Post-Brexit Financial Landscape Implications for Cross-Border M&Arussonxiao
The effects of the United Kingdom’s departure from the European Union have been far-reaching, impacting business and the economy, as well as people on both sides of the English Channel and many aspects of their lives. In this article, we will explore the post-Brexit financial landscape and its implications for cross-border M&A, demonstrating how companies can adapt to this new environment.
The Impact of Brexit on Cross-Border M&A
Brexit has brought about a complex set of challenges for businesses on both sides of the English Channel, and its effects on cross-border M&A are profound:
- Regulatory Divergence: The most immediate and tangible impact is the divergence of regulations. The UK and EU no longer operate under the same regulatory framework, causing complexities in terms of compliance, accounting standards, and legal requirements for M&A transactions.
- Increased Transaction Costs: New customs and trade barriers have resulted in higher transaction costs and increased administrative burdens. Companies are grappling with added expenses and the need to navigate unfamiliar customs procedures.
- Uncertainty: The lengthy negotiation process and ongoing discussions about trade agreements have created a climate of uncertainty. This makes it challenging for businesses to plan and execute cross-border M&A transactions with confidence.
- Exchange Rate Volatility: The fluctuation of the British pound has added an additional layer of uncertainty. Exchange rate volatility can significantly impact the financials of M&A deals.
Different factors to address the Post-Brexit financial landscape
Adapting to the new regulatory environment is crucial for companies engaged in cross-border M&A between the UK and EU member states. The following strategies can help companies successfully navigate these challenges:
- Comprehensive Due Diligence: Thorough due diligence is paramount. Companies must evaluate the impact of Brexit on target companies and assess potential risks. This includes examining the target’s customer base, supply chain, and regulatory compliance.
- Legal Expertise: Engage legal experts with in-depth knowledge of UK and EU law. Their guidance is essential for structuring transactions that adhere to the specific regulations of each jurisdiction.
- Flexibility in Deal Structuring: Consider alternative deal structures to mitigate risks. For instance, staggered payments, earn-outs, or contingent consideration clauses can be used to address uncertainties related to post-Brexit financial performance.
- Supply Chain Management: Optimize supply chain operations to minimize disruptions. Companies may need to reconfigure their supply chains to account for new trade barriers, including customs declarations and potential delays.
- Consider Diversification: Diversifying the geographic scope of M&A activity is another strategic move. Companies may look beyond the UK and EU and explore opportunities in markets that are not directly affected by Brexit.
- Currency Risk Mitigation: To address exchange rate volatility, consider using financial instruments like currency hedges or forward contracts to protect against unfavorable currency movements.
- Continual Monitoring: Keep a close watch on the evolving post-Brexit landscape. Regulations and trade agreements are still subject to change. Companies should be prepared to adapt to new developments and ensure ongoing compliance.
- Internal Training and Communication: Equip your team with knowledge about Brexit’s impact and how to navigate the new regulatory environment. Effective communication and collaboration are essential for success in cross-border M&A.
Case Study: Glencore’s Acquisition of UK Agricultural Trader
A real-world example of a successful cross-border M&A adaptation is Glencore’s acquisition of UK-based agricultural trader Viterra in 2012. The deal was finalized before Brexit but illustrates principles that remain relevant:
- Thorough Due Diligence: Glencore conducted meticulous due diligence to understand the regulatory environment in which Viterra operated. They examined the potential impact of various scenarios, including changes in trade agreements and export regulations.
- Customized Deal Structure: Glencore structured the deal with flexibility in mind. They agreed to an initial payment with contingent consideration, dependent on certain financial milestones and the outcome of regulatory changes post-acquisition.
- Supply Chain Optimization: Recognizing the importance of a streamlined supply chain in the agriculture industry, Glencore invested in infrastructure improvements to optimize the movement of goods. This allowed them to minimize disruptions post-acquisition.
- Ongoing Compliance: Glencore continually monitored and adjusted their operations to ensure compliance with changing regulations, maintaining the success of their investment.
Brexit has had a big impact on the financial landscape for cross-border M&A between the UK and the EU. It has introduced regulatory divergence, increased transaction costs, created uncertainty, and impacted exchange rate stability. Nevertheless, companies can adapt to these challenges by implementing comprehensive due diligence, legal expertise, flexible deal structuring, supply chain optimization, and diversification.
Case studies like Glencore’s acquisition of Viterra demonstrate that successful cross-border M&A is still achievable, even in a post-Brexit world. As the regulatory environment continues to evolve, the ability to monitor and adapt to changes will be a defining factor in the success of cross-border M&A endeavors. With the right strategies and expertise, companies can continue to thrive in a post-Brexit financial landscape.
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(Continued from the previous article)
- Provision on bona fide acquisition of false special invoices
«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement» defines what is “bona fide”.
It is stated in the Circular that the purchaser shall be deemed to have obtained the false special invoice in good faith if all the following conditions are met:
- a genuine transaction between the purchaser and the seller;
- the sale is made using the special invoices of the province (autonomous region, municipality directly under the Central Government, and cities listed in the plan) in which the purchaser is located;
- all the contents of the special invoices match with the actual ones, such as the name of the seller, the seal, the number of goods, the amount, and the tax amount; and
- no evidence that the purchaser knows that the special invoices provided by the seller were obtained by illegal means.
On the other hand, tax authorities of the purchaser’s location shall grant credit for input tax or export tax refund in accordance with the law, if:
- the purchaser is able to obtain again from the seller a legal and valid special invoice issued by the anti-counterfeit tax-control system; and
- the purchaser has obtained the certificate that the tax authorities in the place where the seller is located have conducted or are conducting an investigation and punishment on the seller’s false special invoices accordingly.
However, if the above conditions cannot be met, the input tax deducted or the export tax refund obtained by the purchasing party shall be recovered accordingly.
In addition, if the taxpayer has obtained in good faith a false special invoice that has been recovered and deducted in accordance with the law, then the taxpayer does not need to consider the provisions of Article 32 of the «Tax Collection Administration Law of the People’s Republic of China»: – If the taxpayer fails to pay the tax in accordance with the prescribed period, and the withholding agent fails to settle the tax in accordance with the prescribed period, the tax authorities shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five percent of the tax due on a daily basis. If the taxpayer fails to pay the tax in accordance with the prescribed period, the taxation authority shall, in addition to ordering the payment within the prescribed period, impose a late payment fee of five ten thousandths of the late payment of tax on a daily basis from the date of the late payment of tax. In other words, tax authorities will not add the late payment fee arising from the recovery of past taxes.
- Necessary documentation in case the tax inspection happens
Through the above layer-by-layer analysis, accountants of enterprises need to prepare the necessary financial documents to respond to tax inspection, while supporting themselves if they are bona fide purchasers, including but not limited to: –
- the original special invoice was identified as a false invoice
- purchase and sale contracts/business contracts or other contracts involving the invoice
- the goods involved in the incoming order, outgoing order, transfer orders, or transport documents
- relevant accounting documents
- bank payment voucher
- VAT declaration report for the month in which VAT is deducted, and CIT annual return
- statement of the entire business transaction and tax declaration
To sum up, enterprises do not need to be too panicky after receiving the Notice of Tax Inspection. Prepare the above list of supporting materials first and conduct self-inspection after communicating with the relevant tax officer to understand the situation. Companies that have evidence to prove they are bona fide invoice purchasers should actively respond to the tax authorities’ inspection and cooperate with the follow-up investigation. The enterprise will usually pass the tax inspection successfully if they respect all the conditions mentioned previously.
If you have any questions, please feel free to contact us.
«Circular of the State Administration of Taxation on the Settlement for the Taxpayers Obtaining the False Special Invoice of Value-added Tax without Acknowledgement»
China is now fully open! In order to better coordinate the epidemic prevention and control as well as the needs of economic and social development, and to facilitate the people-to-people exchange between China and foreign countries, the National Immigration Administration of PRC has decided to adjust the visa and entry policy starting as of Beijing time at 00:00 on March 15, 2023.
- Valid visas issued before 28 March 2020 by the Chinese visa authorities abroad will resume functioning.
- Foreigners may apply for all types of visas, including tourism and medical treatment.
- Port visas shall resume being issued in line with the relevant laws and regulations.
- The visa-exemption policy for Hainan, visa-exemption cruise policy for Shanghai, visa-exemption policy for foreigners to visit Guangdong from Hong Kong and Macao, and visa-exemption policy for ASEAN tour groups to Guilin, Guangxi shall resume operation.
In recent times, the immigration policies of many countries are updated in real-time. In addition to the reopening policy, other restrictions are listed below for your consideration.
Chinese embassies in many countries notice: From 15 March, antigen testing instead of nucleic acid testing.
According to the latest requirements of the Chinese government regarding the optimization of pre-trip testing measures for people traveling to China, starting from 15 March 2023, passengers flying directly from specific countries to China are allowed to replace nucleic acid testing with antigen testing (including self-testing with kits). In order to facilitate the pre-trip preparation of travelers, the embassies concerned have issued guidelines on epidemic prevention and control.
- Distal testing: Nucleic acid testing within 48 hours before boarding or self-testing with antigen kits, negative results before going to China, positive results please go to China after turning negative.
- Customs declaration: After obtaining a negative test result, fill out the “Health Declaration Card of the People’s Republic of China” through the WeChat app “Customs Passenger Service” (“海关旅客指尖服务”), the Customs APP or the web version to make declaration.
- Airlines are not required to check pre-boarding nucleic acid test certificates and antigen test results.
- In-flight epidemic prevention: Please insist on wearing a mask during the flight and do your personal protection to reduce the risk of infection.
- Entry quarantine: Upon arrival at the port, complete the necessary customs clearance procedures with the customs health declaration code. Customs will test a sample of people with abnormal health declarations or fever and other symptoms in accordance with a certain percentage.
- passengers with positive test results, in accordance with the requirements of the notification letter, go home/living place for isolation, or medical treatment;
- passengers with negative test results, by the Customs and Excise Department in accordance with the “Frontier Health and Quarantine Law of PRC” and other laws and regulations to implement routine quarantine;
- passengers with normal health declarations and tests can pass the entrance.
- Territorial epidemic prevention and control: Passengers should strictly comply with the requirements of territorial epidemic prevention and control after entering the country.
Policies vary from country to country, so it is recommended that you pay attention to the latest Chinese embassy and consulate notices in real-time before making travel arrangements, read them carefully, and follow them to avoid affecting your trip.
Should you have any further questions, please feel free to contact us.
Further Adjustment of Visa and Entry Policy for Foreigners to China
Authority: National Immigration Administration
Notice on Further Adjustment of Visa and Entry Policy for Foreigners to China
Authority: Embassy of the People’s Republic of China in the United States of America
 Currently, the following countries have issued this notice: France, Italy, Denmark, Spain, Georgia, Tanzania, Nepal, Mongolia, Vietnam, Iran, Greece, Brunei, Thailand, New Zealand, Malaysia, etc.
The difference between EBIT & EBITDA metrics and Net Profit is an ongoing concern for investors. So, what are the differences between them? In this article, we will analyze specifically this matter through case studies.
Net profit is the final result of a company’s operations and the main indicator of a company’s operating efficiency. The main difference between EBIT & EBITDA and Net Profit is that the former deducts the interest, income tax, depreciation, and amortization, which provides a direct insight into a company’s ability to generate earnings and cash flow.
For example, different companies in the same industry can come up with metrics like EBIT & EBITDA to better and more accurately compare earnings and cash flow capacity, regardless of the differences in income tax rates in their locations. Earnings and cash flow capacity of the same company can vary from period to period, and using metrics such as EBIT & EBITDA provides better comparability than simply measuring a company’s profitability in terms of net profit.
Many Chinese investors like to focus on the net profit of the company, but the net profit is confusing and to some extent the least meaningful financial data. Mainly because:
- Reason No. 1: net profits are affected by the capital structure of the firm.
For example, in the case of General Motors and Ford, the latter is valued higher than General Motors from the point of view of equity investors. One crucial factor is that GM has more debt than Ford, which affects the valuation of its equity value.
- Reason No. 2: net profits are affected by income tax revenue. Different income tax rates applied and pre-tax deductions enjoyed affect the net profit of a company.
It might be a one-sided view to use the price-earnings ratio (PE) and net profit to judge the investment value of these two companies without carefully checking their different tax policies.
- Reason No. 3: net profit is affected by the non-core and non-recurring business of a company.
When creditors and investors analyze the value of an enterprise, they usually do not take into account the income brought to the enterprise by some non-recurring and non-core businesses, such as selling fixed assets, obtaining government subsidies, and spending on administrative fines, which are not the core business of the enterprise.
Unlike net profit, EBIT and EBITDA indicators focus more on the main business of the enterprise.
If an enterprise’s net profit is profitable, but its main business items are losing a lot of money and it relies on government subsidies or selling assets to cash in, as an investor, investing in such an enterprise is obviously very risky.
In today’s internationalized and diversified world, as an investor, it is necessary to look at various indicators of a company in a multi-dimensional manner when investing in a company.
In addition to examining the company’s main projects/business model/volume of the company/future development of the industry/general environment and other factors, it is crucial to examine the EBIT & EBITDA indicators. What investors probably think about the most is how much EBITDA profit can be generated from each dollar of revenue. The EBIT & EBITDA metrics allow you to verify a company’s profitability and cash flow ability, and you can look ahead to the company’s future growth prospects.
- Case studies
As a qualified investor, here are three companies, as an alternative to your investment project, whose relevant financial data are as follows, if you do not take into account the company’s main project/business model/company volume/future development of the industry/general environment, and other factors;
|Items||Company A||Company B||Company C|
|Of which: Depreciation||350.00||250.00||150.00|
|Of which: Amortization||50.00||0.00||50.00|
|Of which: Interest expense||150.00||180.00||0.00|
|Income Tax Rate||25%||21%||16.50%|
|Income Tax Expense||1375.00||1155.00||907.50|
Currency in CNY
We will analyze each of the three companies:
The net profit of Company A at the end of the period was CNY 4125.00, and its income tax was 25%, which is the highest of the three companies, and its net profit in hand is also the lowest. The measured EBIT indicator is CNY 5650.00 and the EBITDA indicator is CNY 6050.00, which is the most active among the three companies and has good profitability and cash flow ability.
The net profit of Company B at the end of the period is CNY 4345.00 and its income tax is 21%. The measured EBIT indicator is CNY 5680.00 and the EBITDA indicator is CNY 5930.00, and after removing the effect of income tax, it can be seen that among the three companies, the ability of profitability and cash flow is in the middle level.
The net profit of company C at the end of the period is 4592.50 and its income tax is 16.50%. The EBIT indicator is 5500.00 and the EBITDA indicator is 5700.00. Although Company C has the highest net profit, this is based on the income tax rate, and after removing a series of effects, the profitability and cash flow ability is the weakest among the three companies.
|Items||Company A||Company B||Company C|
Currency in CNY
So as an investor, which company would you choose to invest in?
If you have any questions, please feel free to contact us.