Tax AdvisoryTransaction AdvisoryJune 7, 2022by fieconMergers & Acquisitions in Africa: Kenya Tax Reform and its Implications on M&A Deals – (P3)

Tax

M&A activity in Kenya for the last three years saw key sectors deal closures and exits. The sectors included but not limited to;

  • Financial services sector; DE La Rue Kenya Ltd (a subsidiary of De La Rue Plc) wholly acquired by American Company, HID Corporation Ltd.
  • Banking sector; Kenya Commercial Bank (KCB) acquired National Bank of Kenya (NBK), Merger of NIC Group PLC and Commercial Bank of Africa Limited, Egyptian public listed Commercial International Bank acquired Kenya Mayfair Bank for USD 35 million capital injection and Access Bank PLC acquisition of Transnational Bank Plc for undisclosed amount.
  • Petroleum Sector: Under this Rubis Energie SAS acquired 100% previous stock exchange listed firm, Kenol-Kobil for a deal value of USD 350 million
  • Retail Sector: Adenia partners a PE firm, acquired majority stake investment in Quick Mart Ltd of investment fund of EUR 230 million.
  • Education Sector: Actus Equity through it’s subsidiary Actus Education Holding AB acquired 22.32% of the issued share capital of Riara Group of Schools, giving it a controlling stake.

The recent sanctions on Russia-Ukraine war have disrupted the global markets supply chain. It is therefore interesting to see how this will play out in M&A across Africa and Kenya in particular. On the other hand, the world is undergoing global tax reforms to implement domestic and international tax rules and instruments to address tax avoidance through BEPS (Base Erosion and Profit Shifting) Inclusive Framework action 1 to action 15. The BEPS 15 Actions include: digital economy, hybrids, CFC rules, interest deductions, harmful tax practices, treaty abuse, permanent establishment, transfer pricing (Action 8,9 & 10), BEPS data analysis, aggressive planning, transfer pricing documentation, dispute resolution and multilateral instrument.

In the recent proposed finance bill 2022, Kenya took a step to implement a domestic legal and administrative framework to impose and enforce country-by-country (CbC) reporting requirements as recommended by OECD. In addition to curb tax avoidance through BEPS action 4 of interest deductions, Kenyan government through enacted Finance Bill 2021 introduced Thin Capitalization which is part of GAAR (General Anti-avoidance Rules) to curb interest deductibility at 30% of EBITDA (Earnings before interest, tax, depreciation and amortization).

The inclusion of thin capitalization and country-by-country report as part of transfer pricing documentation as per BEPS action 13, has an implication on how M&A activity within Kenya and cross-border is to be structured. This is likely to result in Post M&A MNEs (Multi-National Enterprises) expanding their tax department to level up with the authority requirements and having the necessary transfer pricing documentation in place to guide their operations pre-and-post mergers and acquisition. In addition, in the financing acquisition stage using debt instruments shall be guided by thin capitalization rules and transfer pricing arm’s length principle in a situation where the M&A results in two related parties.

It is also important to note that there exist double taxation treaties that are currently in force, signed but not yet in force and under negotiation with various jurisdictions that can guide tax experts to exploit pre-and-post M&A activity. In light of the tax reforms in place, it is prudent to understand the Mergers and Acquisition approach and the tax decisions therein at a high level:

  • Due Diligence Phase: The tax diligence phase of the process requires investigation of any potential liability the target company is exposed to and necessary adjustments needed to comply with the tax regime in a given jurisdiction. Every effort should be made to ensure effective implementation of the steps necessary to control and reduce the economic risks assumed by the buyer post M&A.
  • The Structuring Phase: At this stage, the legal and economic shape of the deal is determined. The structuring phase of the process will have outlined an operational structure that can be used to maximize the tax benefits realized by the combined business enterprises; keeping in mind the thin capitalization rule and any anti-avoidance tax rules in place.
  • The Post-Deal Integration Stage: At this stage, efforts should be made to minimize the cost of pre-deal risks that are accepted by the buyer and to maximize opportunities inherent in deal structure. Global tax efficiency and territorial tax compliance is key to avoid impromptu audit by tax auditors that would derail business operations and maximizing of the shareholders return.

In summary, the changes in Kenya tax reforms in relation to thin capitalization, country-by-country and transfer pricing documentation compliance by MNEs should be approached as a transparency and accountability process that is geared towards maximizing shareholders returns; by reducing future contingent liabilities that could erode the gains made in M&A deals.

Author: Eddie Opiyo

Share