M&A investment opportunities in Latin America

by Allen Roiser on August 29, 2016

Increased labor and logistics costs have made it less attractive for U.S. companies to manufacture consumer goods in China and Southeast Asia –– instead, companies are setting their sights on Latin America (LATAM).

While regions like Brazil and Argentina are facing economic uncertainty, they offer opportunities for both strategic acquirers and long-term private equity investors. For example, decreased valuations coupled with the strong U.S. Dollar could present opportunities to acquire fundamentally strong businesses at favorable terms for the investor.

Other regions in LATAM, such as Mexico, continue to be strong areas for M&A investment. Along with its participation in the North American Free Trade Agreement, Mexico holds trade agreements with 45 countries, making it a favorable investment location for regional operation bases in LATAM. Further, Mexico’s competitive wage rates, proximity to the United States, and flexibility of doing business makes it attractive to U.S. companies seeking near-shore manufacturing.

Finally, with an overall growing middle class in LATAM, consumer product sales are expected to increase as disposable incomes grows. This allows U.S. companies to take advantage of LATAM’s competitive wage rates, close proximity, and an expanding market for consumer goods.

While many organizations and private equity firms have earmarked funds to be invested in LATAM, it’s important to remember the region is an emerging market and is subject to volatility and risk. Investors are encouraged to partner with service providers that have experience investing and doing business in the region. For more information and assistance, contact Plante Moran’s Global Services consulting team.

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The IRS has released proposed regulations expanding the scope of business entities that must comply with section 6038A to include previously disregarded entities. The proposed regulations would strengthen rules requiring informational reporting and record maintenance. Section 6038A subjects domestic corporations that are 25% or more foreign-owned to informational reporting and record maintenance requirements. Currently, certain domestic business entities, such as single member LLCs, are treated as disregarded entities and thus exempt from the requirements of section 6083A, even if they’re foreign owned.

The proposed regulations would reclassify these disregarded entities as corporations separate from the foreign owner for the purposes of section 6038A. Thus, these entities will be subject to the reporting requirements. Additionally, the disregarded entities would be required to obtain an employee identification number by filing Form SS-4. This change in entity classification, for section 6038A purposes only, would require disregarded entities to report transactions between the domestic disregarded entity and its foreign owner, or other foreign related parties, on Form 5472. They’ll also be required to maintain records that demonstrate the accuracy of the information return.

In order to ensure that all transactions with foreign related parties are included, the proposed regulations expand the number of reportable transactions by referencing section 482 which includes:

  • Sales
  • Assignments
  • Leases
  • Loans
  • Advances
  • Contributions
  • Transfers in an interest ,or right to use property or money
  • Performances of any services for the benefit of, or on behalf of, another

Additionally, the proposed regulations would make the small business exception (for corporations with less than $10,000,000 in US gross receipts) and the de minimis transactions exception (for corporations with total payments to or from foreign related parties of i) $5,000,000 or less and ii) less than 10% of US gross income) unavailable to these disregarded entities.

The penalty of $10,000 due to failure to file Form 5472 and failure to maintain records will apply to disregarded entities affected by the proposed regulations.

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