Loan payment help for in-debt SMEs

About 3,400 small and medium companies with about two billion baht of debt in total have entered a loan compromise process to avoid being bankrupted.

The Legal Execution Department has helped to with negotiations between the state-owned Small and Medium Enterprise Development Bank of Thailand (SME Bank) and bad debtors the court has ruled must repay the loans they received fromthe bank.

The outcome is that debtors willhave another opportunity to negotiate with the bank to reduce the size of their debt and restart the payment process.

SME Bank chair Salinee Wangtal said the bank has for the first time offered some flexibility for customers owing less than 20 million bahteach to renegotiate the payment terms.

The pilot project will cover 3,400 debtors in Bangkok and nearby provinces by Saturday. Then it will be expandedto enable restructuring of debts for customers in the provinces whohave a total ofaround three billion baht in combined debt.

Ruenvadee Suwanmongkol, director-general of the Legal Execution Department, said the department will work with other financial institutions to negotiate with their debtors for loan compromises. This was considered a better way to solve the problem, as creditors wouldat least get some of the money owing them.

World Acceptance Corporation Illustrates The Risks And Rewards Of Investing In …


Source: World Acceptance Corporation 10-K s, 2005-2014

The companys financial success has translated into investment success as well. World Acceptances stock price has outperformed the Samp;P 500 by an astonishing 1350% since 2000.

(click to enlarge)

Source: Yahoo Finance

Such outperformance is perhaps unsurprising given that the company also exemplifies the third of the competitive advantages I outlined in my article-pricing power. In Warren Buffetts words, whether a company has this quality, the power to raise prices without losing business to a competitor is [the] single most important decision in evaluating a business. World Acceptances pricing power can be seen in a recent quote from Sandy McLean, its CEO, on the companys second quarter 2015 conference call. During that call, McLean was asked whether the company might try to drive additional loan volume with lower interest rates. This was his response:

hellip; we have not really contemplated lowering our rate at this pointhellip;We are constantly looking at our rate structures in charge where they are unregulated, but in those states where theyre regulated we generally charge towards the higher end of the rangehellip;

He also noted:

hellip;We are not a company thats geared towards risk-based pricing.

Both parts of McLeans response demonstrate the companys pricing power. His first assertion is that in those states where [rates are] regulated we generally charge towards the higher end of the range. In other words, the company simply charges as high a rate as is legal in places where interest rates on its loans are regulated. His second assertion is that We are not a company thats geared towards risk-based pricing. This means that the company sets its interest rates without considering the riskiness of individual borrowers.

The fact that the company can do both of these things without worrying about losing business reflects the companys pricing power. In a competitive pricing environment, World Acceptance Corporation would be worried about being undercut in its interest rates. Instead, essentially the only thing that limits its interest rates in regulated states is government action. Similarly, in a competitive environment, other companies would use an understanding of borrowers riskiness to figure out what interest rates were necessary to compensate for that risk. In doing so, such companies would undercut World Acceptance in price. Instead, World Acceptance can apparently set the interest rates it needs to earn the returns it wants. It can do so without having to worry that competitors with more nuanced pricing strategies will steal its borrowers.

Moreover, World Acceptance is even better than the type of company that Buffett described in the article I linked to above. Buffetts idea of a great company is one that can raise its prices. However, what one can infer from McLeans description is that the company doesnt even need to raise prices. Rather, its prices (in the form of interest rates) are already as high as is legal and necessary to earn its high returns.

Thus, World Acceptance Corporation has an extremely strong business model and a history of outperformance. Not only has it had rapid growth at high rates of return, but it also has incredible pricing power.

The Risks

That said, though World Acceptance Corporation has offered investors incredible returns, the company also shows the risks of investing in the alternative finance industry. The first of these risks is corporate misbehavior. The companys business model has been subject to many accusations of misbehavior, and some believe those accusations will lead to it being shut down by the federal government.

The root of these accusations lies in the way World Acceptance earns its high returns. Unlike most companies in the alternative finance business, the company does not make short term loans. Instead, according to its website, the company primarily makes installment loans with terms up to 44 months, though the average term is 12 months. The company also sells credit insurance on those loans and offers tax preparation services.

The accusations of misbehavior largely come from the companys main line of business-making installment loans. Most of the installment loans made by World Acceptance are never paid off. Instead, borrowers refinance their loans partway through the loan term, taking out a new loan to pay off the old one. According to the companys annual report, such refinancing made up 73.5% of the companys loan originations in fiscal year 2014. Moreover, because fees and interest payments are front-loaded onto a loan, many borrowers do not pay down much of a loans principal before refinancing. As a result, a borrowers principal balance might stay the same for years on end, even as he or she pays a steady stream of fee and interest payments to the company.

Of course, frequent refinancing and the front-loading of fees and interest payments are common in many types of loan that no one objects to, most notably mortgages. Moreover, the companys website argues that its repeat business reflects the building of strong personal relationships with its customers. That may be so, but it is worth noting that unlike a mortgage, over half of the companys loans are made at APRs over 50%, and all of its loans have APRs over 21%. Furthermore, the APR fails to take into account the actual interest rates paid by most borrowers. In the words of one short-seller of the company, Citron Research:

The catch [to refinancing] is there is a new set of fees tacked onto the loan balance, bookable as immediate revenue to the company, as well as more front-loaded interest…Any subsequent installment payments made by the borrower will go almost exclusively to interest, and the borrower will face a higher payment threshold to reduce his principal. This is how the effective APR on these loans can quickly spiral to above 100%…This traps borrowers in a cycle where most of their payments will be applied to fees and interest, and not reduction of principal. That is the sweet spot for the companys profits.

Citron continues by asking rhetorically:

What is the real value of a loan book comprised of approximately 700,000 unsecured loans averaging $800, owed by borrowers who have been flipped multiple timeshellip;and whose total payments have already far exceeded the principalhellip;but still owe more than they ever borrowed?

Citrons description is, of course, biased by its financial interests. However, given the realities of World Acceptances business, it is understandable why people would question the companys business model. In my article about misbehavior in the alternative finance industry as described in Broke, USA, I noted how Jared Davis, the CEO of payday lender Check n Go, described it as abusing a customer to make a payday loan to someone to pay off an existing payday loan. Obviously, an installment loan like that offered by World Acceptance differs from a payday loan. However, the high effective APRs on many of World Acceptances installment loans are actually not much lower than the APRs of some payday loans. As a result, I think there is a parallel between the situation criticized by Jared Davis and that of most World Acceptance Corporation borrowers.

If such a parallel does exist, then Davis words are implicitly a criticism of World Acceptance Corporations business model. Certainly, the companys critics have argued that its revenues are built upon trapping customers in a cycle of debt. A 2013 American Public Media Marketplace segment titled the story of one World Acceptance borrower Down into the debt spiral because she had paid more than her original loan amount to the company, but was still heavily in debt due to accrued interest.

Regardless of whether the accusations are true, at the very least, Citrons criticisms of the quality of the companys loan book makes sense. After all, that loan book is predominantly made up of loans to people who either cant repay their loans normally and thus need refinancing, or are constantly in need of extremely high interest rate loans. Such criticisms seem particularly apt given the companys July 2013 amendment to its fiscal 2013 annual report, which revealed material weaknesses in its financial reporting. In the companys words:

The material weakness resulted from the aggregation of the following deficiencies:

  • The Company did not have a documented policy that addressed the establishment of the allowance for loan losses, including the assumptions underlying the allowance for loan losses and how management would review and conclude on the appropriateness of the allowance for loan losses; and

  • The Company did not have a control to assess whether the accounting treatment of renewals was in accordance with US generally accepted accounting principles and what impact, if any, renewals would have on the estimate of the allowance for loan losses.

In commenting on this weakness, the companys CEO, Sandy McLean, noted on the corporations fourth quarter 2014 conference call that the company had been using the same financial processes in these areas for the past twenty to thirty years. I believe McLeans comment was meant to imply that it was odd that such processes would suddenly be considered a material weakness after all that time. That may be true, but World Acceptance Corporations entire business is based on making high risk loans that are regularly renewed. Thus, it is a little unnerving that the company did not have a formal policy on establishing loan loss allowances and a control to evaluate the impact of renewals on those allowances.

Moreover, it is particularly unnerving that KPMG, World Acceptances auditor, chose to resign its auditing duties in August 2014. World Acceptance outlined the aforementioned material weakness as the only issue worth mentioning in explaining KPMGs resignation. Interestingly, in that resignation, KPMG agreed that [the] material weakness [mentioned above] was remediated during fiscal 2014 andhellip;that the Companys internal control over financial reporting was effective as of March 31, 2014. That said, one cant help but imagine that the resignation is related to that internal control issue. Moreover, it hardly inspires confidence that the company switched auditors from KPMG, one of auditings Big Four companies, to McGladrey LLP, a non-Big Four company. Of course, McGladrey is hardly a small operation-its the fifth largest accounting firm in the US after the Big Four, and is quite possibly is a better fit for World Acceptance Corporation, given that it specializes in middle market clients. That said, this change in auditors, on top of the other criticisms of World Acceptances business, is at least a little worrying.

World Acceptances promotion of borrower refinancing isnt its only business area in which it has been accused of misbehavior. The company has also been criticized for its marketing of credit insurance, which reimburses the company if a borrower dies or becomes disabled, or if his or her collateral becomes worthless. According to the 2013 ProPublica article on which the aforementioned Marketplace segment was based, employees were encouraged to avoid disclosing to borrowers that the credit insurance was optional, and roadblocks were put in the way of employees who tried to avoid selling the insurance.

The article also alleges that some employees may have used inappropriate tactics in collecting on borrowers. For example, the article describes how employees may have threatened to confiscate household items such as furniture in violation of FTC rules and how they may have violated debt collection laws through excessive contacts.

A number of short sellers have argued that such misbehavior threatens the survival of World Acceptance Corporation. In 2009 and 2010, Citron Research published a series of articles describing the company as a Barely Legal Ponzi Scheme and arguing that its Lending Business Could Implode as a Result of New Consumer Regulation. In 2013, hedge fund manager Whitney Tilson was prompted by the aforementioned ProPublica article to make the company one of his biggest shorts and to describe in an article why its stock price might fall by at least two-thirds.

However, the most serious indicator that World Acceptance Corporation might be in trouble came in March 2014. As the companys 8-K describes it:

On March 12, 2014, World Acceptance Corporation (the Company) received a Civil Investigative Demand (CID) from the US Consumer Financial Protection Bureau (CFPB). The CID states that [t]he purpose of this investigation is to determine whether finance companies or other unnamed persons have been or are engaging in unlawful acts or practices in connection with the marketing, offering, or extension of credit in violation of Sections 1031 and 1036 of the Consumer Financial Protection Act, 12 USC. sect;sect; 5531, 5536, the Truth in Lending Act, 15 USC. sect;sect; 1601, et seq., Regulation Z, 12 CFR. pt. 1026, or any other Federal consumer financial law and also to determine whether Bureau action to obtain legal or equitable relief would be in the public interest.

In response to this, Abdalla al-Ayrot, who had previously argued that the company would be driven into bankruptcy in 2014 due to its misbehavior, stated that its slide into oblivion had already begun. Clearly, many market participants agreed, given that the companys stock price plunged by nearly 30% after the announcement of the CID:

(click to enlarge)

Source: Yahoo Finance

As one can see, the companys stock price has not recovered since.

Moreover, beyond the risks of misbehavior and regulation, there is also the risk of competition to World Acceptance Corporation. My most recent article discussed the threat of competition to the alternative finance industry as shown in Broke, USA. In that article, I showed how competition has eroded the margins and returns on investment in the payday lending industry. I believe the same might happen for World Acceptance and the installment lending industry.

The reason for this is because the business of making installment loans has become increasingly competitive in the past several years. With scrutiny increasing on the payday lending industry, many payday lenders have turned to making installment loans, which are generally less heavily regulated. One company that has done this is QC Holdings (NASDAQ:QCCO), which first began offering installment loans in Illinois in 2006. As I noted in my article on regulation as described in Broke, USA, QC Holdings 2012 annual filing specifically notes that its new products [such as installment loans] in Illinois, New Mexico, as well as in Virginia and other states, have been in response to changes in payday loan laws in those states making payday lending unprofitable. Perhaps due to its success in those states, in 2012, QC Holdings also introduced new installment loan productshellip;[that] are higher-dollar and longer-term installment loans that are centrally underwritten and distributed through our existing branch network. In doing so, the company placed itself in direct competition with World Acceptance Corporation.

Similar to QC Holdings, Cash America International (NYSE:CSH), a major diversified alternative finance lender, has also moved into the installment loan business. Not only did its retail stores begin offering unsecured installment loans in 2011, but according to its 2013 annual report, [migration] from the traditional single-pay, two-week payday loan into longer-term installment loan and line of credit products is a major theme of the electronic lending industry.

Thus, because of this competition, even if World Acceptance Corporations business model proves legal, it is quite possible that it will not be able to earn the returns going forward that it has in the past. Indeed, the companys growth has already begun to slow. After growing at double digit rates annually for most of the past decade, the companys revenues rose by only about 7% between fiscal years 2012 and 2014, and the companys net income rose by less than 3%. Even more worryingly, the companys net income actually fell by 1.9% in the first six months of 2015 versus the same months of the previous fiscal year, as reported in the companys 8-K. It is true that the companys earnings per share rose significantly in that period, but that was only due to stock buybacks. Moreover, World Acceptance has been borrowing to make those buybacks, and it has almost reached its limit on how much it can do so. As an analyst noted on the companys most recent conference call, In terms of the buyback and the capital structure of the company, it looks like youre at about 1.9 times your debt-to-equity. And you targeted 2 times. Indeed, Sandy McLean acknowledged that because of this, he would anticipatehellip;slower [buybacks]. Thus, even if World Acceptance Corporation survives the threats of misbehavior and regulation, it looks as if its returns for shareholders will still fall due to competition.


World Acceptance Corporation shows both the risks and rewards of investing in the alternative finance industry. On the one hand, the company demonstrates the industrys growth ability, incredible rates of return, and especially its pricing power. On the other hand, the recent slowdown in the companys growth shows how competition can erode the expansion of even the best businesses in the industry.

However, I believe it is in the areas of regulation and corporate misbehavior that World Acceptance Corporation has the best lessons to offer the alternative finance investor. It is beyond my ability to determine if the shorts are correct and whether the company will go out of business due to government action. Nor can I say whether World Acceptance Corporation has broken any laws or not.

However, I can say that the company illustrates the risk posed by corporate misbehavior to investors in the alternative finance industry. If the accusations against the company are true, that will show how easy it is for a company in the industry to cross the line from providing expensive loans to those who need them to helping customers slide into a debt trap. It will also show how easy it is for employees in the industry, who have to worry about lending profitably to individuals with marginal credit, to be tempted to do so by crossing the line into questionable sales or collections tactics, even illegal ones.

Even if the accusations are false, that will still illustrate the risk of misbehavior to investors in the industry. As I noted in my Broke, USA article about misbehavior in the alternative finance industry, the industry makes high interest loans, primarily to those who have no alternative. As a result, there are many operators that genuinely have questionable business practices. Because of this, even legitimate companies will always be dogged with the suspicion of misbehavior. Such suspicions will drive regulators to constantly scrutinize the industry. This is particularly true because regulation in the alternative finance industry is driven by fears about usury, fears that have deep roots. I noted how such fears often bias individuals against the industry in my Broke, USA article about regulation.

Furthermore, if regulators do find that World Acceptance Corporations actions were illegal, it will also illustrate how misbehavior in the alternative finance industry can appear perfectly fine – until it isnt. After all, the actions described by World Acceptances critics have gone on for years. Indeed, the continuous refinancing that short sellers describe as promoting a debt trap among customers is the cornerstone of the companys business strategies. Rather than being something that the company keeps quiet, it is actually proudly described on the companys website as reflecting the companys strong relationships with customers. Thus, it is true that misbehavior lurks at the edges of the alternative finance industrys legitimate business practices. However, serious sanctions on World Acceptance Corporation might cause an investor to wonder if even some of those legitimate practices might suddenly be labeled misbehavior by regulators.

Thus, World Acceptance Corporation illustrates both the risks and rewards of investing in the alternative finance industry. Despite its strong business model, the threat of government action against the company has resulted in a nearly 30% collapse in its share price. It is worth noting that this has occurred without any action being announced – the very possibility that the government will react punitively against the company has been enough to trigger this stock market decline. This is, of course, in part because of the persistent allegations of misbehavior against the company – allegations based on some genuinely questionable aspects of its business. In this way, the market warns investors about the risks of investing in the alternative finance industry, just as it has rewarded investors with years of outperformance leading from the industrys competitive advantages.

However, that does not mean that the current market price for the companys shares is the right price. The Consumer Financial Protection Bureaus investigation of World Acceptance Corporation has left the price of the companys shares in limbo. On the one hand, the price is far too high if the CFPB is going to seriously penalize the company, as the short sellers believe. On the other hand, the price is too low if the companys business model is fundamentally sound. I will discuss how investors can take advantage of this situation in my next article, Uncertainty About World Acceptance Corporations Future Offers An Opportunity To Investors.

Disclaimer: The content here is not meant as investment advice. Do not rely on it in making an investment decision. Do your own research. The content here reflects only the authors opinions. Those opinions might be wrong. This content is meant solely for the entertainment of the reader and its author.

How to Fix Your Poor Credit Despite This Major Catch-22

Its a lot like being stuck in one big catch-22: Trying to improve poor credit when you need good credit to improve poor credit. It can make for a confusing cycle thats as utterly dizzying as it is frustrating.

If youve been faced with this never-ending conundrum, youre not alone; according to Experian, out of 220 million Americans, one in five deals with bad credit. If you belong to this 20 percent of low FICO-scored folk, youve undoubtedly asked yourself this simple question: How is a person supposed to improve his credit when it takes good credit to use most of the products and tools that are often recommended to rebuild credit?

Though the answer is not obvious, you can rescue yourself from the bad credit doldrums. There are several options well within reach to put you back on track and improve poor credit.

Credit? What Credit?

What is bad credit? Its a poor reflection of a persons financial transaction history that can make it difficult (if not impossible) to obtain a credit card, mortgage or car loan. Lenders and banks are reluctant to loan money to people with poor credit because they are considered high risk borrowers, with a reputation for not paying their debts back on time.

Simply put, bad credit is usually the result of poor financial choices. Maybe you purchased a home or automobile and became delinquent on your payments; or, as a college student, you fell over your head into some credit card debt and didnt pay off your balances in a timely way. Circumstances sometimes dictate the ebb and flow of our financial behavior even folks who are responsible with their money might incur debt if theyre unable to afford their credit card or car payments after the loss of a job or other circumstance.

Whatever the cause, you might have ruined your own credit without even knowing exactly what credit is. With many of lifes lessons, hindsight is always 20/20, and its only after we realize the mistakes weve made that we can begin making better decisions for our financial futures.

Related: 9 Things You Can Do to Improve Your Credit Score This Year

Credit Scores A Numbers Game

A credit score is a numerical calculation used to determine the likelihood of someone paying back a loan or borrowed money on time. When your credit card bill is paid on time, in full, it helps to boost your score. Miss a payment (or several), and your score falls, making lenders less likely to loan you money in the future.

Each time money is taken out on a credit basis, lenders report your activity to three national credit bureaus, which use three separate grading criteria to determine a persons credit health.

  • TransUnion: Precision
  • Experian: FICO (Fair Isaac Corporation) Advanced Risk Score
  • Equifax: Pinnacle

A FICO score is the most commonly referenced credit model and ranges between a scale of 300 and 850 300 being the worst, 850 being the best.

Related: Why FICO Isnt the Only Credit Score You Should Care About

From the above chart (courtesy of, an excellent score is for the elite few with perfect, unblemished credit histories they will qualify for the best loan interest rates and offers with no complications.

A modest credit score in the mid-600s, which sounds respectable, is still too poor to nail down a low APR on a loan. Choosing between a 10% interest rate, or no loan at all, is like picking the lesser of two evils. A credit score of 500 or below is troubled and might qualify for the worst of loans, if the credit holder isnt declined outright.

Credit inquiries can hurt your score, too. If you apply for a credit card, the lender or creditor in question will make a standard check on your credit score to see how you qualify. But this will lower your score and poses disadvantages to people with poor credit. Youve applied for a card to rebuild your credit but applying in itself damages your credit further.

Related: Whats the Difference Between a Hard Credit Check and a Soft Credit Check?

Loans for Bad Credit

Believe it or not, you might be able to secure a loan with poor credit. The face-to-face approach with an understanding lender can get you closer to obtaining a loan and closer to improving your credit through traditional means.

Here are three tips to securing a loan despite poor credit:

  • Visit a credit union. Independent property managers will sometimes forgo a credit check and lease an apartment based on a potential tenants good impression. Credit unions are similar; with an in-person meeting with a credit union representative, the financial institution might be more willing to overlook your credit score; in comparison, local banks might be unable to make these accommodations due to stricter regulations.
  • Obtain a peer-to-peer loan. For a person with bad credit, lending from an individual can be a more flexible option than dealing with the standard rules of a bank. This way, things like interest rates and terms of payment can be negotiated on a person-to-person basis.
  • Use collateral. You could succeed in receiving a loan by putting up something of value in lieu of having poor credit. Pawn shops loan money if you pledge a piece of jewelry or other valuable as collateral; the item is sold if the loan isnt paid off by the agreed-upon date. For larger loans, a person cold pledge a car or house as collateral to borrow against. However, this is not recommended due to risk of losing property and other possessions worth much more than the loan value itself.

Credit Cards for Bad Credit

If you have bad credit, chances are that youve applied for a credit card and been declined.  Another option designed specifically for people with blemished credit is a secured credit card.

A secured credit card requires collateral in the form of a security deposit for a minimal credit limit:

  1. To help slowly build your credit score, and
  2. To reduce the risk of going over your credit limit and into debt.

Secured cards require sizable deposits typically $200 to $500 which usually becomes your credit limit or translates to a certain credit-limit tier. But watch out! Secured credit cards usually carry high interest rates. Make a late payment and you could not only be penalized at 29 percent interest, but injure your credit history further.

A secured card is like rehabilitation for bad credit, and many financial institutions provide them, including CapitalOne, Wells Fargo and Orchard Bank.

Stand up for Your Credit

Youve dealt with the drawbacks of bad credit, and now youre taking the steps to rebuild it. That doesnt mean you should stop monitoring your credit report and history. Did you know that 79 percent of all credit reports contain errors?

Dispute your credit report with the bank or credit agencies if you feel an omission has been made, or if a recently resolved debt still remains outstanding on your records.

The National Association of State Public Interest Research Groups also reported that 54 percent of all credit reports contain the smallest of typographical errors, which can result in another persons poor credit ending up on your credit report. Dont let this mistake prevent you from improving your credit standing.

How to Leverage Good Credit

Congratulations! Youve made it to the 700s and youre climbing. Now the last step is to maintain your good credit standing. There are some things you can do to leverage good credit and keep a high score.

  • Keep current. Monitor your credit report regularly and check your score and history at least every few months. Cross-reference them with your credit card and bill statements and check for inconsistencies.
  • Pay your bills on time. Nothing hurts your credit more than tardiness. Lenders dont like to wait for their money.
  • Aim low. Take advantage of your better credit score and be persistent with car salespeople and mortgage lenders to lock in a low interest rate. Its a simple correlation: high credit score = low interest.

Think of credit upkeep like a new exercise regimen a lifelong commitment that needs to be practiced regularly lest we fall out of financial shape. Follow the steps to dig yourself out of a credit conundrum, rebuild your credit and begin again with a strong credit score.

Most of all, be patient. Credit agencies wont reflect changes to your history immediately, so even if youve been keeping up with better spending habits, dont despair. The payoff in a high credit score is worth more to your financial health than any dollar amount could ever reflect.

Shadow Banks Feast on Emerging Markets Bond Boom

  • By

The boom in emerging market bonds is helping to build a large new shadow banking system, according to the Bank for International Settlements.

The Swiss organization estimates non-financial companies now provide around $270 billion of credit to residents of emerging markets countries, compared to virtually no lending at all up until 2007, as traditional bank lenders have retrenched.

And that’s a conservative estimate, the BIS says.

Whys it important? Well, keeping track of the overall amount of leverage in a country’s economy becomes a much trickier task if credit is seeping in via channels other than the traditional banking system. The BIS fears this growing shadow banking sector could be a source of wider financial instability in emerging market economies.

The emerging-markets bond craze has provided a fair chunk of the funding. Emerging markets corporates issued $554 billion of international bonds between 2009 and 2013. Nearly half of these bonds ($252 billion) were issued by offshore affiliates, which the BIS says have morphed into shadow banks.

“The offshore subsidiaries of [EM] non-financial corporates are increasingly acting as surrogate intermediaries, obtaining funds from global investors through bond issuance and repatriating the proceeds to their home country,” the BIS notes.

The report attempts to lift the lid on the web of financing channels these offshore companies use to pump their funds back into emerging-market economies. As well as sending cash back to their parent company, the offshore vehicles also lend money to completely separate firms, or deposit it in domestic bank accounts.

Offshore vehicles’ loans to the domestic financial sector is a potential concern. This could turn out to be “hot money”, according to the BIS, meaning it could be withdrawn at a moment’s notice.

“To the extent that within-company loans are financed through the offshore issuance of debt securities, they could be viewed as portfolio flows masked as FDI [Foreign Direct Investment],” according to the BIS.

Deal to reduce Eastern Carolina power bills gets federal approval

A deal that could lower electric bills here in Eastern Carolina has received federal approval.

The Federal Energy Regulatory Commission is allowing Duke Energy Progress to buy back ownership of nuclear power plants from ElectriCities.

The $1.2 billion deal will reduce debt for 32 cities and towns which provide electricity to their residents. Those include Greenville, Kinston, New Bern and Washington.

The FERC says the buy-back does not have any monopoly-related concerns. Duke Progress has agreed to continue selling wholesale power to the municipalities under a 30-year contract.

The municipalities bought into nuclear plants in Wake and Brunswick counties, but costs exploded after the accident at the Three Mile Island nuclear plant in Pennsylvania. The cost was passed on to their customers who have ended up paying higher electric rates.

The North Carolina Utilities Commission and the Nuclear regulatory Commission must still approve the deal before it becomes final. Officials are hoping the deal could close by the end of next year.

New Jersey Bankruptcy Court Holds That Mortgage Was No Longer Enforceable …

Consumer Finance Litigation

Action Item: In light of this decision, lenders should ensure that foreclosures in New Jersey are filed within six years of the date of default. Failure to file a foreclosure within six years may cause the action to be barred by the statute of limitations.

The United States Bankruptcy Court for the District of New Jersey recently held in In re Washington, No. 14-14573-TBA, 2014 WL 5714586 (Bankr. DNJ. Nov. 5, 2014), that the mortgagee and mortgage servicer (the Creditors) are time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage, essentially entitling a defaulting borrower to a free house.

The Courts analysis focused on whether the Fair Foreclosure Act (FFA), NJSA sect; 2A:50-56.1 (governing statutes of limitations relative to foreclosure proceedings), and Bankruptcy Code sections 11 USC. sect;sect; 502(b)(1) and 506(d) (addressing allowable claims), operate to make the mortgage unenforceable because the creditor waited too long to institute a foreclosure after the maturity date of the loan was accelerated because the borrower defaulted.

Borrower Gordon Washington purchased a three-family home in Morris County, New Jersey, on February 27, 2007, paying a $130,000 deposit and obtaining a 30-year mortgage and note for $520,000 with the first payment due on April 1, 2007. The Debtor failed to make the July 1, 2007, mortgage payment, and the loan went into default and remained in default since that time. On December 14, 2007, the Creditors filed a foreclosure complaint in the Superior Court of New Jersey, Chancery Division. The Complaint alleged that [p]laintiff herein, by reason of said default, elected that the whole unpaid principal sum due on the aforesaid obligation and mortgage hellip;.shall be now due. On October 28, 2010, the Office of Foreclosure returned the foreclosure judgment package to the creditors for deficiencies, notably, failure to produce an attorney certified copy of the Note and Mortgage. On July 5, 2013, the Superior Court Clerks Office issued an Order dismissing the Creditors foreclosure complaint for lack of prosecution, without prejudice. The foreclosure was not re-filed, and on March 12, 2014, the Debtor filed a petition for Chapter 7 bankruptcy. Id. On March 18, 2014, the Debtor filed an adversary complaint to determine the validity of the mortgage lien on the property.

Moving for summary judgment in the adversary proceeding, the Borrower argued that the six-year statute of limitations applicable to negotiable instruments set forth in New Jerseys Uniform Commercial Code (UCC), NJSA sect; 12A:3-118(a), had expired and thus the Defendants were out of time to sue on the mortgage note. The Debtor also argued that the FFA similarly had a six-year statute of limitations, because it required that a residential mortgage foreclosure must be commenced within [s]ix years from the date fixed for the making of the last payment or the maturity date set forth in the mortgage or the note, bond or other obligation secured by the mortgagehellip; NJSA sect; 2A:50-56.1(a). In contrast, the Creditors argued that they had [t]wenty years from the date on which the debtor defaultedhellip; to file a foreclosure action as set forth in sect; 2A:50-56.1(c) of the FFA, and since that time had not expired they may still foreclose on the mortgage.

The Courts opinion focused on the narrow issue of whether NJSA sect; 2A:50-56.1(a) and 11 USC. sect;sect; 502(b)(1) and 506(d) operate to make the mortgage unenforceable, to disallow the Defendants claim, and to void the mortgage lien so that the Defendants have no claim against the Debtor, the property, or the estate. The Court reviewed NJSA sect; 2A:50-56.1, which states in relevant part the following:

An action to foreclose a residential mortgage shall not be commenced following the earliest of:

  1. Six years from the date fixed for the making of the last payment or the maturity datehellip;
  2. Thirty-six years from the date of the recording of the mortgagehellip;
  3. Twenty years from the date on which the debtor defaultedhellip;as to any of the obligations or covenants contained in the mortgagehellip;

Applying NJSA sect; 2A:50-56.1(a), the Court and determined that the maturity date for the subject loan had been accelerated to either July 1, 2007, (the date of default), or December 14, 2007 (the date of the filing of the foreclosure complaint). Thus, although the mortgage had an original maturity date of the year 2037, the Court held that because the maturity date was accelerated by the Creditor, the applicable statute of limitations is six years. Since the accelerated maturity date in this case was either July 1, 2007, or December 14, 2007, the foreclosure had to be commenced no later than July 1, 2013, or December 14, 2013, which it was not.

The Court noted that, even though the foreclosure complaint was originally filed on December 14, 2007, it was dismissed in 2013, was never reinstated, and neither the Debtor nor the Creditors took any action under the mortgage instruments or the FFA to de-accelerate the maturity date. The Court held that therefore the Creditors are time-barred under New Jersey state law from enforcing either the note or the accelerated mortgage.

The Court went on to determine that, because the Creditors could not foreclose on the Debtors loan, the Creditors proof of claim in bankruptcy also was barred because the underlying lien is unenforceable.

In light of this decision, lenders should evaluate their loan portfolios for mortgages that have been in default for five or more years. On a case-by-case basis, lenders may want to ensure that a mortgage foreclosure has been filed on the property, and if one has not been filed, expedite the foreclosure filing process to avoid running afoul of the six-year statute of limitations. Lenders should also exercise caution in dismissing foreclosures without prejudice while the loan is in default. The mortgage and note may be rendered void and unenforceable if the foreclosure is not re-filed prior to the six year statute of limitations.

Mr. Streibich would like to thank Donna Bates and Daniel A. Cozzi for their assistance in developing this Alert.

Kuwait’s Investment Dar eyes second debt-for-assets deal by March

DUBAI Dec 9 (Reuters) – Investment Dar, the
Kuwaiti firm best-known for its stake in luxury carmaker Aston
Martin, hopes to complete a second debt-for-assets deal with
creditors by the end of March, it said in a bourse statement on

The sharia-compliant firm said on Nov. 18 it had received
the backing of a significant majority of investors for the
proposal, which would see creditors voluntarily exchanging debt
for ownership of a portfolio of assets.

It is the latest attempt to reduce debt at Investment Dar,
which overextended itself during the boom years of the mid-2000s
and then struggled to manage its borrowings in the wake of the
global financial crisis.

The proposal, originally made in May but amended with new
terms in June, is an alternative to the 1 billion dinar ($3.4
billion) debt restructuring plan agreed in 2011.

No details or terms for the so-called settlement-in-kind
proposal have been released, although the Nov. 18 update said
there would be no losses imposed on creditors under the plan and
no change to the existing maturity of the debt.

Investment Dar will circulate a draft framework for a deal
by the end of next week so lenders can review the documentation
and have any bilateral discussions with Investment Dars
adviser, Houlihan Lokey, before an all-creditor meeting on Jan.
21, Tuesdays statement said.

It has already completed one settlement-in-kind offer. In
December 2013, Investment Dar said around 30 percent of
creditors at the time had signed up to a similar swap deal
involving debt and a portfolio of assets.

Investment Dar, set up in 1994, has invested in Islamic
insurance, real estate, construction, logistics and

($1 = 0.2920 Kuwaiti dinars)

(Reporting by Archana Narayanan; Editing by David French and
Mark Potter)

TIM’s Abreu says is monitoring Brazil market for consolidation

SAO PAULO Dec 11 (Reuters) – TIM Participações SA, Brazils
second-largest wireless carrier, is carefully monitoring the
nations telecommunications market for possible consolidation
moves, and is under no pressure to make a deal, Chief Executive
Officer Rodrigo Abreu said on Thursday.

The Brazilian market has enough size to accommodate four
major companies, Abreu said at an event in São Paulo. Only one
of Brazils four main industry players, which he did not
mention, is struggling with profitability and other issues,
Abreu said

Were proactively monitoring the environment, Abreu said.
Were not waiting to see what happens.

In the past year Telecom Italia SpA, TIMs largest
shareholder with a 67 percent stake, has taken steps to reduce
debt, increase investment and build up an enviable cash
position, Abreu added.

(Reporting by Brad Haynes; Editing by Guillermo Parra-Bernal
and Chizu Nomiyama)

Autumn statement 2014

Following yesterday#39;s Autumn Statement, we have set out below a selection of some of the main announcements:

  • a new stamp duty land tax system has been introduced for residential (but not commercial) property purchases;
  • the late-paid interest rules governing tax relief for interest on loans from connected entities in certain offshore jurisdictions are being repealed;
  • changes are being made to the remittance basis charge applicable to non-domiciliaries resident in the UK for certain periods;
  • individuals will continue to benefit from entrepreneurs#39; relief from capital gains tax where the proceeds of a sale are reinvested in investments qualifying for EIS or Social Investment Tax Relief;
  • a new 25% diverted profits tax will be introduced targeting multinationals; and
  • measures will be introduced to prevent the use of cancellation schemes to mitigate stamp duty on corporate takeovers.

Further details on these and other key announcements are set out below.

If you would like to discuss the impact of any of the changes, please contact any member of the tax team.

  • Real Estate
  • Business Taxes
  • Personal Taxes
  • Venture Capital
  • Media and Entertainment
  • Anti-Avoidance and BEPS
  • Employment / Employee
  • Finance
  • Pensions
  • Oil and Gas

Real Estate

One of the big announcements was that the current #39;slab#39; system of stamp duty land tax (SDLT) rates was abolished at midnight last night (3 December 2014) for residential property. From 4 December 2014, SDLT will be payable at each rate at the portion of the purchase price that falls within the relevant band, rather than being charged at a single rate on the whole purchase price. Transitional rules will allow buyers who exchange contracts on or before 3 December 2014 to choose whether to pay SDLT under the old or new rules. The new bands and rates are set out below:

Click here to view the table.

  • The annual tax an enveloped dwellings (ATED) charges will increase at 50% above inflation for residential properties worth more than pound;2 million for the chargeable period from 1 April 2015 to 31 March 2016.
  • A seeding relief from SDLT will be introduced for property authorised investment funds and co-ownership authorised contractual schemes (Co-ACSs). Changes will also be introduced to the SDLT treatment of CoACSs investing in property so that transactions in units are not subject to SDLT, subject to resolving potential avoidance issues. These changes will be introduced in the Finance Bill 2016.
  • The definition of a #39;financial institution#39; for the purposes of SDLT alternative property finance reliefs will be changed to include all persons authorised to provide Home Purchase Plans, with effect from Royal Assent to the Finance Bill 2015.
  • Multiple dwellings relief from SDLT will be extended so that lease and leaseback arrangements with housing associations on shared ownership properties qualify for relief from the date of Royal Assent to the Finance Bill 2015.

Business Taxes

  • The Chancellor announced that the rate of the above-the-line research and development (Ramp;D) credit will increase from 10% to 11% and the rate for the small and medium enterprises (SME) scheme will increase from 225% to 230% from 1 April 2015.
  • Legislation will be introduced to restrict qualifying expenditure for Ramp;D tax credits with effect from 1 April 2015, so that the costs of materials that are incorporated into products that are sold are not eligible.
  • An advance assurance scheme and new guidance will be introduced to assist small businesses making their first claim for Ramp;D tax credits. In addition, a consultation will be launched in January 2015 to give Government a better understanding of the issues faced by smaller businesses claiming Ramp;D tax credits.
  • All requirements regarding the location of a link company for consortium relief purposes will be removed with effect from 10 December 2014.
  • As part of the ongoing review of the corporate debt legislation, the Government will repeal the late-paid interest rules concerning loans made to UK companies by a connected company in a non-qualifying territory. Wide-ranging changes will also be introduced to update, simplify and rationalise the legislation on corporate debt and derivative contracts. This will include changes to clarify and strengthen the link between commercial accounting profits and taxation, as well as the introduction of a new relief for companies in financial distress and new anti-avoidance rules. These changes will be included in the Finance Bill 2015.
  • Following consultation, the Government will introduce a package of measures to reduce the administrative burden that the construction industry scheme places on the construction industry.
  • The Government will launch a consultation shortly on the introduction of a levy on tobacco manufacturers and importers.
  • The Chancellor announced that devolution of corporation tax rate-setting powers to Northern Ireland will go ahead if satisfactory progress is made in current cross-party talks.
  • Both the doubling of Small Business Rate Relief and the 2% cap on the RPI increase in the business rates multiplier will be extended to April 2016.
  • The Government will carry out a review of the structure of business rates which will report by Budget 2016.
  • The Government will legislate to make business contributions to flood defence schemes tax deductible for both corporation tax and income tax purposes.

Personal Taxes

  • From 1 April 2015, the personal allowance will increase to pound;10,600, instead of the planned increase to pound;10,500. The benefit of the increase will be passed on in full to higher rate taxpayers, with the higher rate threshold increasing to pound;42,385.
  • There will be some increases to the annual remittance basis charge, with the charge for those who have been UK resident for 12 out of the last 14 years increasing from pound;50,000 to pound;60,000 and a new pound;90,000 charge being introduced for those who have been UK resident for 17 out of the last 20 years. The charge for those who have been UK resident for 7 out of the last 9 years will remain at pound;30,000. The Government will also consult on making the election to pay the remittance basis charge apply for a minimum of 3 years.
  • Following a review, the Government has decided not to make any changes to the tax charge on close company loans to participators.
  • The Government will seek EU approval to increase the annual investment limit for Social Investment Tax Relief (SITR) to pound;5 million per organisation, up to a maximum of pound;15 million per organisation, and to extend the relief to small-scale community farms and horticultural activities. The changes will come into effect on or after 6 April 2015, subject to State aid clearance. The Government will also make special purpose vehicles for subcontracted and spot-purchase social impact bonds eligible for SITR, through secondary legislation in autumn 2015. The Government will also consult early in 2015 on introducing a Social Venture Capital Trust in a future finance bill.
  • The annual ISA limit will increase from pound;15,000 to pound;15,240 in April 2015.
  • Legislation will be introduced to ensure that ISA savings retain their ISA wrapper if they are transferred to a spouse on a saver#39;s death.
  • A new bad debt relief will be introduced for individuals lending through peer-to-peer platforms for losses incurred from April 2015. Such losses will only be able to be offset against income from peer-to-peer lending.
  • A consultation will also be held on the introduction of a withholding regime for income tax across all peer-to-peer lending platforms from April 2017.
  • A consultation will be held on whether to extend ISA eligibility to lenders using crowd-funded, debt-based securities.

Venture Capital

  • The Government announced that, where a gain realised on or after 3 December 2014 would be eligible for Entrepreneurs#39; Relief but is instead deferred into investments which qualify for either EIS or Social Investment Tax Relief, the gain will remain eligible for Entrepreneurs#39; Relief when it is realised. The position for investments qualifying under SEIS is different, where a partial exemption from tax may apply for gains reinvested in SEIS qualifying companies.
  • All community energy generation undertaken by qualifying organisations will be eligible for SITR from the date of expansion of the relief, at which point it will no longer be eligible for EIS, SEIS and VCT reliefs. All other companies which benefit substantially from subsidies for the generation of renewable energy will not be able to benefit from EIS, SEIS and VCT reliefs from April 2015.
  • The Government announced that it will make tax-advantaged venture capital schemes easier to use by launching a new digital process in 2016 for EIS, SEIS and SITR and a new format of VCT return.

Media and Entertainment

  • The Government will consult with industry on whether to reduce the minimum UK expenditure for high-end TV relief from 25% to 10% and modernise the cultural test to bring the relief into line with film tax relief.
  • A new corporation tax relief for the production of children#39;s television programmes will be introduced from 1 April 2015. The relief will be available at a rate of 25% of qualifying expenditure.
  • The Government will consult early next year on extending Theatre Tax Relief to orchestras from 1 April 2016.

Anti-Avoidance and BEPS

  • The Chancellor announced that a new #39;diverted profits tax#39; will be introduced to counter the use of #39;aggressive tax planning techniques#39; by multinational enterprises to divert profits from the UK. The diverted profits tax will be applied at a rate of 25% from 1 April 2015 to business activities between connnected entities that are set up in order to achieve an unfair tax advantage. The details of how this measure will operate are likely to be published with the draft Finance Bill 2015 legislation on 10 December 2014.
  • The Chancellor also announced that measures will be introduced to prevent the use of cancellation schemes of arrangement for company takeovers to reduce stamp duty costs. Regulations are expected to be brought forward in early 2015 to effect these changes.
  • The Government has launched a consultation on the UK#39;s plans to implement agreed OECD rules for addressing hybrid mismatch arrangements.
  • Legislation will be introduced to allow the implementation of the OECD model for country-by-country reporting. This will require multinationals to provide high level information to HMRC on their global allocation of profits and taxes paid, as well as indicators of economic activity in a country.
  • The corporation tax relief that a company can obtain in respect of the goodwill of a business that it acquires from a related individual or partnership will be restricted if that acquisition takes place on or after 3 December 2014, unless the transfer is pursuant to an unconditional obligation entered into before that date. In addition, Individuals will be unable to claim Entrepreneurs#39; Relief on disposals of goodwill when they transfer a business to a related close company (ie incorporate their business) on or after 3 December 2014.
  • The Government will introduce legislation to prevent the avoidance of income tax using losses from miscellaneous transactions, following a recent increase in the use of schemes using miscellaneous loss relief. The use of such losses will be blocked with immediate effect where the loss arises from relevant tax avoidance arrangements and legislation will be introduced to limit relief for miscellaneous losses to miscellaneous income of the same type with effect from April 2015.
  • Legislation will be introduced to enhance civil penalties for offshore tax evasion from April 2016. A new aggravated penalty of up to a further 50% will apply for moving hidden funds to circumvent international tax transparency agreements from Royal Assent to the Finance Bill 2015.
  • The existing disclosure of tax avoidance schemes (DOTAS) legislation will also be strengthened and HMRC will be able to publish summary information about DOTAS-notified tax avoidance schemes and their promoters. These changes will be introduced in the Finance Bill 2015.
  • The Government announced that it will consult in early 2015 on introducing further deterrents for serial tax avoiders and on penalties for tax avoidance cases to which the General Anti-Abuse Rule (GAAR) applies.
  • The Government also announced that it will stop investment managers disguising their guaranteed fee income as capital gains in order to avoid income tax with effect from 6 April 2015. Sums linked to performance such as (such as #39;carried interest#39;) will not be affected by these changes.

Employment / Employee Incentives

  • From April 2015, employees under the age of 21 will no longer be subject to national insurance contributions on their earnings up to the upper earnings limit.
  • From April 2016, national insurance contributions up to the upper earnings limit will be abolished for apprentices aged under 25.
  • From April 2015, the pound;2,000 annual Employment Allowance will be extended to care and support workers.
  • The Government is concerned by the use of #39;special purpose share schemes#39; (#39;B share schemes#39;) to allow shareholders to decide how to receive their dividend so that it is taxed at preferential rates. Legislation will be introduced to remove this tax advantage by treating the amount received in the same way as dividend income where an individual shareholder is offered this choice.
  • Following consultation, the Government will adopt the recommendations of the Office for Tax Simplification (OTS) in relation to employee benefits and expenses, with a view to making the taxation of employee benefits and expenses more straightforward and effective.
  • Following consultations earlier in the year, the Government has decided not to take forward the OTS recommendations in relation to:
    • changes to the taxation of employee shares involving the introduction of a #39;marketable security#39;; and
    • the introduction of a new employee shareholding vehicle.
  • Tax relief will no longer be available in respect of reimbursed business expenses when they are paid in conjunction with a salary sacrifice scheme.
  • The Government is reviewing the use of overarching employment contracts by employment intermediaries such as #39;umbrella companies#39; to make tax relief for home-to-work travel expenses available. It will publish a discussion document on this shortly, with the aim of informing possible action at Budget 2015.


  • The Chancellor announced that the amount of a bank#39;s annual profits that can be offset by carried-forward losses will be restricted to 50% of annual profits for accounting periods beginning on or after 1 April 2015. The restriction will only apply to losses accruing up to 1 April 2015, but there will be an exemption for losses incurred in the first 5 years of a bank#39;s authorisation. The measures will be subject to both anti-forestalling provisions, to prevent the accelerated use of losses before the measures take effect, and a targeted anti-avoidance rule, which will apply to arrangements entered into on or after 3 December 2014 with the aim of circumventing the restriction.
  • The Government has announced a new targeted exemption from withholding tax for interest on private placements.


  • As recently announced, from April 2015 individuals will be able to pass on their unused defined contribution pension savings on death to a nominated beneficiary tax-free if the individual dies before age 75 but will be subject to the beneficiary#39;s marginal rate of income tax, or 45% if taken as a lump sum, if the individual dies after age 75 (rather than subject to 55% tax, as is currently the case). From April 2016, lump sum payments will also be taxed at the beneficiary#39;s marginal rate of income tax.
  • The Government also announced that, from April 2015, where an individual dies before age 75, the individual#39;s beneficiaries will receive payments from the individual#39;s joint life or guaranteed term annuity policy tax-free. The tax rules will also be changed to allow joint life annuities to be passed on to any beneficiary.

Oil and Gas

  • The supplementary charge will be reduced from 32% to 30% from 1 January 2015 and the Government will look at further reductions.
  • The ring fence expenditure supplement will be extended from 6 to 10 accounting periods for all ring fence oil and gas losses and qualifying pre-commencement expenditure incurred on or after 5 December 2013.
  • Following consultation, the Chancellor confirmed that a new cluster area allowance will be introduced to support high pressure, high temperature projects. The allowance will exempt a part of the company#39;s profits from the supplementary charge. The amount of profit exempt will equal 62.5% of the qualifying capital expenditure a company incurs in relation to a cluster from 3 December 2014 onwards.

New Leak Reveals Luxembourg Tax Deals for Disney, Koch Brothers Empire

Latest Lux Leaks files obtained by ICIJ disclose secret tax structures sought by Big 4 accounting giants for brand name international companies


A new leak of confidential documents expands the list of big companies seeking secret tax deals in Luxembourg, exposing tax-saving maneuvers by American entertainment icon The Walt Disney Co., politically controversial Koch Industries Inc. and 33 other companies.

Disney and Koch Industries, a US-based energy and chemical conglomerate, both created tangles of interlocking corporations in Luxembourg that may have helped them slash the taxes they pay in the US and Europe, according to the documents obtained by the International Consortium of Investigative Journalists.

Widespread corporate use of tax maneuvers akin to these, in tax shelters the world over, are estimated to cost the US treasury billions annually. They increase profits and benefit shareholders at the expense of the companies home countries and other places where they do significant business.

ICIJ obtained the Disney and Koch tax documents as part of a trove of information that details big companies complex financial maneuvers through subsidiaries in Luxembourg. ICIJ received these documents last month, soon after publishing an earlier set of leaked documents detailing the Luxembourg tax deals negotiated by FedEx, Pepsi, IKEA and 340 other globe-spanning companies.

Other companies appearing in the newest leaked files include Hong Kong-based conglomerate Hutchison Whampoa, private equity firm Warburg Pincus, and Internet phone giant Skype. One of the Skype files relates to a restructuring in which Internet mega-marketer eBay sold a controlling stake in Skype to private investors. Skype, based in Luxembourg, is now a division of Microsoft.

Microsoft adheres carefully to the laws and regulations of every country in which we operate, the company said in an emailed statement.

The first set of Luxembourg tax deals, published by ICIJ and its media partners on Nov. 5, was arranged through the accounting giant PricewaterhouseCoopers. The latest set of documents reveal that the aggressive tax structures are being brokered not only by PwC but also by Luxembourg-based law and tax firms and the other Big 4 accounting firms: Ernst amp; Young, Deloitte and KPMG.

Since the first wave of stories was published by a team of more than 80 journalists around the world, ICIJs Lux Leaks investigation has sparked swift condemnation and calls for reform in Europe. In the wake of the revelations, Jean-Claude Juncker, the new president of the European Commission, who was prime minister of Luxembourg while many of the controversial tax policies were enacted, survived a no-confidence vote in the European Parliament but saw his leadership questioned.

Juncker has firmly maintained that his home countrys tax practices are legitimate but also admitted after the Lux Leaks publications that the system was not always in line with fiscal fairness and may have breached ethical and moral standards.

Ernst amp; Young, KPMG, PwC and Deloitte have all declined to answer detailed questions regarding the tax agreements and instead cited their global codes of conduct requiring that their employees comply with the law and behave ethically.

EY professionals provide independent tax advice to clients in accordance with national and international law, Ernst amp; Young spokesman Will Brewster said in a statement emailed to ICIJ. This includes advice on compliance with tax regulations in the territories in which they operate.

Ernst amp; Youngs role

The Disney and Koch files show that both companies, advised by Ernst amp; Young, engineered complex restructurings that reorder the ownership of many subsidiaries and centralize them under Luxembourg companies that are all served by internal corporate finance companies, akin to a companys own bank. These internal lenders received interest from affiliated companies channeling hundreds of millions of dollars in profits through Luxembourg between 2009 and 2013 and paid little tax. In some years, the two parent companies Luxembourg subsidiaries enjoyed tax rates of less than 1 percent.

Professional standards, as well as privacy laws, require that EY safeguards confidential client information. We take these obligations very seriously and are therefore unable to comment on individual cases, Brewster, of Ernst amp; Young, said in the statement.

When the money arrives in Luxembourg, taking advantage of an agreement between countries that assumes it will be taxed in Luxembourg, it goes in one of these unusual structures … and its not taxed very much at all, Richard Brooks, a former tax inspector in the UK and author of The Great Tax Robbery, said about these types of arrangements. Brooks was not speaking about Disney and Koch specifically.

Its impossible to determine exactly how Disneys and Koch Industries Luxembourg tax deals affected the companies US tax bills without seeing their confidential filings to the US Internal Revenue Service.

Several experts consulted by ICIJ, however, said the Luxembourg subsidiaries could help both companies move profits outside the US to lower-tax jurisdictions.

Both sets of Lux Leaks files detail confidential tax rulings — also known as advance tax agreements or comfort letters — from Luxembourg officials that assure companies they will get favorable treatment for their tax-saving maneuvers. The newest leaked documents involve tax deals presented to Luxembourg authorities between 2003 and 2011.

Luxembourgs tax deals are legal within its borders, but may be subject to challenges if tax authorities in other countries view them as allowing companies to avoid paying their fair share of taxes to them. Under the US tax code, a transaction that cuts a companys tax bill must have a true business purpose or the IRS can disallow the tax benefit.

Americans are sick and tired of big corporations arranging sweetheart deals with tax havens to dodge their US tax obligations, said US Senator Carl Levin, D-Mich., who has led investigations and held hearings into corporate tax avoidance, including by Apple and Caterpillar. It is unfair and unaffordable to let another year pass without eliminating the unjustified corporate tax giveaways that force everyone else to pick up the tab for government services.

The European Union has been investigating tax deals provided to companies that have established footholds in Ireland, the Netherlands and Luxembourg to see if these countries tax deals provided the companies impermissible state aid under European Union law.

In the past 15 years Luxembourg has become a hub for some of the worlds largest brands — big companies attracted by rulings that allow them to reduce the landlocked Central European duchys corporate income tax rate of 29 percent to little more than zero through financial maneuvers blessed in advance by Luxembourg tax officials. Internal company banks are one way corporations shift profits to Luxembourg in the form of interest payments on intra-company loans. Another way is through royalty payments on intellectual property, which enjoy an 80 percent tax exemption in Luxembourg.

A spokesman for Luxembourgs Finance Ministry defended the tax ruling practice, saying its not unique to his country. Any problem stems from the interaction of tax regimes in multiple countries.

Such interplay can currently lead to a significant reduction of a companys tax or even no taxation at all. While legal, its legitimacy is put in doubt from an ethical point of view, he said.

A tax-savings fairyland

Disney and Koch Industries Luxembourg structures differ in their specifics, but show common threads.

The Disney tax scheme is laid out in a 34-step advance tax agreement proposed in October 2009 by Ernst amp; Young. The document shows the corporate parent of Mickey Mouse moving money in circles across the globe while transforming it from cash to debt to equity and back. The copy of the ruling obtained by ICIJ does not bear the stamp of approval of the Luxembourg tax authority. Yet ICIJ was able to verify that the actions outlined in the document took place based on the companys public filings in Luxembourg.

Disneys Luxembourg offices are set up in a way that could allow the entertainment giant to move profit away from countries with high corporate taxes like France and Germany.

Disneys Rube Goldberg-like series of equity transfers gathered ownership of at least 24 of its subsidiaries in France, Italy, Germany, the UK, Australia, the Cayman Islands and the Netherlands under the umbrellas of two newly created companies in Luxembourg, the new documents show.

At the center of the new structure is a third company, a finance arm initially called Wedco Participations SCA.

The internal bank made loans to many of the subsidiaries at high interest rates, draining profits from those companies that were often in high-tax countries back to Luxembourg in the form of interest payments. In addition, a Cayman Islands subsidiary, which legally owns at least 16 Disney companies in Europe and Australia, sent its profits to Luxembourg in the form of annual dividends.

The Luxembourg internal lender, whose name was later changed to Wedco One (Luxembourg) S.à.rl Participations SCA, reported profits for the four years ending September 2013 of more than €1 billion and paid €2.8 million in income tax in Luxembourg, according to the companies public accounts reviewed by ICIJ. That works out to a tax rate of just over a quarter of 1 percent.

The documents show Disney used this internal bank as an intermediary for two loans totaling €75 million to its French subsidiary, Walt Disney International, France, SAS. Disney charged Wedco Participations just 0.42 percent interest; Wedco went on to charge Disneys French subsidiary 5.7 percent.

The transaction may have allowed Disney to reduce its French taxes because the French company paid more than €16 million in interest to the Luxembourg company from 2009 through 2013. Further, Disney received so little in interest payments from Wedco that it would have incurred little tax on its US interest income from the transaction.

Loans worth €717 million to two of Disneys UK subsidiaries generated €181 million in interest payments, while a €12 million loan to The Disney Store Netherlands generated €495,000 in interest. The Cayman Islands company returned €837 million in dividends to Luxembourg.

Disneys tax agreement also lays out a series of tax-free hidden capital contributions from other Luxembourg subsidiaries to the finance company, totaling more than €650 million.

Disney also set up a US branch of the Luxembourg-based internal lender, at Disneys headquarters in Burbank, California. Brooks said the US branch likely pays no tax on its transactions, because of a loophole in the US tax code where, at the request of the parent company, the IRS can ignore certain subsidiaries for tax purposes.

If so, it is US tax being avoided as this is ultimately investment from the US being routed through Luxembourg for tax purposes, said Brooks, who was hired by ICIJ to review some of the documents.

All together, the three Disney companies established by the tax deal crafted by Ernst amp; Young recorded more than €2.8 billion in profits from 2009 through September 2013, yet they share a grand total of one employee, according to the tax agreement.

They are located in a residential building in Luxembourg with two additional Disney subsidiaries. On the groups letter box, the name of Disney CIS Holdings S.à.rl, a firm created in 2011, had been added by a handwritten notation on a piece of masking tape.

When a reporter from ICIJ partner MO* Belgium visited, a man opened the door and introduced himself as director of the five companies. Now you can see that we really are present here. There is substance, said the man, a Belgian citizen who declined to give his name.

We use a large apartment on the ground floor as our office, he said. Theres not need for a lot of personnel. A qualified person with a full-time job can manage those five holding companies. And all the accounting and board meetings happen in Luxembourg. He declined to answer specific questions about Disneys Luxembourg business or about the 2009 advance tax agreement.

Our global effective tax rate has averaged 34% for the past 5 years and 35% in the most recent year, said Zenia Mucha, Disneys spokeswoman in the US We manage our tax affairs responsibly and aim to fully comply with all applicable tax rules. Your assertions are not based on an accurate understanding of our global tax position. She did not respond to a dozen detailed questions emailed to the company and did not specify what she saw as inaccuracies.

Its unclear if Disney has brought any of its Luxembourg profit back to the US, where it would be taxed at the corporate rate of 35 percent. Disney reported in its 2014 earnings report that it was holding $1.9 billion in foreign earnings overseas and estimated that the US tax liability if it brought that income home would be $377 million.

The $377 million, a fraction of Disneys operations worldwide, would still boost its total global tax bill by more than 10 percent. The company reported in its 2014 financial statement that it paid $3.1 billion in US federal and state income taxes and $600 million in foreign taxes.

Project Snow

Kochs Luxembourg transactions revealed by the new documents involved its chemicals and polymers subsidiary Invista BV, which makes Lycra-brand fiber and Stainmaster-brand carpets.

The Koch documents, also prepared by Ernst amp; Young, describe Project Snow, a 26-step restructuring of Invista designed, they say, to simplify the companys structure, centralize its cash flow into Luxembourg, and pay down debt.

The restructuring was worked out in a series of four meetings in late 2008 and early 2009 between Ernst amp; Young employees and Marius Kohl, head of the Bureau dimposition SociÃtÃs VI, part of Luxembourgs revenue authority, according to the tax ruling. Kohl, now retired, approved thousands of tax deals over 22 years that helped save companies billions of dollars.

The documents show that in the restructuring, which took place starting in September 2008, the subsidiaries of Invista passed hundreds of millions of dollars back and forth, converting shares to debt and occasionally dissolving firms. Tax-free hidden distributions among subsidiaries are just one type of head-spinning transaction included in the confidential tax ruling approved by Luxembourg authorities. Another section describes a $736 million loan that gets passed from company to company until a US-based subsidiary becomes both the debtor and creditor of the same debt, and the debt is canceled.

Each step in the tax ruling includes a separate interpretation of how it will impact the companys taxes in Luxembourg. In most instances, the transactions are exempt.

Central to Kochs restructuring deal is an internal company bank, Arteva Europe S.à.rl, which manages the cash flows of the companys European operations through Luxembourg. Arteva had established a Swiss branch that likely benefited from low tax rates in Switzerland. Luxembourg officials agreed to treat the Swiss branch as separate from the Luxembourg company, according to the tax deal.

From 2010 through 2013 the company paid €6.4 million in taxes on €269 million in profits. Its highest annual tax rate was 4.15 percent.

Arteva reported no staff costs in its annual financial reports filed in Luxembourg. In Switzerland, Artevas branch shares an address in Zurich with a firm called Tax Partners AG, whose principals are also listed in public filings as the deputy branch managers of Arteva, according to reporting by ICIJ partner, The Guardian. The branch manager of Arteva Switzerland describes himself on the web site LinkedIn as tax director, Europe for Koch International Shared Services.

Like all Koch companies, Invista conducts its business lawfully, and pays its taxes in accordance with applicable laws, said Rob Tappan, a Director of External Relations for Koch Companies Public Sector. The company declined to respond to detailed questions about its Luxembourg operations.

Koch says Invista is headquartered in the United States. However, US and other operations are owned by a holding company incorporated in the Netherlands, a low-tax country, where it reports financial results.

The Invista offices are located in a modern office building in Luxembourg in a suite with other Koch companies. A sign on the glass front says Koch Business Solutions — Europe S.à.rl The building is home to more than 670 active businesses, according to an ICIJ analysis of Luxembourgs corporate registry as of September 2014.

No one responded when a reporter rang the bell at the office, and two workers who were leaving declined to say how many people work there and what they do.

Koch Industries is the second-largest privately owned company in the United States, according to Forbes, and it is not required to report its financial information in the US, so its impossible to know how much tax it has paid here. The company bought Invista from DuPont in 2003 for $4.4 billion and combined it with KoSa, the Koch subsidiary that produced polyester and nylon fibers. It incorporated the new company in the Netherlands.

Koch Industries immediately began paying down Invistas debt, according to reports from Moodys. By 2010, Koch Industries had contributed $350 million to Invista, and by 2011, Koch had helped the company repay an additional $720 million, leaving Invista debt-free, Moodys said.

Owners Charles and David Koch have been in the center of political controversy in recent years as theyve sought to use their money and connections to elect Republican political candidates who are sympathetic to their libertarian beliefs.

Koch Industries admitted in 2011 that one of the key companies in its Luxembourg holdings, Invista S.à.rl, had funneled a dozen illegal campaign contributions to state political candidates in Virginia, Delaware and Kansas and to the US Democratic Governors Association. The company agreed to pay a fine of $4,700.

In its submission to the Federal Election Commission the company said that the violations resulted from a general lack of knowledge among company personnel of either the nature of Invistas legal structure or of the restrictions that applied to it as a foreign company.

The Kochs and their network of big-money donors and politically active nonprofit groups raised more than $400 million in an unsuccessful effort to thwart President Barack Obamas bid for re-election in 2012. They were back this year, supporting Republicans successful bid to gain control of the US Senate.

The Center for Responsive Politics calculated that David Koch and his wife Julia contributed at least $2.4 million to political candidates and groups during the 2014 election cycle, while Charles Koch and his wife Elizabeth contributed about $2.3 million. Each of the brothers, through trusts, contributed another $2 million to the nascent Freedom Partners Action Fund super-political action committee.

Check-the-box loophole

Disney and Koch may be benefiting from a loophole in the US tax code that allows them to tell the US government to ignore the existence of a multitude of subsidiaries and look only at the corporations foreign parent at tax time. The so-called check-the-box provision allows companies to bypass a rule that would normally require foreign subsidiaries to pay US taxes every time money flows from one subsidiary to another.

We actually facilitate international tax avoidance with policies like check-the-box, said Kimberly Clausing, an economics professor at Reed College in Portland, Oregon, who specializes in multinational corporate taxation. While such provisions are bad policy, she said, its not really wrong for the firms to make use of them.

In 2009, President Obama included check-the-box in a list of tax loopholes he wanted to eliminate. Documents prepared by his administration at the time claimed that getting rid of check-the-box would raise an additional $86 billion in ten years in US taxes, the most of the more than 25 business tax proposals in the presidents plan.

Businesses mounted an aggressive lobbying campaign to protect their loophole and the proposal was dropped in less than a year.

The tactic is one of a handful of tax strategies US companies employ to move their profits to low-tax countries from the US, where the statutory corporate rate is 35 percent.

Companies also use a strategy called cost-sharing, where they attribute some of the costs of developing new products to foreign subsidiaries, according to Stephen Shay, a professor of practice at Harvard Law School and a former international tax official at the US Treasury. That way they can attribute the profits from those products, or the licensing of trademarks and patents, to the company outside the US

The strategy ends up locking corporate profits outside the US, because companies have to finally pay the tax if they bring the cash home. That may be why Disney is leaving $1.9 billion abroad.

According to Bloomberg, US companies in the Samp;P 500 have $1.95 trillion in profits stashed overseas. They have lobbied for a temporary reduction in the corporate tax rate on dividends from those profits, or a so-called repatriation holiday.

Clausing estimates that companies shifting profits to low-tax countries rather than booking them where they are actually earned costs the US between $57 billion and $90 billion a year.

US companies appear to be taking full advantage.

Multinational corporations based in the US have booked 6.1 percent of their foreign profits in Luxembourg while recording only 0.6 percent of sales in the Duchy, according to Clausing, who based her calculations on data from the US Bureau of Economic Analysis. The same companies have only one-tenth of one percent of their foreign employees based in Luxembourg.

Clausing said, in discussing corporations in general and not Disney and Koch specifically, Theres obviously a lot of lying going on, mischaracterization of whats really happening.

Prime architects

Global accounting and tax advisory firms, including Ernst amp; Young, are prime architects of the inventive profit-shifting strategies that allow multinational companies to cut taxes via the Grand Duchy and other low-tax jurisdictions.

The Big 4 firms role in boosting international tax avoidance has come under increasing scrutiny over the past decade. KPMG, for example, paid $456 million as part of a deferred prosecution agreement with US authorities to settle charges that the firm had set up sham offshore shelters that allowed its clients to generate at least $11 billion in paper losses that cost the US Treasury $2.5 billion. Earlier this year, a US Senate investigation found the PwC tax advisors used legal loopholes to help heavy equipment maker Caterpillar Inc. cut its US tax bill by $2.4 billion by shuffling paper profits from the US to Switzerland.

Both Ernst amp; Young and PwC have been investing in their operations in Luxembourg.

Ernst amp; Youngs office in the Grand Duchy brought in $153 million in revenues in the year ended June 30, led by growth in its tax business, and is planning to hire 350 new employees by June 2015. PWC meanwhile held a grand opening for its 320,000-square-foot Luxembourg office building at a ceremony in late November in which Prime Minister Xavier Bettel and Finance Minister Pierre Gramegna gave speeches. With the Lux Leaks scandal still making headlines in Europe, PwC rescinded reporters invitations to the event.

These investments may be at risk after the document leaks that have exposed how Luxembourg officials and global tax firms cooperate to help companies avoid paying the taxes in the countries where they truly operate.

The European Commission is already investigating the legality of tax rulings obtained by Amazon and Fiat in Luxembourg and by Apple and Starbucks in Ireland and the Netherlands. Luxembourg is expected to adopt changes that it says will make tax rulings more transparent. Under a proposed new law, corporate rulings would have to be approved by a commission rather than a single official.

Now the new EU Competition Commissioner Margrethe Vestager has said her team will review the tax rulings leaked to ICIJ.

We consider the Luxembourg leaks as market information, she said at a recent press conference. We will examine it and evaluate whether or not this will lead us to opening new cases.

Simon Bowers, Kristof Clerix, Emilia Díaz-Struck, Rigoberto Carvajal, Mar Cabra, Minna Knus-Galán, Bastian Obermayer, Lars Bovà and Jan Kleinnijenhuis contributed to this story.​