International trends in taxation of capital and financial products and the impact on Thai Business

Transcription

1 15th Annual Conference Maximise International trends in taxation of capital and financial products and the impact on Thai Business Shareholder Value through Effective TAX Planning 2014

2 Agenda Section 1: International trends 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 Cross border leasing Substance vs Form Raising funds through capital market Slide 2

3 International trends Base Erosion and Profit Shifting ( BEPS ) Slide 3

4 The current environment Slide 4

5 Base Erosion and Profit Shifting ( BEPS ) What is BEPS? International tax planning Sometimes lead to double non-taxation. Slide 5

6 BEPS Foundation Use of low tax jurisdictions Use of hybrid financial instruments Application of treaty to digital goods and services Use of hybrid entities Core issues Shifting of mobile resources (capital, intangibles) Lack of resources to target the issues (Over) leveraging local operations Use of tax incentives Lack of information Coherence across international tax system Slide 6

7 What changes could BEPS lead to? Macro changes Harder to deal with tax authorities and secure agreements Shift to greater source based approach and potentially some clear winners (US, China, India) and losers (the Netherlands, Switzerland, Luxembourg & Ireland) Increased use of CFC regimes by tax authorities Treaty-shopping based structures under greater focus Jurisdiction to tax Transfer pricing Much more focus on substance (e.g. shift in TP to people-based confirmatory tests derived from Article 7) Extended Services PE test for digital business and greater focus on rep offices (prep and auxiliary exemption) Increased scrutiny of intangible property and beneficial ownership Purpose of capital and risk? Documentation and disclosure changes to come Impact on capital structure (including hybrid instruments) Focus on debt financing and guarantees Conduit financing structures Leverage Anti- avoidance Short term anti-avoidance measures General anti-avoidance approach by the tax authorities Increased cases where new rules developed with strong antiavoidance agenda e.g. OECD proposals on beneficial ownership, PE threshold and IP Slide 7

8 ...it s complicated! Slide 8

9 OECD BEPS action plan OECD REFORM G20 Leaders meeting in St. Petersburg 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. Slide 9

10 OECD BEPS action plan Timeline June 2012 Project announced / started July 2013 Release of action plan with 15 separate actions/work streams December 2015 Completion of remainder of action plan February 2013 Release of document, Addressing Base Erosion and Profit Shifting September 2014 Projected completion of approximately 1/3 of action plan 2016 and forward Monitoring, additional/ on-going actions Slide 10

11 BEPS 15 Actions Address the Tax challenges of the Digital Economy Neutralize the Effects of Hybrid Mismatch Arrangement Strengthen CFC rules Limit Base Erosion via Interest Deduction and Other Financial Payments Counter Harmful Tax Practice More Effectively, Taking into Account Transparency and Substance Prevent Treaty Abuse Prevent the Artificial Avoidance of PE Status Assure that Transfer Pricing Outcomes are in Line With Value Creation - Risks and Capital Assure that Transfer Pricing Outcomes are in Line With Value Creation Other High-Risk Transactions Establish Methodologies to Correct and Analyze Data on BEPS and the Actions to Address It Require Taxpayers to Disclose their Aggressive Tax Planning Arrangements Re-examine Transfer Pricing Documentation Make Dispute Resolution Mechanisms More Effective Develop a Multilateral Instrument Assure that Transfer Pricing Outcomes are in Line With Value Creation - Intangible Slide 11

12 BEPS 15 Actions Let s discuss in Section Neutralize the Effects of Hybrid Mismatch Arrangement Limit Base Erosion via Interest Deduction and Other Financial Payments Slide 12

13 BEPS on financial products in Thailand Slide 13

14 BEPS on financial products in Thailand Hybrid mismatch arrangements Slide 14

15 Hybrid mismatch arrangements Type of hybrid mismatch arrangements 1. Double deduction scheme 2. Deduction, no inclusion scheme 3. Foreign tax credit generators Ref: Hybrid mismatch arrangements: Tax policy and compliance issues, OECD, March 2012 Slide 15

16 Hybrid Instruments Definition Instruments which are treated differently for tax purposes in the countries involved, most prominently as debt in one country and as equity in another country. Ref: Hybrid mismatch arrangements: Tax policy and compliance issues, OECD, March 2012 Slide 16

17 Redeemable shares Key features: Company A Redeemable shares treated as debt instrument and dividends paid are considered interest payments and are tax deductible. Interest expense (Debt) Interest WHT rates imposed on payment. Abroad Thailand Recipient exempt from taxation as income considered dividend, not interest Dividend income (Equity) Company B Tax issues: Results in double non-taxation of income Slide 17

18 Perpetual bond Key features: Company A (Issuer) A bond with no maturity date Issuer pays coupons forever Long-term Loan Dividend income (Equity) Abroad Recipient country treats bond investment as equity not debt Thailand permits interest as tax deduction Thailand Interest expense (Debt) Company B (Buyer) Recipient country treats bond interest as tax exempt dividend Tax issues: Results in double non-taxation of income Slide 18

19 Other scheme applied in other countries Double deduction with hybrid entity Scheme: Company A Long-term Loan Hybrid entity Company A holds equity interest in Hybrid entity which in turn holds equity interest in Company B. Hybrid entity borrows from a third party and uses debt to inject as equity into Company B. Hybrid entity is treated as a branch ( disregarded entity ) of Company A and interest expenses of Hybrid entity tax deductible. But Hybrid entity and Company B are tax consolidated and thus interest expense of Hybrid entity is tax deductible (again) in Country B. Company B Tax issues: Group tax regime Results in double deduction of interest expense Slide 19

20 Other countries schemes Foreign tax credit generators (double deduction for foreign tax credit) Scheme SPV shares Company A wishes to borrow money from Company B. 1 Cash Company A Repo agreement Company B Cash It also issues bonds to SPV. 3 2 SPV shares SPV Issues bonds Company A sells shares of SPV to Company B, with a re-purchase ( Repo ) agreement. Dividends (cash flow) Tax implication Country B Country B considers this transaction a sale. Dividend income from SPV is taxed and Company B is granted foreign tax credits of tax paid by SPV Slide 20

21 Other countries schemes Foreign tax credit generators (double deduction for foreign tax credit) Tax implication Country A: SPV shares 1 In Country A, this transaction is treated as a loan by Company B to Company A that is secured through SPV shares. Country A applies an exemption for dividends received by Company B, or an indirect foreign tax credit regime that allows Company A to claim a tax credit for CIT paid by SPV. Company A further claims a deduction for the interest expenses on the deemed loan received equal to dividend payments. Cash Company A Repo agreement Company B Cash 3 2 SPV shares SPV Dividends (cash flow) Tax consequences: Two countries grant tax credits for taxes paid by SPV Slide 21

22 BEPS on financial products in Thailand Tax deduction of financial payments Slide 22

23 Derivative product, e.g. interest rate swap Lender Swapper 1 2 Interest Swap payment payment Abroad 3% 2% Thailand Loan (floating interest rate) Interest hedging Transactions: Lender provides loan to borrower at floating interest rate. Borrower enters into IRS (change from floating to fixed interest rate) with swapper. If floating rate is 3% and fixed rate is 5%, the borrower will make interest payment of 3% and swap payment of 2%. Borrower Slide 23

24 Derivative product, e.g. interest rate swap Lender Swapper 1 3% WHT on interest payment WHT on swap payment 2 Interest Swap payment payment Abroad Tax considerations: 2% Deductibility of interest and swap payments Thailand Loan (floating interest rate) Interest hedging Borrower Slide 24

25 Derivative product, e.g. interest rate swap Transactions: Lender + Swapper Loan (floating interest rate) +interest hedging Lender provides loan to borrower at floating interest rate. 1 Interest payment Abroad Thailand 2 Swap payment Borrower enters into IRS (change from floating to fixed interest rate) with swapper. If floating rate is 3% and fixed rate is 5%, the borrower will make interest payment of 3% and swap payment of 2%. Borrower Slide 25

26 Derivative product, e.g. interest rate swap Tax considerations: Lender + Swapper Loan (floating interest rate) +interest hedging WHT on interest payment WHT on swap payment 1 Interest payment Deductibility of interest and swap payments Abroad Thailand 2 Swap payment Borrower Slide 26

27 Derivative product, e.g. interest rate swap Transactions: Swapper (Head office) 2 Interest hedging Swap payment Abroad Thailand Loan (floating interest rate) Lender Borrower (Thailand Branch) Interest payment 1 Lender is a Thailand branch of foreign bank. Swapper is a foreign bank. Borrower enters into IRS (change from floating to fixed interest rate) with swapper. If floating rate is 3% and fixed rate is 5%, the borrower will make the interest payment of 3% to the lender (Thailand branch) and swap payment of 2% to the foreign swapper. Slide 27

28 Derivative product, e.g. interest rate swap Tax considerations: Swapper (Head office) 2 Interest hedging Swap payment Abroad Thailand WHT on interest payment to Thailand Branch WHT on swap payment to the foreign bank Deductibility of interest and swap payments Loan (floating interest rate) Lender Borrower (Thailand Branch) Interest payment 1 Slide 28

29 Derivative product, e.g. interest rate swap Departmental Instruction No. Paw 114/2545 and 136/2551 What is an income type of SWAP payment? 40(8) 40(4)(a) General cases Paw 114/2545 Swapper/lender is same entity Ignore intention Paw 136/2551 Swapper and lender are different entities Focus on intention Slide 29

30 Guarantee fee Parent Company 2 Loan guarantee Abroad Transactions: A foreign bank provides loan to Thai subsidiary of its customer. Parent Company of customer guarantees the loan. Thailand 1 Loan at 3% interest rate Interest payment Guarantee fee of 2% Thai Subsidiary Slide 30

31 Guarantee fee Parent Company 2 Loan guarantee Abroad Thailand 1 Loan at 3% interest rate Interest payment Tax considerations: WHT on interest payment to the foreign bank. WHT on guarantee fee paid to the parent company. Deductibility of interest and guarantee fee payments. Guarantee fee of 2% Thai Subsidiary Slide 31

32 Update on trends in Thailand Slide 32

33 Update on trends in Thailand Cross border leasing Slide 33

34 Loan VS Lease Traditional loan Principal Interest Cross-border leasing (financial lease) Lease payment (principal + interest) Slide 34

35 Loan VS Lease Description Legal form Security Loan Lease Loan contract Rental contract Unsecured (No asset-back) Secured (Asset-back) Depreciation of equipment Interest expense Lease payment 10%/15% WHT 15%/exempt/reduced WHT No VAT/ No SBT VAT/ No SBT Tax implications of borrower/ lessee i) CIT ii) WHT iii) VAT/SBT Slide 35

36 Cross border leasing Company A (Lessor) Country A Operating lease Depreciation Country B Company B (Lessee) Double dipping Financial lease Slide 36

37 Loan financing Interest payment Foreign lender Equipment manufacturer 1 Loan Payment for equipment Abroad Interest payment Thailand 3 Importation of equipment 2 Tax considerations: Tax deduction: principal and interest VAT arising on importation of equipment WHT on payment of interest and repayment of principal Loan Thai borrower Slide 37

38 Cross border leasing (financial lease) Payment for equipment Interest payment Foreign lessor Equipment manufacturer 1 Loan 2 VAT and WHT on lease payments Thailand 3 Importation of equipment Tax deduction of lease payments (principal + interest) VAT arising on importation of equipment Purchase of equipment Abroad Tax considerations: 4 Lease Lease payment Thai lessee Slide 38

39 Update on trends in Thailand Substance VS Form Slide 39

40 Substance VS Form VS Slide 40

41 Substance VS Form Transactions: Law firm Abroad Company A entered into loan agreement with a bank. Company A was responsible for expenses incurred by the bank, e.g. service fee paid to law firm. Loan agreement Company A paid service fee directly to law firm. Thailand Payment of professional fee Company A Ref. Tax Ruling No. Gor Khor 0811/P/6058, dated 15/06/01 Slide 41

42 Substance VS Form Questions: Law firm Abroad Loan agreement Thailand Payment of professional fee Service fee or interest payment? Tax Service fee Interest payment WHT O P VAT P O Company A Ref. Tax Ruling No. Gor Khor 0811/P/6058, dated 15/06/01 Slide 42

43 Substance VS Form Transactions: Front end fee = 2% Housing loan agreement (Interest = 0%, 2%) Real estate company Purchase home Customer A Customer A entered into a housing loan agreement with a bank. Interest rate 2%. For the first year only, the bank gave Customer A zero interest rate since the real estate company absorbed this expense by paying a front end fee of 2%. Question: Front end fee = subject to SBT? Ref.: Tax Ruling No.Gor Khor 0706/11062, dated 14/11/03 Slide 43

44 Substance VS Form Manufacturer Interest Payment Transactions: Vendor Hire purchase agreement (Interest = 0%) Installment (plus VAT7%) Under the hire purchase agreement, there is no interest charged since the manufacturer absorbed the interest expense. Question: Interest payment = subject to VAT? Hire purchaser Ref.: Tax Ruling No.Gor Khor 0811/3074, dated 29/03/11 Slide 44

45 Update on trends in Thailand Raising funds through capital market Slide 45

46 Trend in fund raising 1 Raising funds through capital market 2 Raising funds through using their own assets Slide 46

47 Raising funds through capital market Factoring Sale & leaseback Securitisation Assets Project finance Existing assets Islamic finance Future assets Property fund Infrastructure fund REIT Slide 47

48 Raising funds through capital market Securitisation Infrastructure fund Slide 48

49 Securitisation Receivables are transferred to the SPV Receivables are collateral for newly-created securities 1 2 SPV (Special Purpose Vehicle) Transferor / originator Investor 4 3 Cash in exchange for receivables transferred Cash from sales of securities Objective Tax implications: (1) Transferor (2) SPV Slide 49

50 Infrastructure fund Model 1 Model 2 Direct investment in assets Investment through income distribution agreement Slide 50

51 Model 1 : Direct investment in assets Distribute dividend Purchase assets Infrastructure owner Fund Investor Transfer ownership Invest Royalty/ rent Licence/ lease Operator Pay for goods/services Provide goods/services End user Objectives Tax implications: (1) Infrastructure owner (2) Fund (3) Investor Slide 51

52 Model 1 : Direct investment in assets Party Tax implications Infrastructure owner Exempt from VAT/SBT/SD on the sales of assets provided that the assets are transferred back to the owner (except tangible assets which can be transferred to a government 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 CIT: -Domestic investor: 50% or 100% exemption - Overseas investor: no WHT Slide 52

53 Model 2 : Investment through income distribution agreement Share income Distribute dividend Payment of rights Infrastructure owner Fund Investor Invest Income distribution rights agreement Pay for goods/services Provide goods/services End user Objectives Tax implications: (1) Infrastructure owner (2) Fund (3) Investor Slide 53

54 Model 2 : Investment through income distribution agreement Party Tax implications Infrastructure owner Payment of rights in legal form might be taxable, but from substance it should be treated as loan principal, thus not subject to tax. Difference between payment of rights and share of future income payable should be treated as funding cost. Fund Out-of CIT scope. Difference between payment of rights and share of future income payable is subject to SBT Investor PIT: Dividend exempt for 10 years CIT: -Domestic investor: Dividend 50% or 100% exemption - Overseas investor: Dividend (40(8)) no WHT Slide 54

55 Q&A Slide 55

56 Contact Ornjira Tangwongyodying Prapasiri Kositthanakorn Partner Partner Tel. +66 (0) Tel. +66 (0) Orawan Fongasira Nopajaree Wattananukit Director Associate Director Tel. +66 (0) Tel. +66 (0) Slide 56

57 Thank you 2013 PricewaterhouseCoopers Legal & Tax Consultants Ltd. All rights reserved. 'PricewaterhouseCoopers' and/or '' refers to the individual members of the PricewaterhouseCoopers organisation in Thailand, each of which is a separate and independent legal entity. Please see for further details.