Time to grab the opportunity, manage risks, and take the lead

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Clifton Lewis
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1 Time to grab the opportunity, manage risks, and take the lead Aircraft Financing and Leasing

2 Contents Challenges faced by the industry... 1 Our core competencies... 2 Our services... 4 Our team... 6

3 Challenges faced by the industry How the change in accounting standard will affect business models and strategies Lessees should no longer differentiate between operating and finance lease under the new accounting standard. Instead, nearly all leased assets should be recognised on the balance sheet. This would lead to drastic changes in the lessee s financial statements which would be taken into account when deciding between acquiring and leasing. Even if the lessee continues to lease, they would take measures to mitigate the impact on key financial indicators. Examples of these key measures are reducing lease periods, use of variable lease rentals, and RMB denomination rather than using USD. Although accounting treatment is not the major factor in determining a business model and strategy, lessors will have to adjust their business models and pricing to better reflect changes in market conditions. Leasing companies will also have to re-evaluate the efficacy of its operational and legal structure, for example using joint ventures and/or special purpose vehicles set up for leasing purposes. Risks faced in management Risk due to compliance requirements by foreign regulatory bodies Country and credit risk Diverse sources and terms in financing to reduce interest rate and exchange rate risk Risks of impairment of aircraft requires better risk management and monitoring of financial accounts Aircraft residual value and asset portfolio management Challenges faced in taxation Compared to Europe and the United States, the Asian aircraft leasing business is relatively young. As the industry grows in mainland China and Hong Kong, we foresee a strong demand in professional services and experts including those in taxation, legal matters, and lease management. Aircraft leasing arrangements are usually very complex and can involve numerous jurisdictions. Hence, tax professionals have to be equipped with extensive knowledge of international tax and real world experiences. Other than the above, tax professionals also have to be knowledgeable about common legal structures within the business and be in constant communication with legal professionals to ensure that tax advice is commercially and legally viable. They are also required to demonstrate business acumen and global perspective and comment on operational proposals from a business perspective. Countries are increasingly aware of profit shifting and tax avoidance issues subsequent to the issuance of The Organisation for Economic Co-operation and Development (OECD) s guidance on Base Erosion and Profit Shifting (BEPS). We predict that anti-avoidance will become a major challenge for the aircraft leasing industry. In order to respond appropriately, tax professionals will have to familiarise themselves with the BEPS rules and their effect on double tax agreements. Firms providing tax services will also have to have a vast global network to remain updated on any modifications. Challenges faced in legal The new accounting standard poses new challenges to aircraft leasing arrangements and transaction structures. Relevant parties would have to assess the accounting, taxation and legal risks. Cross-border aircraft financing and/or leasing structures are complex and usually involve multiple jurisdictions. Hence, an experienced legal team should be engaged to review existing lease agreements to ascertain which transactions will be affected by the new accounting standard. Transaction parties should maintain close contact with accounting and tax professionals to work out solutions and avoid legal risk. Transaction parties should also work out how they will coordinate with tax and other regulatory authorities to minimise issues that may arise from the change in accounting standard. Time to grab the opportunity, manage risks, and take the lead Aircraft Financing and Leasing 1

Our core competencies We offer one-stop comprehensive services that utilises one platform for professionals in multiple disciplines to cooperate, increasing efficiency and providing an all-inclusive

4 Our core competencies We offer one-stop comprehensive services that utilises one platform for professionals in multiple disciplines to cooperate, increasing efficiency and providing an all-inclusive solution for our clients. Accounting advisory services PwC s accounting advisory department has many experienced accounting professionals who are adept in dealing with a diverse array of projects such as restructuring, public listing, acquisitions and reforms. In supporting the audit engagement, our accounting advisory team maintains close contact with the Ministry of Finance, Chinese Securities Regulatory Commission, stock exchanges and the Chinese Institute of Certified Public Accountants in order to alert our clients of the latest updates and provide timely and appropriate advice. PwC s extensive global network allows the sharing of experiences. The team also communicates with the International Accounting Standards Board, providing comments and hence influencing the establishment and revision of International Financial Reporting Standards. This allows us to aid our clients in facing challenges that arise from the change of both local and international financial reporting standards and identify trends and developments. Consulting services PwC has a specialised consulting team providing comprehensive services to leasing and financing clients. We have provided relevant training and advice to the China Banking Regulatory Commission ( CBRC ) and the People s Bank of China and are therefore able to understand the regulator s standpoints and ways of thinking. In addition, we are engaged by regional CBRC to conduct site inspections and evaluations in relation to the risk management of several financial institutions, and we have provided relevant inspection results and rectification opinions in this regard. We have built and optimised risk management systems for leading leasing and financing companies in China pursuant to guidelines provided under the New Basel Accord. Our design incorporates advance and adaptable credit risk measurement tools and instructions on the system s demand on businesses (including advice on the client s credit rating). We have assisted renowned Chinese financing and leasing companies with building their data sourcing system and a platform for early warning monitoring which included: a synchronised view of internal and external information, pre-leasing scan of risks, analysis of stock assets and an early warning mechanism. The platform may be connected with the company s existing internal information systems. We are experienced in advising on interest rate risk management and can assist clients in differentiating, quantifying, managing and monitoring their interest rate risk. We have been involved in liquidity risk management engagements for more than 15 financial institutions within the banking industry. We cooperate with national organisations such as the China Finance 40 Forum, China Leasing 30 Forum, and China Association of Enterprises with Foreign Investment s leasing committee and also with local leasing associations in Shanghai, Beijing, Zhejiang, and Fujian. We have been invited to speak at many national and regional industry forums. 2 PwC

Valuation We have a professional valuation service team with many years experience acquired both from home and abroad, which has won a broad recognition in both methodology and practices of asset

5 Valuation We have a professional valuation service team with many years experience acquired both from home and abroad, which has won a broad recognition in both methodology and practices of asset appraisal. Also, we have government-recognised asset appraisal qualifications that enable us to engage asset appraisal business in the territories of China, whether for state-owned or non-state owned assets. We have repeatedly assisted audit team in reviewing various appraisal reports issued by airline companies for purposes of financial reporting, including post-merger appraisal on multiple intangible assets for apportion of merger consideration, annual impairment test for long-term assets/goodwill and fair value measurement of financial instruments. Taxation services We have a specialised team to handle tax engagements for the aircraft leasing industry. Our team closely monitors the development of Hong Kong s proposed tax regime and maintains close contact with the relevant government authorities. We act as the communicator between market participants and the government, raising their concerns and providing assistance and advice to both parties. We are familiar with the relevant laws in Hong Kong and the newest trends in the industry and can provide our clients with first-hand information on the latest updates. Our team has already assisted multiple sizable aircraft leasing companies (included listed companies) for many years, accumulating experience in international tax planning and typical leasing structures such as using leasing platforms in existing leasing hubs, Ireland and Singapore and Japanese Operating Lease with Call Option (JOLCO). At the same time, we are familiar with the typical operation of an aircraft leasing company which allows to add value for the client when we are providing our tax advice. PwC has a broad global network and our tax professionals covers all corners of the world, allowing us to cope with the cross-border taxation needs of our clients. Our team has local experts which can effectively liaise with European, American and other Asian clients and professionals. For our mainland Chinese leasing companies, we can provide our services in Chinese whilst communicating with our foreign counterparts in English, eliminating the language barrier and serving clients from all around the world. Legal services Our legal team, Rui Bai Law Firm, is familiar with laws relevant to the aircraft financing and leasing. The legal team works closely with Chinese and foreign lenders, lessors and Chinese airlines on matters relating to aircraft, engines and other equipment, including sale and purchase, financing, leasing and dispute resolution. In the past, the team has been involved in various types of transactions such as JOLCO, US EXIM backed financing of Boeing aircraft, US tax leasing, ECA supported financing of Airbus aircraft, Export Development Canada (EDC) financed Bombardier aircraft, BNDES financed Embraer 190 aircraft, Chinese lessors cross-border leases and more. It is worth noting that we were involved in many most new French leveraged lease, Japanese operating lease and French operating lease involving Chinese lessors and/or lessees in the past few years. We have also represented Chinese and Hong Kong leasing companies in aircraft financing and leasing projects through special purpose vehicles. Moreover, lawyers are very experienced in financing settlements for Boeing, Airbus and Embraer aircrafts. Rui Bai Law Firm is a member of the PwC global network of firms. PwC s global network includes legal service providers that spans more than 90 countries. This ensures that we can help Chinese leasing companies expand its global reach in aircraft leasing business. Time to grab the opportunity, manage risks, and take the lead Aircraft Financing and Leasing 3

Our services Accounting consultation impacts of new accounting standard on business models and strategies Our partner is one of the core members of the China Accounting Standards Committee working

6 Our services Accounting consultation impacts of new accounting standard on business models and strategies Our partner is one of the core members of the China Accounting Standards Committee working group on leasing standards. We have in-depth and forward-looking understanding of the new accounting standard. We have worked with all airlines in China and hence we are well aware of their needs. We have access to PwC s global network for knowledge sharing in this industry. In this regard, we can help you: To evaluate the potential impact to existing business and various financial indicators due to the accounting treatments being adopted by lessors and lessees under the new accounting standard. By utilising evaluation results to help companies devise new business strategy in order to optimise the business opportunities; To liaise with the relevant tax authorities in order to facilitate tax planning; To evaluate the potential impact of business with lessees and assist in the negotiation with lessees in relation to lease contract terms; To establish communication channels with the lessee (e.g., workshops, online learning platform etc.) To understand lessees needs on information and effectively provide the relevant information for systems update purposes. Risk management consultation for aircraft leasing PwC is building the leading consulting team within the leasing industry in the Mainland China market. We have an in-depth understanding of and rich experience in aircraft leasing risk management. Based on our knowledge of the industry, we can assist you: To assess and conduct benchmarking analysis upon the aircraft leasing company s management on credit risk, exchange rate risk, operational risk, asset and residual value risk management etc., in order to enhance the aircraft leasing company s risk management and assessment management. Aircraft leasing is an asset-intensive industry. Against the highly transparent rental amount, the fierce competition among the industry and potential influence bring by interest rate fluctuations, we could assist the company to tailor the interest rate risk calculation and managing means and hedging strategies through combining the business development, management needs and available financing channels. With the diversification of financing channels available for aircraft leasing companies and involvement of multiple currency in loans/debts, we assist companies to identify the impact of exchange rate fluctuation exposures, through evaluating the exchange rate fluctuation on the currencies being adopted in company s loans, business income etc., and develop exchange rate risk measurement and management tools to assist the company to hedge against exchange rate risk. Valuation When it comes to measurement and presentation requirements for purposes of equity transfer or financial statements (such as impairment test, etc.), we are extremely honoured and more than willing to leverage our expertise and experience to provide the professional services in connection with: valuation analysis on the market value of all/part of shareholders equity involved in equity transactions; and valuation analysis on the fair value of asset group/portfolio in goodwill/ long-term asset impairment test As a general rule, income approach (discounted cash flow method) is the most widely used method that is in compliance with international practices of appraisal. In applying this method, we will normally review financial forecasts, including analysis and comparison of value-driven factors (which, in cases of airline companies, mainly include transport capacity, carrying capacity, fleet retention form, cost and expenses, income), analysis and calculation of appropriate discount rate, taking into account other factors that may affect valuation (such as aviation fuel price fluctuations and exchange rate risks, hedging arrangements, impact of fleet retention form on capital structures, etc.). 4 PwC

7 Taxation services Generally, our taxation services include the following two phases as set out below: A. Tax structuring and analysis To analyse financing arrangements for aircraft leasing from a tax perspective and advise on the potential tax implications, including: i. an assessment of whether withholding tax would be levied on the interest paid by the leasing platform to the third parties (e.g., Bank) and assess the applicability of tax treaties towards the arrangement; ii. an assessment of whether withholding tax would be levied on the interest paid by the leasing platform to its affiliated entities and assess the applicability of tax treaties towards the arrangement; and iii. advise on the loan arrangement between the company and affiliated entities from a transfer pricing perspective. To analyse the transfer of aircraft from tax perspective and advise on the potential tax implication, including: i. an assessment of the potential transfer taxes (e.g., stamp duty, turnover taxes etc.) may arise when transferring the aircraft ownership and advise on the potential jurisdiction for aircraft transfer to minimise the transfer tax; ii. an assessment of tariff/custom duty implication if any; and iii. an assessment of the novation of the lease (e.g., any stamp duty or corporation income tax) and advise accordingly. To analyse the leasing arrangement of the aircraft from tax perspective and advise on the potential tax implications, including: i. an analysis of whether withholding tax would be levied on the rental payments incurred by the airline and assess the applicability of tax treaties towards the arrangement; ii. an analysis of the domestic tax provisions, such as corporate income tax to be levied on lease rental received from airline/lessee, tax deductibility on interest expenses etc. and eligibility on tax treaties; iii. an analysis of the tax implications on future disposal of the aircraft. We can assist management to set up/review financial model for the proposed aircraft leasing project including computation of the internal rate of return (IRR), net present value (NPV) and effective tax rate (ETR) of the project for evaluation purposes. B. Review legal agreements Review loan agreements and propose amendments; Review lease agreements and propose amendments; Review other related agreements and propose amendments. Legal services Analyse and advise on the aircraft financing and/or leasing transaction structure from legal perspective. Conduct legal due diligence on the aircraft financing and/or leasing transactions. Draft transaction documents (e.g., Lease agreement) for proposed transaction structures. Prepare legal opinions on the aircraft financing and/or leasing arrangements. Handle ownership and mortgage registration for the aircraft leasing transactions. Restructure aircraft financing/leasing transaction in the event of change in law or default of the debtor. Dispute resolution arising from the aircraft financing or leasing transactions and recover the aircraft under the leasing arrangement if applicable. Time to grab the opportunity, manage risks, and take the lead Aircraft Financing and Leasing 5

Our team Tax Rex Ho Asia Pacific Banking & Capital

+852 2289 3599 clarence.kf.leung@hk.pwc.

pwc.com Legal Yi Liu Partner Rui Bai Law Firm +86 (10)

com Assurance Yvonne Kam Assurance Partner +86 (21) 2323

com Peter Li Hong Kong Financial Services / Assurance and

8 Our team Tax Rex Ho Asia Pacific Banking & Capital Markets Tax Leader / Hong Kong Financial Services Tax Leader rex.ho@hk.pwc.com Catherine Tsang Tax Partner +86 (755) catherine.tsang@cn.pwc.com Clarence Leung Asset Finance & Leasing Tax Partner clarence.kf.leung@hk.pwc.com Consulting Nova Chan Valuation Partner +86 (21) nova.chan@cn.pwc.com Michael N. Zhang Consulting Director +86 (10) michael.n.zhang@cn.pwc.com Kenneth T. Ma Consulting Senior Manager +86 (21) kenneth.t.ma@cn.pwc.com Legal Yi Liu Partner Rui Bai Law Firm +86 (10) yi.liu@ruibailaw.com Assurance Yvonne Kam Assurance Partner +86 (21) yvonne.kam@cn.pwc.com Peter Li Hong Kong Financial Services / Assurance and Banking & Capital Markets Leader peter.pt.li@hk.pwc.com Charles Chow China South Assurance Leader +86 (755) charles.s.chow@cn.pwc.com Monica Ng Assurance Partner monica.wy.ng@hk.pwc.com Keith Chau Assurance Partner keith.ck.chau@hk.pwc.com Rui Bai Law Firm is an independent law firm and a member of the PwC global network of firms 2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. HK C1

Financial Services Aircraft Leasing Forum

www.pwchk.com Financial Services Aircraft Leasing Forum How to structure an aircraft leasing fund? On 22 November 2017, PwC hosted its second Financial Services Aircraft Leasing Forum at our PwC office