1. Proposed Amendments to Section 45 Impact upon South African Mergers, Acquisitions and BEE Transactions

2. Types of Mergers and Acquisitions Two basic types –  Share acquisition  Asset acquisition Form is different Economic substance the same Recognised for decades

3. Share Acquisition Acquiring Company pays Target Shareholders for their shares Target Shareholders pay CGT (unless exempt) Acquiring Company gets a base cost in Target’s shares equal to their market value The base cost in the assets of Target, Sub 1 and Sub2 stays the same Target Company Sub 1 Sub 2 Acquiring Company Sub Shareholders Cash

4. Share Acquisition – Final Structure Target Company, Sub 1 and Sub 2 transfer their assets to Newco Transfer qualifies for “roll- over” relief under section 45 No gain or loss Transferee gets a “roll-over” base cost in the assts As a result, any recoupment or gains preserved for tax n the future International approach – deduction for interest expense incurred Acquiring Company Sub (“Newco”) Shareholders Target Company Sub 1Sub 2

5. Asset Acquisition “Newco”, a subsidiary of Acquiring Company, buys the assets of Target Company, Sub 1 and Sub 2 Target Company, Sub 1 and Sub 2 recognise gain (CGT and/or recoupments) Potential STC, Dividends Tax or CGT of distribution of proceeds to shareholders Shareholders Target Company Sub 1Sub 2 Acquiring Company Newco Cash

6. Asset Acquisition – Final Structure Newco holds all of the assets of Target Company, Sub 1 and Sub 2 and uses them in its business The assets all have a market value equal to their base cost As a result, future gain/CGT on the disposal of those assets will be reduced or minimised Deduction for interest expense incurred Shareholders Acquiring Company Newco

7. Comparison – Final Structure Share acquisitionAsset Acquisition Shareholders Acquiring Company Newco Shareholders Acquiring Company Newco

8. Economic Substance Both transactions the same Acquiring Company wants to own and operate Target Company’s business Shareholders of Target Company receive cash (or similar consideration) Choice driven by business, legal and tax considerations Asset acquisitions –  Huge up-front tax costs  Only an option in very limited circumstances

9. The Problem under the ITA Debt Interest expense General Rule –  Asset Acquisition – Deductible  Share Acquisition – Not Deductible Contrary to international practice Contrary to IFRS/GAAP Massive consequences for foreign investment

10. “Gearing” Debt financing often essential 50% to 75% of total funding Reasons –  Investors’ own capital insufficient  Lower overall cost of capital  More tax efficient Deductibility of interest expense essential to economics of these deals No deduction, no investment

11. The Safety Valve - Section 45 and “Push Down” Debt Arrangements Seven step transaction –  Acquiring Company enters into a short-term loan (aka “Bridge Loan”);  Acquiring Company uses that loan (together with its own capital) to acquire Target Company’s shares;  Newco borrows enters into long-term loan;  Newco uses that loan to acquire Target Company’s assets in a section 45 transaction;  Target Company distributes those proceeds to Acquiring Company;  Acquiring Company uses the proceeds to repay the Bridge Loan

12. The Section 45 Step Post-acquisition of Target Company shares Target Company and Newco – same group of companies Target Company disposes of its assets to Newco for cash No gain or loss under section 45 The base cost in target Company’s assets “rolls- over” to Newco Newco gets a deduction for interest expense Acquiring Company NewcoTarget Company Bank Repay Bridge loan Loan Section 45 Assets for cash Cash

13. Push Down Debt – Final Structure Acquiring Company pays Target Shareholders for their shares Target Shareholders pay CGT (unless exempt) Acquiring Company gets a base cost in Target’s shares equal to their market value The base cost of Target Company’s assets stays the same Deduction for interest expense incurred Acquiring Company Shareholders Newco

14. International Standard Share acquisition model “Push down” debt arrangements fully consistent  CGT to selling shareholders  Roll-over base cost in Target Company’s assets  Deduction for the actual interest expense incurred ●No inflation of the deductions ●No “round trip financing”

15. Impact of the Proposed Amendment Cannot use cash – immediate gain/recoupment If notes are used, gain/recoupment when paid Worst of all worlds  CGT for the selling shareholders (share acquisition) plus  Recoupment/gain at the Target Company (asset acquisition) plus  Newco still left with a roll-over base cost in assets acquired for target Company

16. Frying Pan or the Fire? Two unworkable options  No deduction for interest expense or  Deduction, but immediate up-front tax on any gains and/or recoupments in Target Company’s assets Economics  Simply too expensive (especially at current high interest rates)  Impact on foreign investment???

17. The Prohibitive Tax Cost: A Conservative Example Assumptions – Target Market Value –  Shares – R1 billion  Assets – R1 billion Target Base Cost –  Shares – R200 million  Assets – R200 million Debt financing  R500 million  15% interest  R75 million annual interest expense Option 1 –  Forego interest expense  Additional tax cost/cash flow hit - R21M annually  Present value (5 years) – R70.4M  Roll-over base cost – therefore still facing future CGT/recoupment Option 2 –  Gain/recoupment  Best case – all CGT  Immediate tax cost R112M (R800M x 14%)

18. Targeting the Real Abuse Push down debt arrangements are not the problem Legitimate and necessary  Protection for lenders  Company law concerns  Not just a tax issue Need to focus on the real abuse

19. ‘Disguised Sale” The real abuse – “disguised sales” Purpose of roll-over relief  Defer tax until someone “cash’s out” “Disguised sales”  Cash out  Manipulate corporate rules to avoid tax  Typically involve section 42/45 combinations

20. A Modified Proposal Continue to allow the use of cash or notes If notes are used –  Initial roll-over base cost (as currently proposed)  Payments on the note increase base cost without gain recognition provided that the issuer and holder of the note continue to be members of the same group of companies (section 24B(3) model)  De-grouping charge if and when issuer and holder cease to be members of the same group of companies