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Enron Mail |
I received advice today from our outside law firm in Tokyo regarding their=
=20 final conclusions on the Japanese tax issues relating to the non-Japanese= =20 trading offices trading with Japanese counterparties. The following is a=20 summary of their advice: A. Cash Settled Derivatives Transactions 1. Swap, Options and Other Financial Derivative Transactions Based on the current practice of the Japanese tax authorities, standard=20 swaps, options and similar financial transactions with symmetrical payment= =20 flows should not be subject to withholding tax. However, to the extent that= =20 Enron transactions involve asymmetrical payments, concern exists that imput= ed=20 interest from the imbedded loan could be subject to interest withholding ta= x. 2. Consumption Tax (VAT) and Excise Taxes Although Japan imposes a 5% consumption tax (VAT), financial transactions a= re=20 generally not subject to the consumption tax, so cash settled derivative=20 transactions should generally not be subject to consumption tax. Japan=20 imposes various excise taxes, some of which apply to commodities that are t= he=20 subject to Enron Online transactions, such as petroleum excise tax. Such= =20 excise taxes generally apply to physical importation and domestic sale and= =20 delivery of covered products and should generally not apply to purely=20 financial derivatives transactions which reference commodity prices. 3. Collateral for Derivatives Transactions If Enron entities will take collateral from Japan-based customers in=20 connection with derivative transactions, depending upon the specific=20 arrangements, withholding tax liability might arise. For example, if an=20 Enron trading entity takes cash collateral from a Japan-based customer and= =20 pays interest on it, such interest payments could be subject to local=20 withholding tax when paid to the Japanese resident customer. B. Physically Settled Transactions 1. Consumption Tax Japan imposes consumption tax (VAT) on the importation of tangible goods an= d=20 on domestic transfers of tangible goods. Consumption tax should be applicab= le=20 to imports of all physical commodities indicated at the Enron Online websit= e,=20 including natural gas, LNG, petroleum and derivatives, coal and pulp and=20 paper. Consequently, commodity contracts for physical settlement should=20 provide that ownership of the commodity will pass outside Japan to the=20 Japan-based customer. As owner of the products upon import, the Japan-base= d=20 customer would act as importer for consumption tax purposes and in that=20 capacity would handle formalities upon import, pay import consumption tax a= nd=20 then credit or seek a refund for the resulting input consumption tax.=20 If, instead, the title to the commodities is transferred after such=20 commodities enter Japan, each Enron entity that sells to Japan would be=20 required to register as a taxpayer for consumption tax purposes, pay=20 consumption tax upon import and file consumption tax returns. While such a= n=20 arrangement is feasible, in practice, other industries have encountered=20 resistance from customs authorities (who administer the import consumption= =20 tax system) to the designation of a non-resident entity as formal importer. 2. Excise Tax Japan imposes an excise tax on the importation and transfer of various=20 commodities, including natural gas, LNG, crude oil, and refined petroleum= =20 products. Petrochemicals may also be subject to excise tax depending upon= =20 the specific product. Other commodities listed at the website, including=20 coal, plastics (except if a specific product were characterized as a=20 petrochemical subject to excise tax), and pulp and paper, are not subject t= o=20 excise tax. Again, Enron entities should transfer ownership of commodities= =20 before they reach Japan so that the Japan-based customer acts as importer a= nd=20 has responsibility for payment of excise taxes. C. Tax Representations The trading offices considered were those located in the US, the UK,=20 Singapore, Australia, Canada, Spain and Norway. Japan has tax treaties in= =20 force with all of these countries. Consequently, with respect to GTCs=20 entered into with these trading offices, the tax payor and payee=20 representations may provide that: (1) the counterparty agree and represent that withholding tax will not appl= y=20 and will not be deducted from payments it makes to Enron entities, and (2) with respect to payments the counterparty will receive from Enron=20 entities, it is eligible to claim relief under the business profits article= =20 of an applicable tax treaty and does not have a permanent establishment in= =20 the paying Enron entity=01,s jurisdiction. =20 Please let me know if you have any questions, need any additional informati= on=20 or would like me to forward our outside advisor=01,s memo on this subject t= o you. Best regards, Susan
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