Home Accountant An Accountant’s Perspective – Restructuring in Tough Times

An Accountant’s Perspective – Restructuring in Tough Times

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SINCE Since the start of the Covid-19 pandemic last year, many businesses have faced challenges maintaining their operations. On the flip side, opportunities abound in some industries, and some have grown exponentially and prospered in the aftermath of the pandemic.

Still on which side of the coin you are, corporate restructuring or reorganization, mergers and acquisitions can be a strategy to achieve growth and efficiency, improve the financial situation or get your house in order. In doing so, tax issues must be taken into account along with other factors. Unintended tax consequences can be the stumbling block in some situations.

Capital vs. income gains

In difficult times, companies resort to the sale of assets to sustain their activity. Is the gain taxable in Malaysia?

The distinction between income and capital gains can be controversial as the former will be subject to income tax while the latter are generally exempt from tax, unless the Real Estate Gains Tax (RPGT) applies.

This is always a question of fact and depends on a number of factors such as the original intention to acquire the asset, the frequency of transactions, the period of ownership, the circumstances leading up to the disposal. and the source of funding.

Building a solid case to back up your analysis is essential in defending your position if you are challenged by the IRS.

Tax charges

It is important to identify the tax costs associated with restructuring options, as the tax bill can be onerous and can impact the desired outcome if cost reduction is the determining factor in the restructuring exercise. For example, stamp costs can be more than 10 times higher when transferring a business than when transferring shares. The transfer of properties or shares could have potential implications for RPGT. It is worth considering whether exemptions or reliefs are available, for example considering stamp duty and RPGT relief for internal restructuring exercises.

As part of Penjana’s economic recovery plan, a stamp duty exemption is granted to small and medium-sized enterprises (SMEs) on all instruments executed between July 1, 2020 and June 30, 2021 for merger and acquisition activities ( MY).

Debt restructuring

Banks have been cautious by offering moratoriums on loans and refinancing to help affected businesses weather the crisis. The tax treatment of interest expense deductibility needs to be carefully considered in light of these changes. Interest expense must be due and payable, and not just a provision made in the accounts before a tax deduction can be claimed.

Equally important is the purpose of the financing taken, as no tax deduction can be claimed for non-commercial use of the loans. An erroneous claim could result in penalties if this is discovered during a tax audit.

Historical taxes

M&A activity has increased in some industries as companies turn to inorganic growth to gain more market share. If you are considering acquiring a business, make sure that you have done your due diligence to identify potential tax liabilities and that you have the appropriate guarantees and indemnities to protect yourself as a new shareholder against any historical taxes. The law has no mercy when it comes to imposing the payment of unpaid taxes notwithstanding the change of shareholders.

Goal

Tax benefits may arise during the restructuring of your businesses and these include the use of tax losses when businesses are rationalized and tax incentive claims for qualifying activities.

Make sure that the restructuring exercise is a business transaction and not for the sole purpose of obtaining tax benefits. Otherwise, the tax authorities have the right to disregard these provisions and to refuse any resulting tax benefit. In addition, having a strong record-keeping practice in place to support all transactions would save you time in managing tax audits should the IRS knock on your door.

A minimum record-keeping requirement of seven years is provided for in the Income Tax Act 1967.

Proposals

To help businesses, the government may consider extending the stamp duty exemption for mergers and acquisitions carried out by SMEs (as part of the Penjana recovery plan) to include all businesses, as the current crisis has also forced large companies to restructure to stay afloat and stay competitive.

In addition, an RPGT exemption should be granted for restructuring or merger and acquisition activities carried out before December 31, 2021, as RPGT costs may arise in many merger and acquisition activities or restructuring projects.

There is a need to clarify the definition of “operational efficiency” to qualify for stamp duty relief under Section 15A of the Stamp Act 1949 so that taxpayers understand the requirements.

In every crisis there are opportunities and therefore it is time for companies to take a look at their organization 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 businesses must transform to thrive. It is hoped that more measures will be announced in the 2022 budget to facilitate mergers and acquisitions and corporate restructuring to propel Malaysia towards recovery.

This The article was written by Sim Kwang Gek, Member of MICPA and Tax Leader of Deloitte Malaysia.

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