Page 37 - Strategic Tax Planning for Global Commerce & Investment

Strategic Tax Planning for Global Commerce and Investment

higher risk profile compared with a conventional loan, such a
debt will normally carry and arm’s-length interest rate that is
significantly higher than the arm’s-length interest rate on
conventional debt (unless the terms of the conversion are
exceptionally favorable). It may be possible to increase the risk
of the lender, and therefore the arm’s-length interest rate, even
further by making the debt convertible only at the option of the
borrower. In this case the lender only has the downside of
convertibility if the shares are worth less than expected.

Another possibility would be to issue a dual currency loan,
which gives the borrower the option to pay interest and the
principal amount in any of the two currencies in which the loan
is denominated. Such a loan would increase the risk of the
lender and therefore increase the arm’s-length interest rate.

The foregoing are illustrations of the principle that a
multinational usually has several options for choosing the
jurisdictions in which its profits arise through the allocation of
functions, assets and risks among different group companies.

2. Asset Financing

Leasing involves fixed assets that one enterprise (“the lessee”)
needs on order to carry on its business being owned by another
enterprise (“the lessor”), which allows the lessee to use in
return for a periodic fee.

There are two broad classes of lease agreements:

 Operating leases – Under this arrangement

the lessor retains substantial economic in-
terest in the leased asset, for example, be-

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