The current state of M&A in Latin America and beyond

Cristina Sansonetti Hautala
KPMG, San Jose
csansonetti@kpmg.com

Report on a panel discussion at the 16th IBA/ABA US and Latin America Tax Practice Trends Conference in Miami

Thursday 13 June 2024

Session Co-Chairs
Devon Bodoh Weil, Gotshal & Manges, Miami
Ricardo Bolan Lefosse Lefosse, Sao Paulo

Speakers
Adalberto Valadez Nader, Hayaux & Goebel, Mexico City
Bruna Marrara Machado Meyer, Sao Paulo
Daniela Rey Bruchou & Funes de Rioja, Buenos Aires
Rodrigo Stein Cuatrecasas, Santiago
Laura Williams PwC, Washington, DC

Introduction

The panel focused on highlighting the specificities applicable in different jurisdictions regarding mergers and acquisitions (M&A) operations, as well as the relevant trends in each and the region-specific challenges.

The discussion delved into how each country in Latin America has fiscal regulations and international treaties impacting cross-border transactions, emphasising the complexity and associated costs, particularly given the limited network of double taxation treaties and anti-abuse rules implemented under the Base Erosion Profit Shifting (BEPS) Plan.

Furthermore, local tax policies and tax rates influencing the structuring of M&A transactions were analysed, with an emphasis on how companies must adapt to optimise tax efficiency. The costs involved, such as capital gains taxes and transfer fees, and how these affect valuation and price negotiation in transactions were explored.

Panellists also discussed specific challenges in post-transaction tax planning, highlighting the importance of integration and restructuring to optimise long-term tax burdens and maximise tax benefits.

Panel discussion

Taxation plays a crucial role in the M&A market in Latin America. The panel discussions focused on analysing the most relevant aspects regarding direct and indirect taxes applicable in each country, including stamp duty, financing schemes and the level of adoption of new trends to mitigate tax contingencies through specialised transaction insurance.

Panellists examined the tax effects applicable to these operations in their jurisdictions, as well as the potential impacts that could arise if proposed tax reforms were approved, particularly in Brazil. The discussion emphasised highlighting the differences in the tax treatment applicable to asset purchases versus share purchases.

Indirect taxes

Devon Bodoh and Ricardo Bolan emphasised the importance of recognising that each Latin American country regulates these transactions differently, necessitating a detailed review of the tax implications in each jurisdiction for reorganisation processes or acquisitions, spin-offs or mergers.

Daniela Rey and Bruna Marrara underscored differences in structuring businesses as asset sales or share sales from the VAT perspective, noting that share sales are generally not subject to VAT, whereas asset sales may trigger VAT depending on the assets transferred.

Similarly, Rodrigo Stein addressed the applicable implications in Chile, noting that Chile does not tax share transfers with indirect taxes. Stein mentioned a pending bill including an anti-abuse provision that could reclassify share sales as asset sales for VAT purposes under specific conditions outlined in the bill.

In Mexico, similar principles apply. Share sales are generally not subject to indirect taxes, whereas asset sales may be taxed, with exceptions, as indicated by Adalberto Valadez. Valadez noted that mergers of companies in Mexico can be executed on a tax-neutral basis, provided formal and substantive requirements are met.

Regarding stamp duty, Rey pointed out that every sale contract is subject to stamp duty in Argentina. There is a trend in Argentina to structure transactions through the signing of two documents, separating the offer and acceptance, which falls outside the taxable event scope, resulting in lower transaction costs. Brazil does not levy stamp duty but may apply other federal indirect taxes.

In Chile, stamp duty applies in cases of share purchases with financing, while Mexico and the United States do not tax these transactions with stamp duty.

Laura Williams discussed the treatment applicable in the United States, explaining that share acquisitions may be subject to excise tax. The rate currently stands at 1 per cent, but there is a pending bill that could increase it to 4 per cent.

Direct taxes applicable to the sale of shares or assets by a non-resident

The sale of shares or assets is generally subject to the payment of direct taxes. Depending on the jurisdiction of the assets, additional taxes may also arise from inflation or exchange rate differentials, requiring further analysis.

Rey emphasised that in Argentina, the transfer of shares or assets is subject to capital gains tax, with the rate and calculation base differing depending on the type of business. Usually, the sale of assets requires the incorporation of a local vehicle. It is possible to merge local entities without triggering capital gains tax if it is a reorganisation and substance requirements are met. This rule only applies when the reorganisation is done locally, so international reorganisations involving the transfer of assets located in Argentina may incur taxes, unless a double tax treaty (DTT) applies, including specific clauses like those in treaties with Spain, Chile and the Netherlands.

Similarly, Brazil imposes a capital gains tax, which varies depending on the residency of the seller. If the seller is a resident of a low-tax jurisdiction, the applicable rate is 15 per cent.

Stein referred to Chile, specifically mentioning recent cases from the Supreme Court where they analysed the interpretation of capital gains clauses. Valadez discussed the Mexican case, highlighting Mexico’s extensive network of DTTs and noting that, with the entry into force of the multilateral instrument (MLI) in 2024, access to DTTs becomes more complex due to included substance clauses.

Regarding the US, Williams discussed the applicable accreditation rules when foreign taxes apply and emphasised that the US has a limited network of DTTs in Latin America. Mexico, Venezuela and recently Chile have a DTT with the US.

In all cases, it is necessary to analyse whether a DTT applies.

Funding

Bolan briefly mentioned the limitations and challenges in the region regarding the deductibility of interest expenses in the case of share purchases. Overall, panellists from Mexico, Chile, Brazil and Argentina concluded that, generally, financing expenses must meet certain requirements in all countries, one of which is being associated with the generation of taxable income. Additionally, in some countries like Chile, tax authorities have scrutinised financing structures formalised through group companies.

Other points of analysis included interest limitation rules, thin capitalisation rules, withholding taxes applicable to interest payments to non-resident creditors and access to DTTs.

From the presentations, it can be concluded that in Latin America, although with exceptions and particularities, financing operations follow a similar pattern.

Tax insurance

The panel began its final section with Bodoh noting that, in the US, there is a trend towards securing asset or share purchase deals with insurance. This has led expert advisers in these negotiations to also undergo training regarding operations covered by insurance and exclusions. It is crucial to have clarity on these concepts to properly advise clients. Williams reaffirmed the use of insurance in deals in the US.

However, panellists from Mexico, Argentina, Brazil and Chile concluded that such insurance products have not been widely adopted in Latin American markets, and there is no specific regulatory framework for them. Additionally, implementing these options can incur additional costs due to insurance premiums, which are subject to remittance taxes when paid abroad. Given the limited network of DTTs in Latin America, this represents an additional cost.

In general, the following mechanisms are commonly used to mitigate tax contingencies:

• due diligence;
• tax indemnities;
• representations and warranties; and
• escrow accounts (in seller financing transactions, escrow accounts are used for unforeseen liabilities that may emerge during the financing period).

Conclusion and final remarks

In conclusion, the panellists’ discussion highlighted the following key aspects:

1. local regulations and international treaties: the complexity of taxation can increase due to specific local regulations and international treaties that affect the taxation of companies involved in cross-border transactions. Each country in Latin America has its own peculiarities that must be individually analysed. Given the limited network of DTTs, withholding tax rates often represent a significant cost. Most jurisdictions have implemented the BEPS Plan, making access to treaty networks more complex with the application of anti-abuse rules;
2. transaction structuring: local tax policies and tax rates affect how M&A transactions are structured. Companies must consider the tax benefits of different structures (eg, mergers and asset acquisitions versus share acquisitions) to optimise the tax efficiency of the operation;
3. transaction costs: taxes on capital gains, transfer taxes and other fiscal costs can impact the total cost of an M&A transaction. Companies evaluate these costs as part of valuation and price negotiation;
4. post-transaction tax planning: after an M&A transaction, companies must carefully plan integration and restructuring to optimise the long-term tax burden, including aspects like consolidating tax bases and optimising tax benefits; and
5. changes in tax policies: changes in local tax policies can significantly impact foreign investment attraction and M&A activity in the region. Companies need to monitor and adapt to these changes to mitigate tax risks.

In summary, taxation in Latin America is a critical factor in the M&A market, influencing everything from initial transaction structuring to post-merger tax planning. It must be carefully considered by companies involved in such operations to navigate the complexities and ensure compliance while optimising financial outcomes.