Mergers & Acquisitions in Nigeria: What are the pre-nuptial tax 'considerations?

Mergers and acquisitions (M&A’s) are generally defined as forms of business combinations that either result in formation of new companies or assimilation of existing businesses by others.

Nigeria witnessed an unprecedented wave of mergers and acquisitions in its banking sector in the post-1995 and 2009 periods as a result of regulatory mandates issued by the Central Bank of Nigeria, aimed at strengthening the capital base of Nigerian Banks.

A similar experience took place in the Nigerian Capital Market in the last quarter of 2013 following new capitalization requirements announced by the Security and Exchanges Commissions for capital market operators. The insurance sector also witnessed similar wave of regulatory triggered recapitalization based on the directive issued by National Insurance Commission (NAICOM) in 2007.

M&A’s are outcomes of some economic decisions. Accordingly, there are various economic theories which seek to unravel the diverse underlying factors for M&As. These include

• Efficiency theory – the creation of more wealth for shareholders
• Monopoly theory – the quest for increased market power and reduced competition
• Empire-building theory – the building drive of business managers

No doubt, the prevailing local economic situations in a country can also create favourable conditions for M&A activities.

In Nigeria, the recent revaluation of Nigeria's Gross Domestic Base (GDP) and the devaluation of the Naira as a response to the economic crisis arising from the crash in crude oil prices and the attendant inevitable reduction in the receipts accruing to the Nigerian government, may have unwittingly set the stage for another wave in M&A transactions. The continued financial pressures exerted on local businesses appears to be making them attractive candidates for mergers, takeovers and acquisitions, by both foreign companies and other local brands with time-tested strong financial capital strength.

Experience has shown that in many instances, counter-parties to business combinations sometimes fail to evaluate the tax implications of the proposed business combination pre and-post the  transaction. It is therefore useful to raise the following tax considerations for M&A purposes:

• What is the target's level of tax compliance with respect to companies income tax (CIT), tertiary education tax (TET), capital gains tax (CGT), information technology levy and payroll related taxes?
• What are the available tax assets (e.g. unrelieved capital allowances, unabsorbed tax losses, unutilized WHT credits etc.) on the target books
• What is the quantum of non-allowable tax expenses and/or deductions in the target's tax position e.g. filing fees, stamp duties etc?
• What are the prospects for the applicability of the commencement and/or cessation tax rules post-combination given their potential for double taxation?

The commencement/cessation rules can be waived for the company under the approval of the Federal Inland Revenue Service. This enables counterparties to manage the incidence of double tax on over lapping profits and the cumbersome computation of taxable profits under both rules.

An acquiring party may be able to take advantage of the tax benefits available under Nigeria's tax laws in relation to interest payments if it finances the business combinations through loan facilities. Interest expenses are specifically allowable as tax deductions under the relevant tax legislation.

The above assessment assists counterparties to forestall inheriting unwieldy tax burdens in the surviving and/or resulting company after the ink has dried on the nuptial papers.

It is the responsibility of the counterparties to ensure that the M&A process is executed in such a manner that ensures that available tax benefits or assets in the target's books can be utilized by the surviving or resulting company after completion of the business combination. This inevitably implies that competent and/or trusted advisors must be engaged and their inputs sought throughout the M&A value chain. For instance, loss reliefs may be preserved and utilized by the surviving and/or resulting company depending on the manner the M&A is conducted otherwise, the parties may be exposed to challenge by tax authorities for “loss trafficking”.

There is the general thinking that the M&A process would further enjoy favourable tax conditions where Nigeria amends her tax laws to provide for group tax and thereby make possible group loss relief, joint VAT registration, disposal gains, etc. for companies that are within a consolidated group. The non-tax considerations involved in an M&A decision has been reviewed in our earlier article titled, “Basic Tax and Non-tax Considerations for Merging Entities in Nigeria” (The Guardian, 2 December 2013).

Whatever the economic theory or driver for the M&A decision, the focal point of the M&A plan and attendant costs is the consumer. The ultimate aim is to compete better for his and/or her attention and patronage. The consumer is king' so says Mario Monti (2000). Indeed, 'the struggle for superiority in the market place {howsoever orchestrated} is defined by the objective to persuade consumers on the grounds of quality and value to make a particular purchase” (Sonya Willimsky, 1997). We are all consumers, and we are all taxpayers (Mario Monti, 2000)