maximise 29-30 october 2013 - pwc · 2015-06-03 · september 2014 december 2015 completionof...

15th AnnualConferenceMaximise

International trends in taxationof capital and financial productsand the impact on Thai Business

www.pwc.com/th

MaximiseShareholder Valuethrough EffectiveTAX Planning 2014 29-30 October 2013

Agenda

Section 1: International trends

• Base Erosion and Profit Shifting (‘BEPS’)• Base Erosion and Profit Shifting (‘BEPS’)

Section 2: BEPS on financial products in Thailand

• Hybrid mismatch arrangements

• Tax deduction of financial payments

Section 3: Update on trends in Thailand

PwC

Section 3: Update on trends in Thailand

• Cross border leasing

• Substance vs Form

• Raising funds through capital market

Slide 229-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014

International trends

Base Erosion and Profit Shifting (‘BEPS’)Base Erosion and Profit Shifting (‘BEPS’)

PwC Slide 329-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014

The current environment…


Base Erosion and Profit Shifting (‘BEPS’)

What is BEPS?

• International tax planning

• Sometimes lead to double non-taxation.

What is BEPS?


BEPS – FoundationUse ofhybrid

financial

instruments Application

of treaty todigital goodsand services

Use of lowtax

jurisdictions

Core issuesCore issues

Shifting of

mobileresources(capital,

intangibles)

(Over)leveraging

localoperations

Lack ofresources to

target theissues

Use ofhybridentities

PwC29-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014

Slide 6

Coherenceacross

internationaltax system

Lack ofinformation

Use of taxincentives

What changes could BEPS lead to?Macro changes

• Much more focus on substance (e.g.shift in TP to people-basedconfirmatory tests derived fromArticle 7)

• Harder to deal with tax authorities andsecure agreements

• Shift to greater source based approachand potentially some clear winners

TransferTransferpricingpricing

LeverageLeverage

JurisdictionJurisdictionto taxto tax

AntiAnti--avoidanceavoidance

Article 7)• Extended Services PE test for digital

business and greater focus on repoffices (prep and auxiliary exemption)

• Increased scrutiny of intangibleproperty and beneficial ownership

• Purpose of capital and risk?• Documentation and disclosure

changes to come

and potentially some clear winners(US, China, India) and losers (theNetherlands, Switzerland,Luxembourg & Ireland)

• Increased use of CFC regimes by taxauthorities

• Treaty-shopping based structuresunder greater focus


Slide 7

• Impact on capital structure(including hybrid instruments)

• Focus on debt financing andguarantees

• Conduit financing structures

avoidanceavoidance• Short term anti-avoidance measures• General anti-avoidance approach by

the tax authorities• Increased cases where new rules

developed with strong anti-avoidance agenda – e.g. OECDproposals on beneficial ownership,PE threshold and IP

...it’s complicated!


OECD BEPS action plan

OECDOECDOECDOECD

“REFORM”G20 Leaders meeting in St. Petersburg


Slide 9

• Identifies 15 actions that are required to address BEPS;• Sets deadlines for actions (the majority within 24 months); and• Identifies resources and methodology required to implement solutions.

OECD BEPS action plan

Timeline

June 2012

Projectannounced

/ started

February 2013

July 2013

Release ofaction

plan with 15separate

actions/workstreams

September 2014

December 2015

Completion ofremainder ofaction plan

2016 and


February 2013

Release ofdocument,

‘Addressing BaseErosion and

Profit Shifting’

September 2014

Projectedcompletion of

approximately 1/3of action plan

2016 andforward

Monitoring,additional/

on-goingactions

Address the Tax challenges of the Digital Economy

BEPS – 15 Actions

11

Neutralize the Effects of Hybrid Mismatch22

Assure that Transfer Pricing Outcomes are in Line WithValue Creation - Risks and Capital

99

Assure that Transfer Pricing Outcomes are in Line With1010Neutralize the Effects of Hybrid MismatchArrangement

Strengthen CFC rules33

Limit Base Erosion via Interest Deduction andOther Financial Payments

44

Counter Harmful Tax Practice More Effectively, Takinginto Account Transparency and Substance

55

66

Assure that Transfer Pricing Outcomes are in Line WithValue Creation – Other High-Risk Transactions

Establish Methodologies to Correct and Analyze Data onBEPS and the Actions to Address It

1111

Require Taxpayers to Disclose their Aggressive TaxPlanning Arrangements

1212

Re-examine Transfer Pricing Documentation1313

1414


Slide 11

Prevent Treaty Abuse66

Prevent the Artificial Avoidance of PE Status77

Make Dispute Resolution Mechanisms More Effective1414

Develop a Multilateral Instrument1515

Assure that Transfer Pricing Outcomes are in Line WithValue Creation - Intangible

88

BEPS – 15 Actions

Let’s discuss in Section 2

Limit Base Erosion via InterestLimit Base Erosion via InterestDeduction and Other FinancialPayments

Neutralize the Effects of HybridMismatch Arrangement

22

44

Let’s discuss in Section 2

PwC

Payments

29-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014Slide 12

BEPS on financial products in Thailand


Slide 13


Hybrid mismatch arrangementsHybrid mismatch arrangements


Hybrid mismatch arrangementsType of hybrid mismatch arrangements

1. Double deduction scheme1. Double deduction scheme

2. Deduction, no inclusion scheme

3. Foreign tax credit generators

PwC

Ref: Hybrid mismatch arrangements: Tax policy and compliance issues, OECD, March 2012


Hybrid InstrumentsDefinition

“Instruments which are treated differently for tax purposes in the countriesinvolved, most prominently as debt in one country and as equity in anotherinvolved, most prominently as debt in one country and as equity in anothercountry.”

Ref: Hybrid mismatch arrangements: Tax policy and compliance issues, OECD, March 2012


Redeemable shares

Key features:

• Redeemable shares treated asCompany A • Redeemable shares treated as“debt instrument” and dividendspaid are considered “interest”payments and are tax deductible.

• Interest WHT rates imposed onpayment.

• Recipient exempt from taxation asincome considered “dividend”, not

Company A

Abroad

Thailand

Interest expense(Debt)

Dividend income(Equity)

PwC

income considered “dividend”, not“interest”

Tax issues:

• Results in “double non-taxation ofincome”


Company B

Perpetual bond

Key features:

• A bond with no maturity dateCompany ACompany A

(Issuer)(Issuer) • A bond with no maturity date

• Issuer pays coupons forever

• Recipient country treats bondinvestment as “equity” not “debt”

• Thailand permits interest as taxdeduction

• Recipient country treats bondinterest as tax exempt “dividend”

(Issuer)(Issuer)

Abroad

Thailand

Long-termLoan

Dividend income(Equity)

Interest expense(Debt)

PwC

interest as tax exempt “dividend”

Tax issues:

• Results in “double non-taxation ofincome”


Company BCompany B(Buyer)(Buyer)

Other scheme applied in other countriesDouble deduction with hybrid entity

Scheme:

• Company A holds equity interest in HybridCompany ACompany A • Company A holds equity interest in Hybridentity which in turn holds equity interest inCompany B.

• Hybrid entity borrows from a third party anduses debt to inject as equity into Company B.

• Hybrid entity is treated as a branch(“disregarded entity”) of Company A andinterest expenses of Hybrid entity taxdeductible.

• But Hybrid entity and Company B are taxconsolidated and thus interest expense of

HybridHybridentityentity

Long-termLoan

PwC

consolidated and thus interest expense ofHybrid entity is tax deductible (again) inCountry B.

Tax issues:

• Results in “double deduction” of interestexpense


Company BCompany B

Group tax regime

Other countries’ schemesForeign tax credit generators (double deduction for foreigntax credit)

Scheme

• Company A wishes to borrow moneySPV shares

1 • Company A wishes to borrow moneyfrom Company B.

• Company A sells shares of SPV toCompany B, with a re-purchase(“Repo”) agreement.

• It also issues bonds to SPV.

Tax implication – Country B

• Country B considers this transaction

Company A

Dividends(cash flow)

2

“Repo”agreement

Company B

Cash

1

SPV shares

Cash

3

PwC

• Country B considers this transactiona “sale”.

• Dividend income from SPV is taxedand Company B is granted foreigntax credits of tax paid by SPV


SPV

(cash flow)

Issues bonds

Other countries’ schemesForeign tax credit generators (double deduction for foreigntax credit)

Tax implication – Country A:

• In Country A, this transaction is treatedSPV shares

1• In Country A, this transaction is treated

as a loan by Company B to Company Athat is secured through SPV shares.

• Country A applies an exemption fordividends received by Company B, oran indirect foreign tax credit regimethat allows Company A to claim a taxcredit for CIT paid by SPV.

• Company A further claims a deductionfor the interest expenses on the deemed

Company A

Dividends(cash flow)

2

“Repo”agreement

Company B

Cash

1

SPV shares

Cash

3

PwC

for the interest expenses on the deemedloan received equal to dividendpayments.

Tax consequences:

• Two countries grant tax credits for taxespaid by SPV


SPV

(cash flow)


Tax deduction of financial paymentsTax deduction of financial payments


Derivative product, e.g. interest rate swap

Transactions:

• Lender provides loan to borrower atLender Swapper

• Lender provides loan to borrower atfloating interest rate.

• Borrower enters into IRS (changefrom floating to fixed interest rate)with swapper.

• If floating rate is 3% and fixed rateis 5%, the borrower will makeinterest payment of 3% and swap

Interest hedging

Abroad

Thailand

Interestpayment

3%

1

Swappayment

2%

2

Loan (floatinginterest rate)

PwC

interest payment of 3% and swappayment of 2%.


Borrower


Tax considerations:

• WHT on interest paymentLender Swapper

• WHT on interest payment

• WHT on swap payment

• Deductibility of interest and swappayments

Interest hedging

Abroad

Thailand

Interestpayment

3%

1

Swappayment

2%

2

Loan (floatinginterest rate)


Borrower


Transactions:

• Lender provides loan to borrower at

Lender+

Swapper • Lender provides loan to borrower atfloating interest rate.


• If floating rate is 3% and fixed rateis 5%, the borrower will makeinterest payment of 3% and swap

Loan(floating interest rate)

+interest hedging

Swapper

Abroad

Thailand

Interestpayment

1

Swappayment

2

PwC

interest payment of 3% and swappayment of 2%.


Borrower

payment


Tax considerations:

• WHT on interest payment

Lender+

Swapper • WHT on interest payment

• WHT on swap payment


Loan(floating interest rate)

+interest hedging

Swapper

Abroad

Thailand

Interestpayment

1

Swappayment

2


Borrower

payment


Transactions:

• Lender is a Thailand branch ofSwapper

(Head office)• Lender is a Thailand branch of

foreign bank.

• Swapper is a foreign bank.


• If floating rate is 3% and fixed rateis 5%, the borrower will make the

(Head office)

Interesthedging

Swappayment

Abroad

Thailand

Loan

2

PwC

is 5%, the borrower will make theinterest payment of 3% to the lender(Thailand branch) and swappayment of 2% to the foreignswapper.


BorrowerLender

(Thailand Branch)

Loan(floating

interest rate)

Interestpayment

1


Tax considerations:

• WHT on interest payment toSwapperSwapper

(Head office)(Head office)• WHT on interest payment to

Thailand Branch

• WHT on swap payment to theforeign bank


(Head office)(Head office)

Interesthedging

Swappayment

Abroad

Thailand

Loan

2


BorrowerLenderLender

(Thailand Branch)(Thailand Branch)

Loan(floating

interest rate)

Interestpayment

1

Derivative product, e.g. interest rate swapDepartmental Instruction No. Paw 114/2545 and 136/2551

What is an income type of SWAP payment ?What is an income type of SWAP payment ?

40(8) General cases

Paw 114/2545• Swapper/lender is same entity


40(4)(a)• Ignore intentionPaw 136/2551• Swapper and lender are different entities• Focus on intention

Guarantee fee

Transactions:

• A foreign bank provides loan toParent

Company• A foreign bank provides loan to

Thai subsidiary of its customer.

• Parent Company of customerguarantees the loan.

Company

Abroad

Thailand

Loanguarantee

2

GuaranteeInterest


ThaiSubsidiary

Loan at 3%interest rate

1Guaranteefee of 2%

Interestpayment

Guarantee fee

Tax considerations:

• WHT on interest payment toParent

Company• WHT on interest payment to

the foreign bank.

• WHT on guarantee fee paid tothe parent company.

• Deductibility of interest andguarantee fee payments.

Company

Abroad

Thailand

Loanguarantee

2

GuaranteeInterest


ThaiSubsidiary

Loan at 3%interest rate

1Guaranteefee of 2%

Interestpayment

Update on trends in Thailand


Slide 32


Cross border leasingCross border leasing


Loan VS Lease

Traditional loan

• Principal

Cross-border leasing

• Principal

• Interest


Cross-border leasing

(financial lease)

Lease payment(principal + interest)

Loan VS Lease

Description Loan Lease

Legal form Loan contract Rental contract

Security Unsecured(No asset-back)

Secured(Asset-back)

Tax implications ofborrower/ lessee

i) CIT •Depreciation ofequipment

•Interest expense

Lease payment

ii) WHT 10%/15% WHT 15%/exempt/reduced


ii) WHT 10%/15% WHT 15%/exempt/reducedWHT

iii) VAT/SBT No VAT/ No SBT VAT/ No SBT

Cross border leasing

Operating leaseCompany ACompany A(Lessor)(Lessor)

Doubledipping

Country A

Country BDepreciation


Slide 36

Company BCompany B(Lessee)(Lessee) Financial lease

Loan financing

Tax considerations:Foreignlender

Interestpayment

• Tax deduction: principal andinterest

• VAT arising on importationof equipment

• WHT on payment of interestand repayment of principal

Equipmentmanufacturer

lender

Abroad

Thailand

Loan

2

Loan

Payment forequipment

Interestpayment

3

1


Slide 37

LoanImportationof equipment

Thaiborrower

Cross border leasing (financial lease)

Tax considerations:Payment forequipment

Foreign

Interestpayment

• Tax deduction of leasepayments (principal + interest)

• VAT arising on importation ofequipment

• VAT and WHT on leasepayments

Equipmentmanufacturer

Foreignlessor

Loan

1

3

Abroad

Thailand

Purchase ofequipment

2

4

Lease


Slide 38

Importationof equipment

Lease Leasepayment

Thailessee


Substance VS FormSubstance VS Form


Substance VS Form

VSVSVSVS


Slide 40

Substance VS Form

Transactions:

• Company A entered into loanLaw firm • Company A entered into loanagreement with a bank.

• Company A was responsible forexpenses incurred by the bank, e.g.service fee paid to law firm.

• Company A paid service fee directlyto law firm.

Abroad

Thailand

Loanagreement

Payment ofprofessional fee

Law firm


professional fee

Company A

Ref. Tax Ruling No. Gor Khor 0811/P/6058, dated 15/06/01

Substance VS Form

Questions:

• Service fee or interest payment?Law firm • Service fee or interest payment?

Abroad

Thailand

Loanagreement

Payment ofprofessional fee

Law firm

Tax Servicefee

Interestpayment

WHT O P

VAT P O


professional fee

Company A

Ref. Tax Ruling No. Gor Khor 0811/P/6058, dated 15/06/01

VAT P O

Substance VS Form

Front end fee = 2%

Transactions:

• Customer A entered into a housingReal estatecompany

Housing loanagreement(Interest =

0%, 2%)

Purchasehome

Front end fee = 2% • Customer A entered into a housingloan agreement with a bank.Interest rate 2%.

• For the first year only, the bankgave Customer A zero interest ratesince the real estate companyabsorbed this expense by paying afront end fee of 2%.


CustomerA Question:

• Front end fee = subject to SBT ?

Ref.: Tax Ruling No.Gor Khor 0706/11062, dated 14/11/03

Substance VS Form

InterestPayment

Transactions:

• Under the hire purchaseManufacturer Vendor

Payment

Installment(plus

VAT7%)

Hire purchaseagreement

(Interest = 0%)

• Under the hire purchaseagreement, there is no interestcharged since the manufacturerabsorbed the interest expense.

Question:

• Interest payment = subject to VAT ?


Hirepurchaser

Ref.: Tax Ruling No.Gor Khor 0811/3074, dated 29/03/11


Raising funds through capital marketRaising funds through capital market


Trend in fund raising

1 Raising funds through capital market

Raising funds through using their own assets

1

2


Slide 46

Raising funds through capital market

Sale & leaseback

Factoring

Sale & leaseback

Securitisation

Project finance

Islamic finance

Property fund

AssetsAssets

•• Existing assetsExisting assets

•• Future assetsFuture assets


Slide 47

Property fund

Infrastructure fund

REIT

Raising funds through capital market

SecuritisationSecuritisationSecuritisationSecuritisationInfrastructureInfrastructure

fundfund


Securitisation

1 2

Receivables aretransferred to the SPV

Receivables are collateralfor newly-created securities

• Objective

Transferor /Transferor /originatororiginator

SPVSPV(Special Purpose Vehicle)(Special Purpose Vehicle)

InvestorInvestor

1

4

2

3

Cash in exchange forreceivables transferred

Cash from sales ofsecurities


• Objective

• Tax implications: (1) Transferor (2) SPV

Infrastructure fund

Direct investment in assets

Investment through incomedistribution agreement

ModelModel

22

ModelModel

11


Model 1 : Direct investment in assets

InfrastructureInfrastructureownerowner FundFund InvestorInvestor

Purchase assets Distribute dividend

Transfer ownership InvestTransfer ownership Invest

Royalty/ rent

OperatorOperator

Licence/ lease

Pay forgoods/services

Providegoods/services

PwC

29-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014

Slide 51

• Objectives

• Tax implications: (1) Infrastructure owner (2) Fund (3) Investor

End userEnd user

Model 1 : Direct investment in assets

Party Tax implications

Infrastructure owner • Exempt from VAT/SBT/SD on the sales of assetsprovided that the assets are transferred back to the ownerprovided that the assets are transferred back to the owner(except tangible assets which can be transferred to agovernment agency or a government organisation)

• Income from the sales of assets is subject to CIT

Fund • Out-of CIT scope.

• VAT on leasing/royalty fee payable by the Operator

Investor • PIT: Exempt for 10 years

PwC

29-30 October 201315th Annual Conference Maximise Shareholder Value through Effective TAX Planning 2014

Slide 52

Investor • PIT: Exempt for 10 years• CIT:

-Domestic investor: 50% or 100% exemption- Overseas investor: no WHT

Model 2 : Investment through income distributionagreement

Share income

InfrastructureInfrastructureownerowner FundFund InvestorInvestor

Payment of rights Distribute dividend

Income distributionrights agreement

Invest

Pay forgoods/services

Providegoods/services


End userEnd user

• Objectives

• Tax implications: (1) Infrastructure owner (2) Fund (3) Investor

Model 2 : Investment through income distributionagreement

Party Tax implications

Infrastructure owner • Payment of rights in legal form might be taxable, but fromInfrastructure owner • Payment of rights in legal form might be taxable, but fromsubstance it should be treated as loan principal, thus not subjectto tax.

• Difference between payment of rights and share of future incomepayable should be treated as funding cost.

Fund • Out-of CIT scope.• Difference between payment of rights and share of future incomepayable is subject to SBT

Investor • PIT: “Dividend” exempt for 10 years


Investor • PIT: “Dividend” exempt for 10 years• CIT:

-Domestic investor: “Dividend” 50% or 100% exemption- Overseas investor: “Dividend” (40(8)) no WHT

Q&A


Slide 55

Contact

Ornjira Tangwongyodying Prapasiri Kositthanakorn

Partner PartnerTel. +66 (0) 2344 1118 Tel. +66 (0) 2344 1228Tel. +66 (0) 2344 1118 Tel. +66 (0) 2344 [email protected] [email protected]

Orawan Fongasira Nopajaree Wattananukit

Director Associate DirectorTel. +66 (0) 2344 1302 Tel. +66 (0) 2344 [email protected] [email protected]

PwC

[email protected] [email protected]


Thank you

© 2013 PricewaterhouseCoopers Legal & Tax Consultants Ltd. All rights reserved.'PricewaterhouseCoopers' and/or 'PwC' refers to the individual members of thePricewaterhouseCoopers organisation in Thailand, each of which is a separate andindependent legal entity. Please see www.pwc.com/structure for further details.

maximise 29-30 october 2013 - pwc · 2015-06-03 · september 2014 december 2015 completionof...

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