Asset finance and leasing

www.pwc.com Asset finance and leasing Clarence Leung Director, Hong Kong Brian Leonard Partner, Ireland Lim Maan Huey Partner, Singapore

1. Introduction Clarence Leung Director, Hong Kong +852 2289 3599 clarence.kf.leung@hk.pwc.com Brian Leonard Partner, Ireland +353 1 792 6179 brian.a.leonard@ie.pwc.com Lim Maan Huey Partner, Singapore +65 6236 3702 maan.huey.lim@sg.pwc.com 2

Agenda 1. Developments and updates 2. BEPS recent developments 3. BEPS impacts network discussion 3

1.1 Developments and updates Hong Kong / China 4

Latest developments HONG KONG 5

Latest developments in Hong Kong 14 Jan 2015 Chief Executive, Mr. CY Leung, said that Hong Kong Government should promote aircraft and ship leasing to capture the opportunity in China 25 Feb 2015 Financial Secretary, John Tsang, echoed Chief Executive s message in the Policy Address on the Budget Day 1Apr 2015 4 th Protocol on the double tax treaty agreement between China and Hong Kong to reduce the withholding tax rate on aircraft and ship leasing to 5%, the lowest among the CDA signed by China 6

Reduced withholding tax on aircraft and shipping rentals Hong Kong signed the Fourth Protocol to the Arrangement for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income with the PRC Reduced PRC withholding tax on lease rentals from 7% to cap of 5% Hong Kong will be the jurisdiction with the lowest withholding tax applied by rentals paid by PRC lessees, followed by Singapore and Ireland of 6% withholding tax Boosts Hong Kong s development as an asset leasing hub 7

Latest developments CHINA 8

Developments in the Chinese factoring market 2009 to 2013 Total global factoring average annual growth rate was approximately 15%, while China s annual growth rate was 54% 2013 China accounted for 17% (about EUR378 bn) of the global factoring value (about EUR2.23 trillion) Since 2011, China has replaced UK as the world s largest factoring country 25000 20000 15000 10000 5000 0 2009 2010 2011 2012 2013 China Global 9

Developments in the Chinese factoring market 2013 Chinese factoring market valued at EUR378.1bn (EUR295.4bn domestic, EUR82.7bn international) End of 2013 200 factoring companies registered in China, bringing the total number of Chinese factoring companies to 284 End of 2014 over 700 Chinese factoring companies (compared to 284 as at end of 2013) 2013 China factoring market Domestic International 10

Characteristics of the Chinese factoring market Number of factoring companies increasing rapidly, but banks are the main drivers of the factoring industry The factoring market in China is limited to a few type of products, and most of them are recourse factoring products 5% Factoring products 12% Recourse factoring Non-recourse factoring 14% Reverse factoring 69% Bank - Company cooperative factoring 11

Geographic location - important Free Trade Zones (FTZ) for leasing and factoring industry At the end of 2011, the Ministry of Commerce promulgated the Guidance on Promoting the Development of Financial Leasing Industry during the 12th five-years period. The guidance encourages the formation of the leasing industry development centers. Enhance the function of financial leasing in Qianhai, Shanghai and Tianjin 天 津 自 贸 区 四 川 上 海 自 贸 区 深 圳 前 海 北 京 石 景 山 重 庆 广 东 自 贸 区 Hong Kong is also mentioned. 香 港 Open up factoring business in Shanghai Pudong, Qianhai, Guangzhou, Tianjin Binhai, Beijing 福 建 自 贸 区 12

China trade factoring China tax considerations Buyer 1. Receivables 3. Credit investigation Seller Factoring company Corporate income tax at 25% Turnover tax at 5% VAT reform for the financial services sector to be implemented in 2015 Seller Financing charges and interest expenses will be deductible provided valid VAT invoices are obtained Bank Factoring company Funds Tax issues Should the seller or buyer repay the loan? Invoicing for sale Deductibility of input tax for the buyer Deductibility of interest expenses to the seller (whether the factoring company will issue tax invoices) 13

China factoring of leases China tax considerations Factoring company Corporate income tax at 25% Manufacturer Turnover tax at 5% VAT reform for the financial services sector to be implemented in 2015 Factoring company Transfer of lease interest and financing Financing costs Assets Lessor Lessee Lessor VAT of 17% for operating leases VAT of 17% for finance leases, with possibility of VAT refund Financing charges and interest expenses will be deductible Tax issues Should lessor or factoring company be receiving the lease income? Should the factoring company or the lessor be issued with the leasing tax invoice? Deductibility issues for the input VAT for the lessee? Deductibility of interest expenses to the lessor (whether the factoring company will issue tax invoices) 14

1.2 Developments and updates Ireland 15

Irish leasing tax regime overview Funds flowing into Ireland Taxation within Ireland Funds flowing from Ireland Extensive tax treaty network (72 signed) supplemented by access to EU Directives. Generally 0% withholding tax rates on inbound lease rentals. No capital duty on equity investments. Not considered a tax haven. No banking secrecy rules or exchange of information blockages. 12.5% trading corporate tax rate. Revenue published safe harbour trading rules for aircraft lessors. Efficient holding, securitisation and financing structures available, including tax neutral Section 110 vehicles. Fully deductible trade interest, no thin capitalisation issues or CFC rules. Tax losses available against prior profits, future profits, and can be grouped out. Legislation introduced to facilitate EETC arrangements. No capital duty/ net wealth taxes. Stamp duty exemptions and effective 0% VAT regime. 0% withholding tax rate on outbound lease rentals. Generally, no withholding tax on interest, dividends and royalties to EU and treaty countries. Ability to mitigate withholding tax to non treaty countries, particularly dividends, under domestic law. Manageable migration or exit planning. Tax-efficient restructuring options 16

Section 110 company What is a Section 110 company An Irish Special Purpose Vehicle (SPV) can be funded by way of external debt and/or internal debt/ equity. The SPV will use these funds to acquire assets (including aircraft/engines). The internal debt/equity generally takes the form of a profit participation loan (PPL) issued by the SPV. This PPL will be the mechanism used to extract surplus cash and/or taxable profits from the SPV. Takes the form of a normal Irish company. Flexibility in corporate structure - can be formed as limited or unlimited company, private or public. A Section 110 company must elect into the regime. To do so a number of conditions must be satisfied. The main conditions require that the company should (1) be tax resident in Ireland, (2) carry on a business of acquiring, holding or managing qualifying assets (can include the leasing of aircraft, engines, etc.) and (3) holds qualifying assets with a market value of not less than EUR10m on the day on which the assets are first acquired. 17

Section 110 company Taxation of a Section 110 company Section 110 companies are taxed on their profits at the higher rate of Irish corporation tax of 25%. Taxable profits are calculated under the rules applicable to normal trading companies. This means that tax deductions are allowable for normal trading expenses such as trading interest, broker fees, management fees, etc. In addition, a deduction is allowed for profit participating interest. Certain anti-avoidance provisions which restrict deductibility of interest paid need to be considered. Small taxable spread (typically EUR1,000/EUR5,000 annually) left at the level of the Section 110 company each year (the PPL is the mechanism used to achieve the small spread). Section 110 companies are entitled to tax depreciation/capital allowances where the usual prerequisite conditions are satisfied. Section 110 companies benefit from Ireland s DTA network and also EU Directives in respect of inbound flows of income or gains. Any tax losses incurred by the Section 110 may be carried forward against future taxable profits but cannot be carried back against the profits of an earlier accounting period or relieved against the profits of any other group company. 18

Section 110 structures Section 110 owning assets and leasing directly Parent company Intermediary group Co PPL Group/third party external senior debt Group treasury Co / external bank Irish leasing Co. Irish Section 110 (leasing vehicle) Lease A (Country A) Lease B (Country B) Lease C (Country C) Third party/group leases 19

Ireland treaty submission/ treaty updates Tax Director Network (1/2) Ireland established the Aviation Leasing Tax Director Network in 2014. The network comprises senior tax and finance professionals of the largest global aircraft lessors (based in Ireland and abroad) as well as major engine, helicopter and OEM lessors. The network was established to share Irish and international industry tax developments with a view to representing the industry at relevant governmental and OECD level where appropriate through round table discussions. While Ireland s double tax treaty continues to expand, (see further below), the network made a submission to the Irish Revenue with regard to specific double tax treaties which would be beneficial for the aircraft leasing industry in Ireland. 20

Ireland treaty submission/ treaty updates Tax Director Network (2/2) The submission was made to the Irish Revenue on 6 March 2015 and outlined a list of double tax treaties which the network believes require renegotiation (Japan, Australia and Malaysia). Also included in this submission was a list of territories with which Ireland does not currently have a double tax treaty but whose leasing business is steadily increasing and therefore Irish lessors would greatly benefit from double tax treaties with these countries (Indonesia, Brazil, Kazakhstan, Argentina, Nigeria, Taiwan and Mongolia). Ireland had a follow up meeting with the Irish Revenue in relation to the submission. 21

Ireland treaty submission/ treaty updates Treaty network recent developments Ireland has signed comprehensive double taxation agreements with 72 countries, of which 68 are in effect, which continues to expand. New agreements have been signed with Botswana, Thailand, Ukraine, Ethiopia, Zambia and Pakistan. Treaty discussions have commenced recently with Kazakhstan. A new agreement with Turkmenistan is expected to be signed shortly. Negotiations are ongoing for new treaties with Azerbaijan, Jordan and Ghana. 22

Domestic legislative and policy updates Employment Tax Special Assignee Relief Programme (SARP) Introduced in 2012 and extended to 2017. Removal of relief threshold amount of EUR500,000. Requirement not to be resident elsewhere removed. Relaxation for the requirement to perform all of their duties in Ireland as well as reduction in previous employment from 12 months to 6 months. Employment Tax Foreign Earnings Deduction (FED) Extended to 2017, allows a deduction of up to EUR35,000 per annum for employees who spend a minimum 40 days outside Ireland (reduced from 60 days). Qualifying countries extended to include Chile, Indonesia, Japan, Malaysia, Saudi Arabia, Singapore, United Arab Emirates and more. 23

Domestic legislative and policy updates Transfer Pricing TPCR (Irish Revenue Transfer Pricing Compliance Review) previously introduced however Irish Revenue now conducting field Audits. Domestic legislation in line with international standards. National Aviation Policy Ireland has also published a draft national aviation policy, which specifically endorses the aircraft leasing industry. Evidence of continued support from governmental and regulatory authorities. 24

1.3 Developments and updates Singapore 25

Offshore leasing Lease income from offshore leasing is taxed at 10%. Lessor Lease arrangement For equipment used outside Singapore Not a finance lease treated as a sale Lease payments Not in SGD Not deductible against Singaporesourced income Lessee 26

Offshore leasing Budget 2015 changes With effect from 1 January 2016, the concessionary tax rate for offshore leasing of plant or machinery will not be available. Lease arrangement For equipment used outside Singapore Not a finance lease treated as a sale Lessor Lessee Lease payments Not in SGD Not deductible against Singaporesourced income 27

Maritime sector tax concessions Owners/ operators Service providers Financing MSI Shipping Enterprise (SG Flag) (MSI-SRS) Tax exemption MSI Maritime Leasing (Ship) (MSI-ML) Tax Exemption on leasing income and 10% on managing shipping investment enterprise Change MSI Shipping Related Support Services (MIS-MSS) 10% on incremental qualifying income Automatic WHT exemption for qualifying financing arrangements Change MSI Approved International Shipping Enterprise (Foreign-Flag) (MSI-AIS) Tax exemption MSI ML (Container) 5% or 10% on leasing income and 10% on managing container investment enterprise Change 28

Factoring of trade receivables Singapore tax considerations Discount or commission Factor Seller Receivables Transfer of receivables Key issues Is the substance of the transaction a true sale or secured loan arrangement? Should withholding tax apply on the discount or commission borne by the seller where the factor is not resident in Singapore? Should the discount or commission be deductible against the seller s income? GST treatment of the discount or commission Customer 29

Singapore s treaty network Number of treaties 76 Number of treaties where Royalties article does not include consideration for use or right to use equipment Treaties entered into force in the past 12 months Treaties amended in the past 12 months but not yet ratified Treaties signed in the past 12 months but not yet ratified 16 (including Guernsey, Ireland, Jersey, South Africa, Spain, Switzerland, UK) Barbados* Liechtenstein* France UAE* Rwanda* Seychelles* Uruguay* Treaties where Interest article provides for withholding tax exemption for non-residents Mauritius Luxembourg* (treaty not yet ratified) * The Royalties article in these treaties does not include consideration for use or right to use equipment. 30

2. BEPS recent developments 31

The BEPS action plan Partly September 2014, partly September/December2015 September 2014 deadline September 2015 deadline ACTION 1: ACTION 2: ACTION 3: ACTION 4: ACTION 5: Address the challenges of the digital economy Neutralise the effect of hybrid mismatch arrangements Strengthen CFC rules Limit base erosion via interest deductions and other financial payments Counter harmful tax practices more effectively, taking into account transparency and substance ACTION 6: ACTION 7: ACTION 8: ACTION 9: ACTION 10: Prevent treaty abuse Prevent the artificial avoidance of PE status Assuring that TP outcomes are in line with value creation Intangibles Assuring that TP outcomes are in line with value creation Risks & capital Assuring that TP outcomes are in line with value creation Other high-risk transactions ACTION 11: ACTION 12: ACTION 13: ACTION 14: ACTION 15: Establish methodologies to collect and analyse 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 32

Responding to BEPS affected areas 33

Action 13 Transfer Pricing Documentation High risk actions Overall risk assessment There are a number of areas where BEPS could lead to adverseconsequences.theactionareasposingthegreatest material risk to the aircraft leasing industry are: Action 6 Treaty Abuse Action 7 Avoidance of PE Action 4 Interest Deductibility Action 13 TP documentation Action 15 Multilateral instrument Action 15 Multilateral Instrument Action 4 Interest Deductibility Overall Risk Action 6 Tax Treaty Abuse Action 7 Avoidance of PE This high-level assessments is designed to help give you a better understanding of the specific action areas we believe provide the highest potential risk to lessors in the Aircraft Leasing industry caused by the OECD BEPS action plan and other associated developments. Action 6 Tax Treaty Abuse Summary The implementation of a Limitation of Benefits clause (LoB) and/or principal purpose test (PPT) proposed by Action 6 could have a material impact on corporate structures within the aircraft leasing industry. Widespread implementation would threaten the sustainability of well established leasing arrangements such as the head lease/sub lease structure. Sufficient business activity may be required in order to avail of treaty benefits potentially requiring significant operational re-organisation in order to provide substance permitting the utilisation of favourable treaty benefits. Action 7 Artificial Avoidance of PE Summary The PE paper poses a risk to the operational and corporate structure of aircraft lessors due to the nature in which business is conducted within the industry. In the absence of mitigating measures, the implementation of this action maycreatetaxablepe sforaircraftlessorsacrosstheglobeincurring bothadministrationandcompliancecosts.in addition to this, additional risk is also created by the establishment of a PE with regards to local tax authorities determination of attributable profits. Action 4 Interest Deductions Summary The Interest Deductions paper poses a risk to group effective tax rates in the aircraft leasing industry. Affecting both related and third party funding of aircraft leasing groups, changes in the availability of deductions relating to interest expense payments may cause a material impact to the industry. Action 13 Transfer Pricing Documentation Summary Related party transactions are a common feature of the leasing industry, arising in the context of funding, asset servicing, credit approval, cross guarantees and head lease/sub lease structures. The introduction of country by country reporting requirements will place considerable pressure on existing resources to meet the administration obligations. Risk is further augmented due to potential scrutiny from tax authorities on foot of extensive TP documentation requirements. Action 15 Developing a Multilateral Instrument Summary In order to implement the above the BEPS actions, and in particular those mentioned above, changes to a network of over 3,000 bilateral agreements would be required. To overcome the burdensome and potentially inhibiting nature of such action, a multilateral instrument will instead be used to amend such agreements in one action facilitating the successful and timely implementation of the BEPS programme. 34

3. BEPS impact network discussion 35

Key considerations Final submissions/ representation on PE and Treaty Actions. Unilateral developments influenced by BEPS Agenda. Likely impact on corporate structure and business model. Questions for all: - Have government / tax authorities in your country been influenced by BEPS Actions to date / have they introduced any unilateral legislation or commented on BEPS? - Has there been a response by any of the lessors /lessees in your jurisdiction? - Are you considering ways to mitigate the potential effect of these developments or are you still adopting a wait and see approach? 36

Thank you. The information contained in this presentation is of a general nature only. It is not meant to be comprehensive and does not constitute the rendering of legal, tax or other professional advice or service by PricewaterhouseCoopers Ltd. (""). has no obligation to update the information as law and practices change. The application and impact of laws can vary widely based on the specific facts involved. Before taking any action, please ensure that you obtain advice specific to your circumstances from your usual client service team or your other advisers. The materials contained in this presentation were assembled in May 2015 and were based on the law enforceable and information available at that time. 2015. All rights reserved. refers to the network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.