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Sunday, 19 October 2014

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Mergers and acquisitions:

Guidelines on tax incentives

The Central Bank with the concurrence of the Ministry of Finance and Planning issued guidelines on the ascertainment of cost of acquisition or merger as a qualifying payment and on the claimability of any unabsorbed input credit in terms of the Inland Revenue Act and Value Added Tax.

These guidelines are applicable to licensed banks, licensed finance companies and specialised leasing companies and are effective from April 1, 2014.

These guidelines specify the items of costs in relation to the acquisition of a business as a going concern or the acquisition of shares or the merger with another bank, finance or leasing company.

Accordingly, the cost of acquisition will include purchase consideration, professional fees, documentation fees, expenditure incurred on IT systems, human resource related costs, advertising costs and infusion of capital at the time of acquisition or merger.

The costs will be permitted to be deducted from the year of assessment of the acquisition or merger subject to a maximum limit of 1/3 of the assessable income.

However, if the assessable income of the acquiring financial institution is less than Rs. 300 million, the qualifying payment can be deducted up to the level of assessable income and any amount remaining could be carried forward and set off against the future assessable income.

The transfer of shares due to the acquisition or merger will be exempted from Stamp Duty by an Order published in the Gazette.

The guidelines will further promote the financial sector consolidation process and ensure the expeditious completion of on-going mergers and acquisitions.

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