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Enron Mail |
Based on Ed's e-mail, given that Darren Delage will be in the Tokyo office
entering into trades, we should pursue a back-to-back trading arrangement. That is, Darren would be working for Enron Japan ("EJ") and would enter into the trades for EJ as principal. Then, EJ would enter into mirror trades with ENA. The tax issue then is a transfer pricing issue. Ed previously advised that the margin should be based on a profit-split method. In his June 23rd memo, he advised: "Such a profit split would likely be along the lines of the various profit split methods that have been used to allocate profits among branches or local entities of banks and financial institutions that engage in global trading operations. As we expect you are aware from experience in other jurisdictions, there is no clearly agreed upon set of factors to use in profit splits for global trading operations, but typical profit split factors employed have been trader compensation, back office compensation, a location or value factor, and perhaps a risk or capital factor. If our sense is correct that a profit split would ultimately be determined to be the appropriate price method, this could entail a substantial effort to make the necessary functional analysis to develop the profit split. These are initial impressions only and, on your request, we can evaluate the appropriate pricing method for the Japan financial trader operation in detail." Basically, under a profit split approach, Enron Japan should earn a margin depending on what risks it retains and the costs it occurs with respect to these back-to-back trades. The amount of the margin is something that we'll have to develop, based on how comparable unrelated trades would be priced. Please let me know if you have any questions or need any additional information. Best regards, Susan ---------------------- Forwarded by Susan Musch/ENRON_DEVELOPMENT on 09/25/2000 08:04 PM --------------------------- Edwin.T.Whatley@BAKERNET.com on 09/24/2000 10:54:02 PM To: Susan.Musch@enron.com cc: jane.mcbride@enron.com, john.viverito@enron.com, Jeremy.Pitts@BAKERNET.com, Alan.Aronowitz@enron.com, Paul.TYO.Davis@BakerNet.com, Yukinori.Watanabe@BAKERNET.com Subject: Enron: Japan-Based Trader/PE and TP Issues Dear Susan: We confirm that we continue to recommend the basic approaches put forward in the June 23, 2000 memo: either (1) use back-to-back transactions if it is essential to have Japan-based personnel trading for ENA or other offshore affiliates or (2)(preferable purely from the tax standpoint if acceptable in light of operational considerations) have personnel at Enron Australia (or other affiliate in an appropriate time zone) handle the Japan trading. Your description of the back-to-back trades as "mirror" transactions is correct in the sense that the trades would be symmetrical in order to transfer to ENA or other offshore affiliate the position it wants to take in the covered trade. The terms might differ depending what decision is made about what mechanism to compensate Enron Japan for transfer pricing purposes, i.e., if some margin were built into the back-to-back trades to compensate Enron Japan. As discussed in our June 23 memo, the transfer pricing issues are potentially difficult in view of the limited authority in this area, but in our view, such pricing issues would present less exposure than structuring the operation so that it would constitute a PE. If you have any questions, or if we can provide further assistance with this matter, please let us know. Best regards, Y. Watanabe/E. Whatley Edwin.T.Whatley@bakernet.com Phone: 81-3-3796-5857 Fax:81-3-3479-4224 Registered in Japan as an Attorney at Foreign Law; Jurisdiction of Primary Qualification--California; Designated Law--Washington, D.C. and All U.S. States Except Louisiana -----Original Message----- From: Susan.Musch@enron.com [mailto:Susan.Musch@enron.com] Sent: Monday, September 25, 2000 10:41 AM To: Paul.TYO.Davis@BakerNet.com; Edwin.T.Whatley@BAKERNET.com Cc: jane.mcbride@enron.com; john.viverito@enron.com; Jeremy.Pitts@bakernet.com; Alan.Aronowitz@enron.com Subject: Re: Trader Paul and Ed, I want to confirm my understanding of your advice from last week (attached below). I think you're advising consistent with what Ed had advised back in June, but I'm not totally sure. That is, it would be best to have back-to-back trades between Enron Japan ("EJ") and Enron North America ("ENA"). Under this scenario, DD would be an EJ employee who would enter into the trades for EJ as principal. Then, EJ would enter into mirror trades with ENA. The issue, as I understand it, under this scenario is that the NTA could assert transfer pricing issues if the trades between EJ and ENA weren't at arms' length. Would you please confirm that this is your conclusion on how the trades should be structured? I am trying to get this structure resolved by Monday night (Houston time) so I would appreciate your thoughts in an e-mail during your Monday. Best regards, Susan
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