Mergers – Procedure for obtaining Consent of the FIRS & Tax Considerations

Introduction:

By virtue of the Federal Competition and Consumer Protection Act, 2018, a merger occurs when one or more undertakings directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another undertaking. A merger may be achieved through the purchase or lease of shares, interest, or assets of one of the merging parties by the other; (ii) amalgamation or other combination of the undertakings of the merging entities; or (iii) joint venture.

For a merger to be fully consummated, the consent of relevant agencies must first be sought and obtained. One such agency is the FIRS.

Approval of the Federal Inland Revenue Service (FIRS):

Section 29(12) of the CITA in CapC21, LFN, 2004 (as amended) makes it a prerequisite to first obtain the direction and clearance of the FIRS with respect to taxes payable under the CITA or Capital Gains Tax ACT (CGTA) before undertaking the merger, take-over, transfer or restructuring of any business. As a result, no merger transaction can be fully executed and actualized without parties to the restructuring obtaining the approval of the FIRS.

To obtain the approval of the FIRS for a merger transaction, the merging entities are required to submit to the Board copies of the scheme of merger and scheme of arrangement on the consolidation request together with a due diligence report covering aspects of taxes of the integrating entities. In the case of a merger between related entities involving sale or transfer of assets from one of the merging entities to the other, the FIRS while acting pursuant to section 29(9)(c)(i) of the CITA may in addition to the documents mentioned above require either of the merging entities to guarantee or give security to its satisfaction for payment in full of all tax due or to become due by the company which is selling or transferring such asset or business.

Tax Implications of mergers:

Upon obtaining relevant approvals and concluding a merger process, certain tax issues will arise depending on the outcome of the merger. While some mergers result in the formation of a new company, some others may result in the continuation of the consolidated business by one of the merging parties, in its name or under a new name. In either case, one or more of the merging entities may undertake a cessation of business.

The tax implications of mergers are highlighted below:

Capital Allowance

Where a new company emerges from a merger process, such entity must record transferred assets, liabilities, and reserves at their carrying balances (Tax Written Down Value) and not at fair value. As such, any allowance (be it an investment, initial, or annual) already claimed by the absorbed company on the transferred assets can no longer be claimed by the newly emerged company.

Similarly, in the case where one of the merging entities continues the consolidated business of parties, the surviving company will not be allowed to claim investment and initial allowance on transferred assets. However, it may claim annual allowance on the Tax Written Down Value of the assets.

Unabsorbed Losses

Where a new company emerges from the merger process, such company cannot inherit unabsorbed losses and capital allowances of the absorbed companies. Although, an exception exists in cases where a newly emerged company is formed and such company carries on the same business previously carried on by absorbed companies. Where such occurs, the unabsorbed losses of the absorbed companies are deemed to be those of the newly emerged company.

However, in the case where one of the merging entities continues the consolidated business of parties, the surviving company cannot inherit the unabsorbed losses and capital allowances of the merging companies.

Annual Returns

Where a new company emerges from a merger process, it is expected to file its returns within eighteen months from the date of its incorporation or not later than six months after the end of its first accounting period, whichever is earlier.

Where one of the merging entities continues the consolidated business of parties, it is expected to file within six months after its accounting year end.

Cessation of Business:

Where one of the merging companies ceases to carry on business, the cessation rule will apply. Its assessable profits will be the amount of the profits from the beginning of the accounting period to the date of cessation and tax will be payable within six months from the date of cessation.

where the merging companies are connected, the FIRS may direct that the cessation rule should not apply.[1]

Conclusion:

Before entering a merger transaction, it is important to know the steps to be taken and the documentation to be filed with the tax authorities because failure to undertake a critical step may pose a threat to the consummation of the merger. Similarly, getting familiar with the tax implications of the various merger options will help with making an informed decision on the most suitable merger option to adopt.

Please do not treat the foregoing as tax advice as it is only an expression of our Tax Information Service. All enquiries should please be directed to our TaxThursday Desk at resources@taxaide.com.ng; +234 700 TAXAIDE or any of our following personnel:

	Adeola Adefuye Associate a.adefuye@taxaide.com.ng
	Bidemi Olumide Partner b.olumide@taxaide.com.ng