SINCE the onset of the Covid-19 pandemic last year, many businesses have been faced with challenges to sustain their operations. On the flip side, opportunities abound in certain sectors, and some have experienced exponential growth and prospered as a result of the pandemic.
Regardless of which side of the coin you are on, restructuring or reorganisation of businesses, mergers, and acquisitions can be a strategy to achieve growth and efficiency, improve financial position or put your house in order. In doing so, tax issues must be given weight along with other factors. Unintended tax consequences can be the stumbling block in some situations.
Capital vs revenue gains
In difficult times, companies resort to divestment of assets to sustain their business. Is the gain subject to tax in Malaysia?
The distinction between revenue or capital gain can be a controversial one as the former will be subject to income tax while the latter is generally exempt from tax unless Real Property Gains Tax (RPGT) applies.
It is always a question of fact and depends on a number of factors such as the initial intention of acquiring the asset, the frequency of the transactions, the holding period, circumstances leading to the disposal, and source of funding.
Building a strong case to support your analysis is key in defending your position if you are challenged by the tax man.
Tax costs
Identifying the tax costs associated with the restructuring options is important as the tax bill can be hefty and may impact the desired outcome if cost-saving is the driving factor behind the restructuring exercise. For example, stamp duty costs can be more than 10 times higher in a transfer of business as opposed to transfer of shares. Transfer of properties or shares could have potential RPGT implications. It is worthwhile to examine whether exemptions or reliefs are available, eg consider stamp duty and RPGT reliefs for internal restructuring exercises.
Under the Penjana economic stimulus package, stamp duty exemption is given to small and medium enterprises (SMEs) on any instruments executed between July 1, 2020 and June 30, 2021 for merger and acquisition (M&A) activities.
Debt restructuring
Banks have been considerate in offering loan moratoriums and refinancing to assist affected businesses to tide over the crisis. The tax treatment on deductibility of interest expense has to be considered carefully in light of these changes. The interest expense must be due and payable, and not a mere provision set aside in the accounts before a tax deduction can be claimed.
Equally important is the purpose of the financing taken because no tax deduction can be claimed for non-business usage of the loans. An erroneous claim could result in penalties should this be discovered during a tax audit.
Historical taxes
M&A activities have been on the rise in certain sectors as companies look towards inorganic growth to capture more market share. If you are contemplating acquiring a company, ensure that you have done sufficient due diligence to identify potential tax liabilities and have proper warranties and indemnities to protect you as a new shareholder against any historical taxes. The law has no mercy when it comes to enforcing payment of outstanding tax liabilities notwithstanding the change of shareholders.
Purpose
Tax benefits may arise in the course of restructuring your businesses and these include utilisation of tax losses when businesses are streamlined, and tax incentive claims for qualified activities.
Do make sure that the restructuring exercise is a commercially-driven transaction and not for the sole purpose of achieving tax benefits. Otherwise, the tax man has the right to disregard such arrangements and deny any tax benefits arising therefrom. In addition, having a robust record-keeping practice in place to support all transactions would save you time in managing tax audits should the tax man knock on your door.
A minimum seven-year record-keeping requirement is provided under the Income Tax Act 1967.
Proposals
To assist businesses, consideration can be given by the government to expand the stamp duty exemption for M&As carried out by SMEs (under the Penjana stimulus package) to include all businesses as the current crisis has also forced larger businesses to restructure to stay afloat and remain competitive.
In addition, an RPGT exemption should be given to restructuring or M&A activities carried out before Dec 31, 2021 as RPGT cost may arise in many M&A activities or restructuring projects.
Clarity on the definition of “operational efficiency” to qualify for stamp duty relief under Section 15A of the Stamp Act, 1949 is needed so that taxpayers understand the requirements.
In every crisis, there are opportunities and, therefore, it’s timely for companies to look into their organisation and see if there are any inefficiencies or opportunities. As Deepak Chopra said: “All great changes are preceded by chaos”.
Covid-19 has changed the economic and business landscape, and companies need to transform to thrive. It is hoped more measures will be announced in Budget 2022 to facilitate M&As and restructuring of businesses to propel Malaysia to recovery.
This article was contributed by MICPA member and Deloitte Malaysia tax leader Sim Kwang Gek.
