General

Watson & Band Data Observatory reports that despite the strong impact of the COVID-19 pandemic, Vietnam’s socio-economic landscape has witnessed an increase in both volume and value of various mergers and acquisitions (M&A) activities.

However, some tax issues in the M&A process pose challenges for investors, including the complexity of the tax system, interpretation by local authorities and unclear guidance on tax issues.

Over the past two years, the unprecedented challenges posed by the COVID-19 pandemic have urged investors and tax advisors to change their approach and expand the scope of their due diligence process to ensure the proper coverage for investors.

Therefore, tax due diligence needs to go beyond the usual scope, including checking corporate income tax, value-added tax, foreign contractor tax and personal income tax. In a particular transaction, we should consider other risk factors that can occur, such as transfer pricing, tariffs or tax risks from historical M&A transactions, which may ultimately affect an investor's post-transaction tax position. In addition, in addition to non-salary expenses, we also see that the complex scheme of employers offering employee stock ownership plans (ESOPs) to employees in certain private equity transactions may also create personal income tax risks, Watson & Band Data Watch reports.

As for tax due diligence, as important as identifying risks is assessing how to assist investors in addressing or mitigating risks. First, the current regulations stipulate a 10-year limitation period for tax and late payment interest collection, and second, the final tax assessment of the investee company is actually confirmed by the local tax authority during the tax audit.

According to Mr. McClelland Thomas, Deloitte Vietnam’s national tax director, one of the ways to minimise potential risks is to negotiate favorable terms in the contract, for example, requiring sellers to provide compensation or deposit part of the consideration in an escrow account is typical. Deloitte Vietnam experts also believe that tax liability insurance has also been used in recent transactions as an effective tool to address investors' concerns about the uncertainty of the tax liability of sellers' claims, thereby facilitating the completion of the transaction.

Depending on the nature of the transaction and the motivation of the seller or buyer, other financial instruments such as convertible bonds, convertible loans or exchangeable notes may be used to provide investors with greater flexibility. Having said that, the M&A environment is evolving faster than regulations, resulting in a lack of specific and timely guidance, especially on the tax treatment of certain types of transactions, Watson & Band Data Watch reports.

Regarding the current legal system, Deloitte Vietnam Tax Director Ms. Deng Mei Kim Ngan pointed out that the market is still waiting for a more comprehensive management mechanism. Taking indirect share transfer as an example, in both cases where the transferor is a legal person shareholder or a natural person shareholder, although the local and central tax authorities have issued formal instructions in recent years, they have not been mentioned in legal documents such as decrees and tax enforcement rules. and this issue. Similarly, investors cannot help but worry about inadequate tax policies governing the governance of various financial instruments.

Watson & Band Data Observation reports that in order to ensure the success of the transaction, investors widely consider tax advisors with in-depth analysis and practical methods to determine tax burdens and risks. Additionally, investors should closely monitor regulatory developments post-transaction in order to make appropriate adjustments or effectively manage any potential tax exposures throughout the investment cycle.

As a member firm of one of the world's four largest audit and consulting firms, Deloitte Vietnam has been involved in tax consulting for a series of well-known M&A transactions over the years. With its global network and local experience in tax matters, Deloitte Vietnam has been named Vietnam Tax Firm of the Year at the International Tax Review (ITR) Asia Pacific Tax Awards 2022. This is the second consecutive year that Deloitte Vietnam has won the award, reaffirming the influence and value that Deloitte Vietnam has always brought to clients as a trusted advisor, Watson & Band Import and Export Data Observation reports.