Business Strategy and Tax Implication on Acquiring a Company
Company (Business) Valuation
Identifying the company value.
The potential buyer in merger and acquisition, has to firstly do a due-diligence process, that consist of:
1. Legal Due diligence by Corporate Lawyer
2. Tax Due diligence by Tax consultant
3. Accounting due diligence by CPA or an accounting firm
4. Operational due diligence, by Management Consultant
Modern due-diligence process employs business projection that also can be referred to as a business valuation in today’s companies such as fin-tech or market places, e.g. Bukalapak, Gojek.
Likewise, The Buyer, the company Seller, can perform its own internal business valuation in order to get the fair-market valuation of the company. Once the valuation value earmarked, both the buyer and the seller must agree on the earmarked value. Both companies will then appoint a third party who will act as Project Leader (Business Consulting Firm i.e. KIB Consulting), to recruit other consultant partners, who will work together to achieve the best result of the merger and acquisition cost.
Options of acquiring a company
At least there are two options available, for selling a company:
1. Acquiring the company’s shares
The potential capital gain as well as the tax derived from selling the company’s shares, shall be imposed to the current (existing) shareholders of the company. Capital gains is calculated as the different between the sales proceeds and the tax written-down value of the assets concerned.
Depending on the taxpayer subject (a corporate or an individual), there will be a distinct sets of income tax applicable to each taxpayer subject as respectively.
Usually, the potential buyer does not to buy the company shares, because they want to avoid potential tax liabilities which may occur in the previous tax year.
2. Acquiring the company’s assets.
Assets of a service company may consist of Goodwill, Logo, Trademark, Licenses, and Company’s Database. There is a value-added tax and income tax implied on any of the above asset being sold and bought in Indonesia. Value Added Tax (VAT) is typically due on events involving the transfer of taxable goods or the provision of taxable services in the Indonesian Customs Area. The delivery of taxable goods is defined very broadly, it also includes deliveries of a title to taxable goods according to an agreement in merger and acquisition process. By law, all goods and services, unless otherwise stated, constitute taxable goods or taxable services.
Shall the asset purchase occur in overseas or shall the purchaser is a foreign tax subject, then a different sets of tax rules will be imposed on the transaction.
Employee transfers at the time of company acquisition
Referring to the Labor Law No. 13 year 2003, there is a governing clause to rectify the amount of a severance plan, if the selling company chooses to terminate or transfer its employees to the acquiring company. Based on employment contract which constitutes the work duration of employment, employee status, and number of employees, an independent actuary can help calculate the amount payable to the employees which has to be borne by the selling company.
Optimum Business strategy may provide structure which may accommodate previous employment period in a new proposed entity in order to get maximum Pension Plan.
Employment Income tax has to be calculated, paid and reported by acquired Company when the employees has been terminated. Form 1721 _A1, has to be prepared wisely. In year of Company acquisition, there is possibility that employee who work for more than one company, has to pay additional income tax at the end of fiscal year.
Tax-neutral mergers
Market value has to be used in transfers of assets in business mergers, consolidations, acquisition, or business splits. Gains resulting from this kind of restructuring are assessable, while losses are generally claimable as a deduction from income.
However, a tax-neutral merger, consolidation, or acquisition under which assets are transferred at book value, can be conducted but is subject to the approval of the DGT. To obtain this approval, the merger, consolidation, or acquisition plan in question must pass a business-purpose test. Tax-driven arrangements are prohibited and therefore tax losses from the combining companies may not be passed to the surviving company.
Instead of using traditional merger and acquisition model, the parties may do corporate restructuring for the same purpose.
Dissolving a company
RUPS – Rapat Umum Pemegang Saham (the shareholder general meeting) holds the final say of a company being dissolved, based on Article 89 of the Company Law (Undang – Undang no. 40/2007).
Following the RUPS, the company has to prepare a liquidation financial report, which has to be prepared by a certified public accountant.
Using the liquidation financial report, the company has to submit its corporate income tax return. In parallel to the aforementioned the company has to apply for a revoking letter of its tax id (NPWP).
Once the company tax return has been accepted, the tax office will do the tax audit in order to calculate all the potential tax liabilities, before revoking the tax id takes place.
For taxation purpose, Market value is being used for transactions between related parties, remaining inventories of taxable goods upon a company’s dissolution, and sales of (non-inventory) assets originally not for sale.
Legal Documentation
At all time, each of the above mentioned business process should be well documented by a Corporate Lawyer together with the appointed Project Leader (business consultant). An experienced business consulting firm such as KIB Consulting can help strategize and implement all the above process starting at the initiation phase --- business valuation.
Bambang B Suwarso, 26 December 2018
