The term “SPAC” has been causing quite a stir in the Singaporean market these days. This happened after the Singapore Exchange (SGX) finally announced the SPAC listing regulations in Singapore in September 2021, more than a decade since it first looked into SPAC listing framework. This announcement has left many financial industry players on the edge of their seats despite the uncertainties that continue to loom as the pandemic evolves.
As a matter of fact, the SPAC listing regulations of SGX had obtained more than 80 respondents in just the second public consultation. And just within the first month of 2022, there have already been three listings on the SGX. Some experts believe that this great interest in SPAC is partly due to increased demand by other developed SPAC listing markets searching for ideal de-SPAC targets and partly due to the plentiful supply of more developed Asia-Pacific startups seeking new options to raise capital.
However, despite the promising benefits of SPAC, all SPAC registrants and targets need to bear various tax considerations in mind as they seek to go through this alternative capital fund-raising route. Read on to learn more about the possible tax implications that some of SGX’s SPAC listing framework requirements may bring to Singapore SPAC registrants and targets.
Listing of Non-Singapore Incorporated Companies on the SGX
Under the present SGX’s SPAC listing framework, companies incorporated outside Singapore can be listed on the SGX. This rule ultimately provides issuers and sponsors with the flexibility to choose their place of incorporation of the SPAC, taking into consideration critical commercial factors like business strategies, the profile of the SPAC investor, the possible SPAC targets, and the total tax efficiency of the business combination with the target company.
Usually, tax considerations do not manifest at the time of the SPAC’s incorporation. For instance, the issuer may decide to incorporate the SPAC to allow cross-border mergers to smoothen the business combination with the target. While no confirmed target may still be in place, the straw man proposal of the sponsor is a great start to constrain vague areas of tax concerns.
SPACs incorporated outside Singapore but are planning to list on the SGX with a target group that operates across the region are expected to become much prominent moving forward. Given that Singapore is traditionally considered a great headquarter location because of its stable government and infrastructure, it will no longer be surprising if the target group chooses Singapore as the location of its headquarter. Here are some questions regarding the SPAC’s place of incorporate that are worth noting:
- What would the process for taxing the interest and related income from the shareholders’ deposited funds into the escrow be? Which country would have the right to tax this?
- Since expenses are incurred and recognised as losses until the point of de-SPAC, can such losses be used effectively against future income?
- How would incorporation outside Singapore affect the series of tax treaties available to the SPAC?
- In what way would the shareholders be taxed on the dividend distribution?
Completion of Business Combination Within Two Years
The present SPAC listing framework requires an SGX SPAC to finish its business combination within two years from its listing date. In cases where an agreement has been made, and the SPAC needs more time to complete the business combination past the two-year period, an extension of up to a year shall be allowed. Otherwise, it will be necessary to return the total proceeds raised in the listing to the public shareholders.
Meanwhile, if no agreement has been entered into by the SPAC when the two-year period ends, and the SPAC wants to have additional time to find an appropriate business combination, it needs to ask for the approvals of the shareholders and the SGX and give compelling reasons why an extension of up to a year is necessary.
From the target company’s point of view, this entire journey of the SPAC does not differ so much from a normal IPO process. Like any merger and acquisitions transaction, the target in a SPAC process will be the subject of tax due diligence. Tax exposures brought to light by the SPAC during the target’s due diligence essentially impact the target’s pricing and valuation.
Considering the constrained timeline confronted by SPACs in finishing a business combination, possible SPAC targets must consider conducting due diligence by themselves in advance. This will ultimately provide the target management team with forewarning and enough time to resolve some or all of the existing and potential tax concerns before the SPAC starts the target’s due diligence. Aside from making the target seem more appealing as a de-SPAC candidate, this will relieve both parties from the time and resourcing pressure to face other key business combination concerns.
Additionally, before de-SPAC, it is essential to bring in early the tax function for the possible business combination process. The purpose of this is to avoid the lengthy process of undertaking internal restructuring activities or carve-outs that usually occur if the target company has businesses and legal entities in numerous jurisdictions. Similarly, after de-SPAC, the target company’s management team will have to operate the entity as a listed company that is subject to more compliance and filing obligations.
Therefore, present internal functions like accounting, finance, internal audit, controls, and taxes will need to raise their game. As early as possible, possible SPAC targets are advised to evaluate their SPAC IPO preparedness to prevent last-minute setbacks in the business combination. Here are some essential factors to consider:
- Is a solid in-house tax function present in the company?
- Is a proper process for identifying and escalating internal tax risk in place in the company?
- To what degree does the transfer pricing policy support the company’s business model?
- What are the ways for the company to monitor the status of its tax compliance and determine the effective intragroup tax rates?
80% Fair Market Value Requirement
Another criteria stipulated in the SPAC listing framework is that the SPAC’s possible target company’s initial business or asset obtained per the business combination should have a minimum of 80% of the amount in the escrow account as its fair market value. This requirement is considered another dampener that can constrain the timeline for de-SPAC.
Although SGX’s mainly requires a minimum of 80% of the amount in escrow as the initial acquisition, it is ready to consider a case-by-case waiver to enable the SPACs to accumulate numerous concurrent acquisitions and meet the 80% threshold, subject to some specific conditions. This is an answer to the concern of the consultation paper respondents that acquisitions are managed on a portfolio basis in some industries.
Among the critical conditions that the SGX may require is for the concurrent transactions to be in separate resolutions and simultaneously completed on or around the same date within the allowed timeframe. The inevitable implication is that SGX’s conditions may place timing and resourcing pressure on the entire de-SPAC process.
SPACs are expected to take the Singaporean capital market by storm in the next couple of months. With three companies already receiving SGX’s approval, one can expect the SPAC space in Singapore to thrive even more. However, amidst the buzz surrounding SPACs, tax considerations should not be overlooked. It is necessary for SPAC registrants and targets always to consider several tax implications as they delve into the world of SPACs.
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