Tax Planning for
International Investment
Jonathan C. Blaine, Esq.
(LLM, JD, CPA, MCSI)
Director – Tax
DFDL (Thailand) Ltd.
Spring 2021
Topics
TOPICS
 What is Tax?
 What is Taxable Income?
 How do we analyze and plan for taxes
(Timing/Charater/Source)?
 What about International Taxation?
 What are Double Taxation Agreements (“DTA”)?
 What examples International Investment Strategies




Indian investment via Mauritius
Permanent Establishment: Lone Star Funds and KEB
Securitization in Ireland: Lehman and Korea NPL’s
Labuan, Malaysia for Capital Gains& Business Profits: GS, Newbridge
Capital, The Carlyle Group
What
is Tax?
TOPICS
 Social Contract View
 The costs of living in a society
 Libertarian View
 Theft of one’s property/form of slavery
 Statutory in Nature = imposed by government
 Should not be informal payments (quasi bribes)
 Judge Learned Hand:
“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to
choose that pattern which best pays the treasury.There is not even a patriotic duty to increase one's
taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs
as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody
owes any public duty to pay more than the law demands.” - Gregory v. Helvering 69 F.2d 809, 810 (2d Cir.
1934), aff'd, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935)
What is Taxable
TOPICSIncome?
 Income = economic gain
 Two definitional approaches:
1.
2.
Definitional approach: only that income expressly included
Comprehensive income approach: any benefit is income unless
excluded by law
 Income is net of expenses associated with the income
 Accrual v. cash based accounting for income taxes
 Timing can be used to reduce taxes by moving expenses
forward and deferring income to a later period
 Examples:
1. Sales: record revenue upon delivery not shipment
2. Compensation: Pension expenses deducted as incurred
3. Depreciation: use accelerated depretiation for tax purposes
How do we analyze
and plan for taxes?
TOPICS
 Income and Expense can be analyzed based on:
1. Timing
2. Character
3. Source
 Timing = When to recognize income or expense?
 See previous slide
 Recognized v. realized
 Examples = Capital Gains, Partnerships
 Character = What type of income is it?
 Capital gain v. Ordinary income
 Diviend v. Interest
 Example = Hybrid instrument for financing
 Souce = Where is the income from? (See next slide)
What about International
TOPICS Taxation?
 Residency = Where the “person” is subject to tax
 Source = Where the income is derived
 What about double taxation?
 SUBSIDIARY EXAMPLE:
Income
Local (Source) taxes
$100
Available for distribution
80
Taxes (Resident) @ 35%
(35)
After tax return
TOTAL TAXES PAID =
USPCO
(20)
$ 45
Dividends
FSUB
55%
20% More than if earned at home!
INCOME
What are Double Taxation
Agreements (“DTA”)?
TOPICS
 How do we address the double tax problem?
 Source country = Withholding Taxes; and
 Resident country = Foreign Tax Credits (FTC’s)
 SUBSIDIARY EXAMPLE:
Income
Local (Source) taxes
Available for distribution
Witholding Taxes 10%
Tax due to home country
After tax return
$100
(20)
80
(8)
(7)
$65
Taxes (Resident) @ 35% of Gross
Less: Credit taxes paid in Source
Taxes due to Resident
35
(28)
7
TOTAL TAXES PAID = 35% The same as if the income were earned at home.
Double Taxation
Agreements
TOPICS
(Problems/Opportunities)
 Aim is to reduce double taxation to promote international
investment (capital neutrality) and efficient uses of capital?
 “Treaty Shopping” can lead to tax exempt investment.
 Contrary to the spirit of these agreements.
 Treaties rely on definitions of charater and source:
1.
2.
3.
Dividends paid by a company resident in one country to a beneficial
owner resident in the other country are subject to taxation by source
country at reduced rates.
Interest arising in a country and paid to beneficial owner in the other
country is subject to taxation by source country at reduced rates.
Business Profits = Onlytaxable in source country if earned by a
Permanent Establishment
 Can we change the charater? Can we change the source?
Double Taxation
Agreements
TOPICS
(Problems/Opportunities)
1.
2.
3.
4.
5.
Apple (Ireland and EU)
Indian investment via Mauritius
Permanent Establishment: Lone Star Funds and KEB
Labuan, Malaysia for Capital Gains& Business Profits: GS, Newbridge
Capital, The Carlyle Group
Securitization in Ireland: Lehman and Korea NPL’s
AppleTOPICS
and the EU
1.
2.
3.
4.
5.
Apple has non-resident Ireland companies
These companies earn Royalties from EU countries (taxed at 3%-ish)
Paid onward to Bermuda (no-tax)
Not returned to US, non US tax
Ireland granted lower tax rate (EU complaint as state aid)
Treaty Shopping?
TOPICS
Indian Investment via Mauritius (Source Example)
 Non-Indian investors wishing to invest in the Indian stock market can do so
by setting up a corporation in Mauritius.
 If done correctly, the capital gains on shares traded in India can be avoided
with NO taxes paid to either India or Mauritius.
 How is this possible?
 India-Mauritius DTA exempts from Indian taxation any capital gains earned in





India by a Mauritius Company.
Mauritius domestic law will grant a license to a company for meeting minimal
requirements.
Under Mauritius law a company is resident if it is incorporated in Mauritius or has
its seat of management in Mauritius.
Foreign investors can invest in Indian shares and avoid Indian taxes on capital gains
under the treaty.
Mauritius has no capital gains taxes.
Mauritius does not impose withholding taxes on dividends.
Treaty Shopping?
TOPICS
Indian Investment via Mauritius
SOURCE: BUSINESSWORLD INDIA at
http://www.businessworldindia.com/Dec1106/big04.htm
Permanent Establishment?
TOPICS
Lone Star Funds and Korea Exchange Bank (Source & Character Example)
 Lone Star Funds (“LSF”) is a US based (Texas) global investment firm.
 LSF set up a subsidiary in Belgium (“LSF-KEB”).
 LSF-KEB holds shares in Korean Exchange Bank (“KEB”), which LSF
purchased at a distressed price during the Asian financial crisis (2003).
 LSF claimed that:
1. All the work on the deal was done by LSF, a US company, and
2. LSF-KEB, a Belgium based company only held shares, and
3. Lone Star has no Permanent Establishment in Korea, thus under the
relevant treaties no taxes can be imposed on these business profits.
 Previously, LBS sold the Star Tower building. The NTA claimed that sale
was subject to taxation under the US-Korea DTA, which provided for
taxation of transactions by Korea if >50% of the transaction value consisted
of real-estate situated in Korea by arguing that the Belgian entity was a
“paper company” without substance and thus, Korea could “look-though” the
entity to the parent LSF and apply the Korea-US treaty.
Permanent Establishment?
TOPICS
Lone Star Funds and Korea Exchange Bank
LSF
(US)
LSF - KEB
Hana
(Belgium)
(Korea)
51.2% Shares
KEB
KEB
(Korea)
(Korea)
Labuan, Malaysia
TOPICS
GS, Newbridge Financial, The Carlyle Group
 Many companies have structured their investments into Korea and other countries
through Labuan, Malaysia
 Labuan is a Special Economic Zone in Malaysia where there are no taxes imposed on
off-shore income from non-trading activities.
 There are no withholding taxes on dividends paid to shareholders and getting
residency is easy so many investment holding companies and other investors set-up a
company in Labuan and use that company to funnel investments into countries which
have a DTA with Malaysia.
 Goldman Sach’s, Newbridge Financial, The Carlyle Group and others made extensive
use of Labuan for investing in banks, real-estate and NPL securitization in Korea. By
doing so they avoided taxes in Korea and Malaysia.
 As long as these earnings are permanently re-invested outside the US, no taxes will
ever be paid on these earnings and they will reduce taxes on the financial statements
of these US based entities under APB23…..the topic of a later lecture.
Securitization Planning
TOPICS
Lehman and Korean NPL’s
 Lehman worked with the Korean government to assist in removing Non-
Performing Loans from Korean banks.
 Built a structure with Korean Asset Management Corporation (“KAMCO”)
 Structure used multiple methods of reducing Korean taxes
1.
2.
3.
4.
5.
Set bonds rates artificially high to reduce taxation by subjecting interest to withholding
taxes and not income taxes.
Used a Labuan based management company to provide services to the Special Purpose
Corporations (“SPC’s”) and charged excess fees to reduce Korean taxes.
Held bonds in SPC’s located in Ireland to reduce taxes on sales of bonds.
Utilized total return swaps as a funding device to avoid thin-capitalization taxation.
Providing a guarantee to third-party financing would have rendered a portion of interest
being paid as non-deductible.
Taxes would normally be creditable against US tax liability of 35% at a later date, so why
go through all the trouble? All of it was for the benefit of the arrangers who stood to make
a bonus based on revenues net of immediate taxes payable.
Securitization Planning?
TOPICS
Lehman and Korean NPL’s
LBHI
Cash
(US)
LBK Trust
(Ireland)
LBHI UK
Branch
𐑕𐑕
Opal Holdings
(Ireland)
Loan
KAMCO
GKI Korea
Limited
(Korea)
(Labuan)
Revival Fund
Management
Korea LLC
Loan
Opal SPV
(Ireland)
(US)
Corporate
Restructuring
Company
(Korea)
Management
Services
Cash
Secured Bonds @ 20%
Unsecured Bonds @ 25 %
LBGKI Trust
(Labuan)
GKI Holdings
Limited
Non-Performing
Loans (NPLs)
Cash
(Labuan)
Cash
SPV 1
SPV 2
(Korea)
(Korea)
REFORMS
TOPICS
 Renegotiation of treaties to require substance for residence
 Limitations on Benefits articles being added to treaties
 “Tax Haven” lists being produced by some countries and OECD
 Minimum taxes paid requirements
 Enhanced tax shelter reporting and monitoring
 Enhanced information sharing agreements (FATCA and GATCA)
 Participation Exemptions for Foreign Earnings
 Tax Morality = OECD Base Erosion and Profit Shifting
 Google, Amazon, Starbucks = Not Taxes in the UK
 Justin King, Sainsbury's chief executive: “tax is a moral issue” for
British companies
 Bill Gates: “Corporate tax is not a moral issue”
How BEPS developments are affecting Thailand?
 Project that grew out of G20 and OECD to address perceived abuses
in tax planning and arbitrage structuring
 Inclusive framework including developing country input
 15 Action Items (see next slide)
 Multiple means of participation
1. Global Forum on Transparency and
Exchange of Information for Tax Purposes
2. Inclusive Framework
3. Multi-lateral Instrument (MLI)
 THAILAND joined Global Forum in January 2017 &
The Inclusive Framework in June 2017
19
How BEPS developments are affecting Thailand?
1
DIGITAL ECONOMY
2
HYBRIDS
11
3
CFC RULES
4
5
6
7
TRANSFER PRICING: INTANGIBLES, RISKS
8-10 & CAPITAL, HIGH-RISK TRANSACTIONS
BEPS DATA ANALYSIS
12
DISCLOSURE OF AGGRESSIVE TAX
PLANNING
13
TRANSFER PRICING
DOCUMENTATION
INTEREST DEDUCTIONS
HARMFUL TAX PRACTICES
14
TREATY ABUSE
PERMANENT ESTABLISHMENT STATUS
15
DISPUTE RESOLUTION (MAP)
MULTILATERAL INSTRUMENT
20
How BEPS developments are affecting Thailand?
PREVENT
TREATY ABUSE
C-b-C
REPORTING
FIGHTING
HARMFUL TAX
PRACTICES
IMPROVING
DISPUTE
RESOLUTION
• Modification of DTA’s to prevent Treaty Shopping = (LOBs)
• Increased scrutiny and substance requirements for CoR
• Require reporting for MNEs with group revenue over €750 M
• Taxable profit, tax payments, business activities, investment
• Thailand will share information with other Framework members
• Regimes, Unilateral APAs, Tax rulings, other Preferential Matters
• Domestic and Treaty updating for Mutual Agreement Procedures
• 24 month resolution period + Tax Arbitration?
21