

We have to separate the operation of Big C Vietnam and that of Groupe Casino. If Big C Vietnam makes a loss every year, then Big C Vietnam does not have to pay corporate income tax. They can even take the loss from one year and subtract it from the profit of another year. But it does not matter whether Casino invested in Vietnam through a subsidiary or an associate, what matters is how much they invested in Vietnam, and for how much they are selling this investment. If the latter sum is higher than the former, they have to pay corporate income tax on the difference. In reality, in all M&A deals the sellers make a profit and have to pay tax.

I want to add that Vietnam has signed an agreement with 75 countries and territories on avoiding double taxation and preventing tax evasion. The General Department of Taxation also signed cooperation agreements to exchange information with the tax authorities of different countries and to prevent tax evasion and tax fraud together, so it is difficult for companies to hide information.

Moreover, in an M&A, expenses, such as hiring consultancy and lawyers, and the money from the transfer itself are all transferred through banks, so there are records. Companies are allowed to calculate, file, and submit tax but if the transaction value is not close to the market value, the tax authorities are going to investigate and verify the amount they are due.

But who has to pay when both the seller and the buyer are based in another country and the transaction does not happen within the territory of Vietnam?

That is exactly why the tax authority have to fight with companies in order to collect tax from M&A deals, with Vietnamese laws and regulations, as well as the agreements that the General Department of Taxation signed and international norms as bases.

Just like in the Metro Cash & Carry case, the new owner of Big C has to request Vietnamese government agencies to carry out procedures to change the investor.

According to current regulations, when a company splits, dissolves, goes bankrupt, merges with another company, or when the owner changes, the company has to report all tax obligations. The seller has to pay the tax based on the filing of the buyer. But the law allows the tax authorities to ask the buyer to file and pay the tax on the seller’s behalf. In reality, the parties have to clarify in the contract whether the buyer or seller pays the tax. The tax authority does not interfere in that.

From companies that have assets, equipment, workshops, production lines, and machinery in Vietnam, it is easy to collect tax, but how about companies in ecommerce? How do you tax an M&A that involves such companies?

Tax in the case of ecommerce is complicated. An M&A among ecommerce companies is even more complicated. There needs to be cooperation between the Ministry of Finance, the General Department of Taxation, and other government agencies, such as the Ministry of Industry and Trade, the Ministry of Information and Communication, and the State Bank of Vietnam, to regulate these.

There must be regulations on tax obligations tied to registration and operation supervision. When Vietnamese ecommerce companies transfer their stakes, the transaction has to go through banks, which means the tax authority knows, so it can collect tax.

But the situation is far more complicated for M&As between foreign ecommerce companies. Recently, Lazada sold a controlling stake to Alibaba. When the transaction is finalised, the Vietnamese tax authorities are going to cooperate with tax authorities of our regional neighbours in order to collect the right amount at the right time.

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