Tax Risks That Cultural Enterprises Need To Guard Against Mergers And Acquisitions

In the context of promoting industrial pformation and upgrading and enhancing cultural soft power in the country, the cultural industry continued its boom in the first half of 2014 and continued to push up.

According to the incomplete statistics of the related paction database, in the first half of the year, only about 125 mergers and acquisitions have occurred in the domestic cultural industry, with a total paction amount of 100 billion yuan.

The merger and reorganization of cultural enterprises is undoubtedly one of the most important issues. Based on the long-term experience of assisting enterprises in mergers and acquisitions, tax planning and tax risk control, the author holds that the following six major tax risks should be taken into consideration in cultural enterprise mergers and acquisitions.

Risk 1: tax issues left over from history

In the case of equity acquisition, all the historical tax issues of acquired company will be inherited by new shareholders. In practice, the historical legacy of tax problems usually includes false invoices, tax declaration irregularities, tax evasion, and arrears of taxes.

Recently, we encountered a case. In 2012, a cultural company in Beijing bought 55% of the shares of another media company by means of equity acquisition. In early 2014, the media company was found by the tax inspection agency that it had an annual tax evasion problem from 2011 to 2012. It needed to pay taxes and the arrears of up to 26 million yuan, and at the same time impose 1 times administrative penalties. The economic losses caused by the tax inspection could only be borne by the new shareholders because the paction between the buyer and the original shareholder was not related to the historical tax issues.

[risk two] risks arising from unreasonable tax structure

Especially for cross-border mergers and acquisitions, corporate structure tax planning is very important. Due to the different tax policies between different countries (regions), the M & a structure will lead to quite different tax differences. For example, if an American company purchases a Chinese company, if it chooses to buy directly, after assuming that a year's profit after tax is 10 million dollars, it should pay 1 million dollars in income tax. If it is indirectly acquired through a company in Hongkong, the income tax will be $500 thousand.

[risk three] lack of risk in tax planning.

Merger and acquisition pactions can be classified into two kinds: equity acquisition and asset acquisition. Among them, the tax risk of equity trading acquired company will be inherited by new shareholders, and asset pactions will not.

At the same time, the choice of asset pactions will be faced with the tax burden of value added tax, business tax and land value-added tax arising from changes in the property rights of movable property and real estate.

Comparatively speaking, equity pactions generally do not need to pay turnover tax and land value-added tax.

[risk four] failure to declare taxes in accordance with regulations

Since 2011, capital pactions have been the focus of the State Administration of Taxation, including inspection of income items and deductions.

At the same time, the investigation of indirect tax avoidance initiated by indirect equity pfer is becoming more frequent.

Recently, the State Administration of Taxation issued the notice on strengthening the management of the enterprise income tax collection of equity pfer (general tax Letter No. [2014]318). In the notice, it put forward the practice of "chain dynamic management of equity pfer", "centralized management of expert teams" and "strengthening information construction". In the course of mergers and acquisitions, cultural enterprises will continue to raise their tax compliance risks.

[risk five] special tax treatment risks caused by non-compliance

Special tax treatment can achieve the effect of deferred tax and save cash flow.

According to the regulations, the merger and reorganization of enterprises should apply special tax treatment to meet the requirements of "no tax avoidance purposes", "acquisition of assets or equity is greater than 75%", "equity payment amount is not less than 85% of the entire paction" and so on 5 conditions. At the same time, eligible enterprises need to go to the tax authority for record.

In practice, some enterprises conformed to the above five conditions, but they did not file a record, nor did they make any tax returns. This situation was found to be tax evasion by the Inland Revenue Department.

Recently, the opinions issued by the State Council on further optimizing the market environment for mergers and acquisitions of enterprises (Guo Fa [2014]14) put forward: "reducing the acquisition of equity (assets) accounts for the proportion of all equity (assets) of acquired enterprises, expanding the scope of application of special tax treatment policies", and this policy is expected to enable more mergers and acquisitions cultural enterprises to apply special tax treatment to the planned cultural enterprises.

[risk six] the risk of tax adjustment in indirect equity pfer.

In recent years, the international division of the State Administration of Taxation directed against indirect equity pfer.

More and more cases are being adjusted. The most common case is the pfer of shares of mainland subsidiaries by foreign companies through the pfer of shares of Hongkong holding "empty shell" companies.

According to the Circular of the State Administration of Taxation on strengthening the management of enterprise income tax on the pfer of shares of non resident enterprises (the tax letter [2009]698), if the non resident enterprises indirectly pfer the shares of their Chinese residents through the pfer of shares of a non resident intermediate holding company, if the intermediate is in the middle,

The existence of the company is merely a lack of commercial essence to avoid tax liability. The Chinese tax authorities can use the general principle of anti avoidance to negate the existence of the intermediate holding company.

In view of the above six mergers and acquisitions risks, I believe that in the process of mergers and acquisitions, cultural enterprises can control and resolve potential through three steps.

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Step 1, actively conduct tax due diligence before mergers and acquisitions, identify timely and fatal tax defects hidden in mergers and acquisitions companies, so as to make timely judgement: whether pactions should continue and whether paction prices need to be reassessed.

At the same time, through tax due diligence, it is also beneficial for the acquirer to fully understand the real operation of the acquirer and find opportunities for future tax optimization.

Step two, plan the tax structure and paction mode of mergers and acquisitions.

In the merger and reorganization of cultural enterprises, we should choose the optimal tax structure and paction mode according to the company's strategy and operation conditions. For example, through prior planning for special tax treatment, we can save a huge amount of cash flow and ensure the smooth progress of mergers and acquisitions.

Step three, enhance the level of tax risk management of mergers and acquisitions.

Capital paction project is the focus of tax inspection at present. In accordance with the relevant documents, timely declaration and payment is also a basic tax management work that cultural enterprises need to do well.