Exemptions from tax for business reorganisations – Need of the hour?

Muscat: Globally, downward cycles in economies like the current one in the region caused by low oil prices, have led to an increase in merger and acquisition activity. Given the fact that there will be fixed operating costs that cannot be reduced or controlled beyond certain level, loss in revenue would lead to net operating losses for many businesses. This forces consolidation and influences business groups to restructure or reorganise the way they operate.
Business reorganisation takes various forms such as merger, acquisition, demerger or spin-off, joint venture, buy back of securities, etc. Further, they could be external involving third parties or just internal group restructuring. The current tax laws in Oman do not contain any specific rules governing the taxability of business reorganisation. Therefore, we have to rely on the general principles of taxation elucidated under the Tax Law and look into the practices of the Oman Tax Authority.
Under the current tax laws, merger between two companies even if it is only a group restructuring involving no third parties is considered as a taxable event wherein the merging entity is required to pay taxes on the gains, if any, arising on transfer of its business/assets to the acquiring entity. Gains are calculated as a difference between the sale price (fair value on the date of transfer would be taken if sales price is under-declared because of related party transactions), and the tax base of the asset transferred.
Consider a scenario where a holding company holds two wholly-owned subsidiaries operating in Oman. The holding company decides to merge these two entities into one single company with a view to consolidate its business and in order to reduce operational costs. Although there is no change in shareholding or ownership of these entities, still the merger transaction will give rise to a taxable event in Oman in the absence of exemptions to group re-structuring. This is notwithstanding that the accounting for internal reorganisations would mostly be carried out at book value.
At the time of finalising the assessment, which may happen after few years from the date of filing the tax return, the tax authority would deem a gain in the tax assessments of the merging entity. Further, since the acquiring entity would have accounted for the transfer of the net assets only at book value,it would not get any deduction for goodwill. The situation is aggravated where the merging entity holds land that it acquired several years ago. The tax authority would deem a gain on such transfer by applying the fair value on the date of transfer even though the land continues to be held by the same group and the gain is not realised by the group.
Business reorganisations have become a very important aspect with the increasing level of competition and reduction in profit margins.The prospect of facing significant tax liabilities will often be a deterrent to a reorganisation, particularly for smaller businesses. Even government companies face these tax issues when they attempt to restructure their operations.The commercial justification to reorganise the business assets, activities or shareholders' interests within a company should not be dampened by potential tax liabilities.
Many countries globally have specific rules for tax-free reorganisations. Time has come for Oman to consider incorporating specific tax rules for business reorganisations providing for a tax neutral position where there is no change in economic ownership of the restructured entities.
Similar rules could be extended to even external reorganisations meeting specific criteria. This will go a long way in encouraging consolidation, efficiencies being achieved and shareholder value being increased. The tax authority will also benefit as business reorganisations invariably lead to more profits and therefore more taxes.