There are a number of factors that determine whether an acquisition is for a creditable purpose and is one for which an input tax credit can be claimed.
The practical guidance provided here focuses on whether the acquisition relates to making supplies that would be input taxed. For this purpose, a sufficient connection is established between acquisitions and supplies that would be input taxed if, on an objective assessment of the surrounding facts and circumstances, the acquisition is used, or is intended to be used, solely or to some extent for the making of supplies that would be input taxed.
In the context of M&A, not all of the possible transactions that might arise would be input taxed financial supplies. You will need to assess the character of the relevant supplies on a case-by-case basis. For example, if you are planning to buy shares in a target entity, this is an input taxed acquisition-supply. To the extent that an acquisition relates to buying those shares, it would not be for a creditable purpose. This is so regardless of whether or not you are committed to proceeding with the purchase of shares or ultimately do purchase the shares.
On the other hand, if you are planning to buy the assets of an enterprise and do not intend to use the assets to make input taxed supplies, to the extent your acquisitions relate to the purchase of those assets, they will be for a creditable purpose.
Acquisitions made in phase one may be so remote that they do not have a sufficient connection with any future M&A related input taxed supply. Such acquisitions may be for a creditable purpose.
We consider that the factors listed below are indicative of an M&A activity where the related acquisitions are too remote from a potential input taxed supply. No single factor is necessarily decisive, and weight must be given to each factor, depending on the circumstances of the M&A transaction:
- the work being conducted is exploratory and high-level
- no business case or board paper/purchase recommendation paper has been prepared for senior management's consideration
- there has been no commitment at the level of the board or senior management that the M&A will proceed, that an offer will be made, or that extensive due diligence be conducted
- there is no dedicated project team
- a potential bidder in a sale process (for example, a tender) is considering the target entity, but has not yet determined whether it will make an indicative offer or put forward an expression of interest to commence due diligence
- the work being conducted might be equally relevant to gaining a better understanding of the business's competitors or market – that is, while an M&A is a possible outcome, a significant purpose is to build knowledge that is generally helpful to the business.
There is no single factor to indicate when an acquisition associated with a proposed M&A is no longer too remote from a proposed input taxed supply. The following is a non-exhaustive list of indicators that the M&A transaction, regardless of whatever form it might eventually take, has ceased to be a remote possibility and has become a planned course of action:
- the work being conducted is no longer exploratory and high-level, but specific and detailed
- the board or senior management have committed to pursuing the M&A, or extensive due diligence is being conducted
- a specific project relating to the transaction has started and a dedicated project team has been set up
- for a possible acquisition, the prospective purchaser has prepared or started to prepare an indicative offer or expression of interest
- services have been acquired that specifically relate to M&A activity, such as (but not limited to) investment banking/corporate advice, valuation services, specialist legal and accounting services, or due diligence services.