THE GREAT THAKSIN ASSET SALE: TAX-FREE BUT WITH

UNCLAS SECTION 01 OF 04 BANGKOK 000788

SIPDIS

SENSITIVE

STATE FOR EAP/MLS AND EB
TREASURY FOR OASIA
COMMERCE FOR 4430/EAP/MAC/OKSA
STATE PASS TO USTR FOR WEISEL

E.O. 12958: N/A
TAGS: ECON EFIN PREL TH
SUBJECT: THE GREAT THAKSIN ASSET SALE: TAX-FREE BUT WITH
COSTS


1. This cable is sensitive but unclassified. Not for internet
distribution.


2. (SBU) Summary. The sale of the Prime Minister's
publicly-listed family holding company, Shin Corp, to
Singapore's Temasek, has provoked widespread criticism for
the byzantine nature of the transaction, the fact that it was
structured to be entirely tax-free, the appearance that
government polices were promulgated to support the deal, and
the sale of "national assets" to foreigners. While the
legality of the transaction is still open to debate, a sale
providing nothing to the government coffers while earning the
Thaksin family US$1.8 billion is widely seen as unethical.
The deal has catalyzed Thaksin opponents and created perhaps
the most serious challenge to the stability of the Thaksin
administration since it took office in 2001. Attacks on
Singapore's motives and implication that the Singapore
government somehow abetted Thaksin's corrupt practices in the
Shin sale are causing a Thai nationalist reaction, with even
respected academics demanding Singapore call off the deal.
The fact that the PM's 2001 platform called for Thai
nationalist economic polices coupled with the amount of
political capital that the Shin Corp transaction has cost,
further complicates Thaksin's efforts to push forward his
outward-looking, albeit politically difficult economic
policies, including privatization of SOEs, massive
infrastructure development, and an FTA with the US. End
Summary.

The Deal
--------------


3. (U) On January 23, 2006 the Shin Corp CEO announced that
the company's controlling shareholders, the PM's Shinawatra
family, would sell their 49.6 percent ownership of the
company's outstanding shares to Temasek Holdings, the
investment vehicle of the government of Singapore. Shin
Corporation is publicly listed on the Stock Exchange of
Thailand (SET) and it functions as a holding company for
shares in mobile telephone company Advanced Info Service (AIS
- 43 percent),Shin Satellite (41 percent),television
station iTV (53 percent),and communications and tech company
CSLoxinfo (40 percent). The total value of the sale was 73.3
billion baht (US$1.8 billion). In addition, Singtel, the
Singapore telephone company majority owned by Temasek, owns
20 percent of AIS.


4. (SBU) The Temasek transaction was designed in a way to
avoid taxes and get around Thai law limiting foreign equity
in telecom firms to 49 percent. The law raising the limit on
foreign equity participation was raised to 49 percent from 25
percent the day before the Temasek deal was announced. Three
companies were created in Thailand one week before the
transaction was announced to hold varying amounts of Shin
Corp shares. Each nominee company has Temasek as a major
shareholder but two also include Siam Commercial Bank and a
local businessman (who received a 20 billion baht loan from
Siam Commercial Bank to fund his contribution to the capital
of the nominee firm). One of the nominee companies owns 41
percent of another. Through these Thai nominee companies
holding Shin Corp shares, the legal fiction can be maintained
that Shin Corp remains a majority-Thai owned firm.(This
practice of using nominees is quite common in Thailand as a
means to get around a variety of restrictions to foreign
ownership on Thai as
sets.)


5. (U) The members of the PM's family and their associates
sold their shares (transferred to them by the PM in 2000,
just prior to running for PM in 2001 as part of an effort to
comply with Thai conflict of interest requirements for senior
officials) to Temasek through the SET. Thai law exempts
capital gains taxes from trades made by individuals
transacted through the SET. However, it became clear that
Thaksin's son and daughter sold more shares than they had
previously reported as owning. This was due to a transaction
on January 20 in which they bought shares equivalent to 10.4
percent of Shin Corps total outstanding from a British Virgin
Islands company called Ample Rich Investment Ltd. Although
the price of Shin Corp shares was 49.25baht/share on January
20, the transaction between Ample Rich and the Thaksin
children was done at 1baht/share.

Ample Rich
--------------


6. (U) As explained at a February 1 press conference held by
Suvarn Valaisathien Thaksin's tax attorney, the timeline of
the Ample Rich transaction was as follows:
-June 11, 1999. Ample Rich Ltd. established in the British
Virgin Islands to hold Shin Corp stock in preparation for
listing Shin Corp. American Depository receipts on NASDAQ.
The US listing was never done because of the "poor
performance of the NASDAQ in 2000" (Note: through August 31,
2000 the NASDAQ Composite Index was up slightly for the
year.) Ample Rich transferred the Shin Corp shares from
Thaksin at par i.e. 1baht/share.
-December 1, 2000. PM transfers his shares in Ample Rich to
his son Panthongtae, to comply with Thai constitution
prohibiting a minister from holding more than 5 percent of
the shares of a company.
- May, 2005. Panthongtae transfers 20 percent of Ample Rich
shares to his sister, Pinthongta.
- January 20, 2006. Panthongtae and Pinthongta purchase all
the Shin Corp shares held by Ample Rich at the same price as
Ample Rich's original purchase price i.e.1baht/share. Suvarn
explained that the shares were brought back to Thailand in
order for the country to benefit from the capital inflow
achieved through the sale of shares to Temasek. It should be
noted that if the shares were sold offshore, a 15 percent
withholding tax would have applied to the transaction. We
also understand that Temasek did not want questions to arise
from buying such a large part of the shares from a shell
company located in a tax haven.
- January 23, 2006. The siblings sell all their Shin Corp
shares, about 27 percent of all outstanding Shin Corp shares,
to Temasek via the SET.

Favorable Rulings
--------------


7. (U) Prior to Temasek purchasing the shares, the Securities
and Exchange Commission (SEC) and the Revenue Department made
several rulings highly favorable to the Shinawatra family and
Temasek. Thai securities law requires that an entity
acquiring 25% of the equity of a listed firm must offer to
buy the remaining outstanding shares of existing shareholders
at a price "not less than the price the tender-maker offered
to any shareholder during the previous 90 days." Yet the SEC
ruled that Temasek could tender for remaining AIS shares at a
price 23 percent below market based on an opinion from a
financial advisor (the advisor was SCB Securities, a
subsidiary of the Bank which owns shares in the nominee
companies that formally acquired Shin). Also, the SEC ruled
that "because Shin Sat and iTV comprised less than 10 percent
of Shin Corp's total revenue," Temasek did not have to tender
for those shares despite the regulations regarding change of
control. These rulings substantially reduced Temasek's
required cash outlay for controlling interest in the Shin
subsidiaries.


8. (U) When Thaksin transferred Shin Corp shares to family
members in 2000, the Revenue Department ruled that, because
the shares were transferred below market price, they would
not be liable to personal income tax. When the family sold
their Shin shares to Temasek, the Revenue Department ruled
that, since the shares were sold by individuals on the SET,
no capital gains liability occurred. The Revenue Department
has ruled that no tax event has occurred on any of the asset
transfers and sales from the time Thaksin began distributing
Shin Corp shares in 1999 through the sale to Temasek. Critics
have been unable to find evidence of tax evasion (as opposed
to tax avoidance) from these maneuvers but argue that because
at least some of the transfers were not reported to the SEC
as required for all off-SET trades, the Shinawatra children
could be subject to fines and up to one year in jail.

Questions and Accusations
--------------


9. (U) In addition to these facts, Thaksin opponents have
made additional accusations:
-Thaksin did not sell his shares in 2000 because he wanted to
use his position as PM to favor his companies and make them
more valuable. As demonstrated by the fact that the value of
Shin and affiliated company shares have appreciated more
rapidly than the overall Thai stock market over the past five
years, these critics argue the PM succeeded in his goal and
sold out at the high. Policy decisions limiting competition
in the mobile phone and satellite markets and preferential
concession agreements are, critics contend, just some
examples of the special treatment these Thaksin-owned
entities received from the RTG to help build the value of
their enterprises.

- The Thai constitution specifically prohibits ministers from
having an interest in or acting on behalf of a company, yet
the PM was "on vacation' in Singapore for four days during
the end of December, a remarkable coincidence.

- There are reports that a second company called Ample Rich,
incorporated in the UK, engaged in trades of Shin Corp shares
held offshore through Singapore brokerage firm Vickers,
Ballas & Co. This accusation is based on a July 21, 2000 Shin
Corp major shareholders report to the SEC indicating that
Ample Rich (BVI) owned 10 million fewer Shin shares than it
had when Thaksin first transferred shares offshore in 1999.
These 10 million shares reportedly showed up on the books of
Vickers although no trade was ever reported. When the
siblings bought all Ample Rich's Shin Corp shares in 2006,
the missing 10 million shares were there.

- Temasek paid a premium of about 20 percent for Shin shares
over market value of the underlying assets. Critics contend
that "there must be a quid pro quo" with one senior Democrat
Party MP asking "did they promise Singapore basing rights for
their F-16s?" An academic accused Singapore of "enabling
Thaksin's cash out" and questioning "the moral and ethical
standards of the buyer."

-Even if the transaction can be legally justified, critics
contend there is no doubt but that making a profit of over
US$1 billion and not paying any taxes at a time when the
government budget is under pressure and the Revenue
Department has become more active in collecting taxes sets
the wrong example and violates Buddhist precepts for proper
behavior of a leader.

- Thaksin has been trying for several years to privatize
EGAT, the state-owned electric utility, in the face of
opposition from unions and those who fear privatization would
lead to higher energy prices for consumers. Three days ago
the EGAT chairman, responsible for preparing the company for
privatization, resigned in the wake of the Shin Corp sale
stating that he did not want to preside over the sale of his
company "to foreigners."


10. (SBU) Comment: The Constitutional Court and the National
Counter Corruption Commission investigated Thaksin in 2001
for failing to dispose of all his substantial corporate
assets. By the narrowest of margins, both institutions
acquitted the PM of wrongdoing and accepted his argument that
his failure to disclose certain assets was simply an error.
Now Thai regulators stand accused of again making special
rulings to favor the PM. As one stock market observer noted
"it's not exactly news that Thai institutions are weak" but
the blatant manipulation of legal loopholes and influence has
now resulted in enormous liquidity in the hands of the PM and
made him appear "greedy."


11. (SBU) In his favor, the path of Thaksin's transaction is
well trodden here in Thailand, from the use of offshore
companies, to nominees, to effective use of tax avoidance
techniques. But the arrogance and scale with which this was
done has rubbed many Thais the wrong way, thereby weakening
the PM politically, at least in Bangkok. Thais are also
concerned that "national assets, some of which may have a
national security component" (e.g. satellites),were sold to
an entity controlled by a foreign government. Thaksin
opponents are trying to play up the nationalist/xenophobia
card with a February 7 newspaper headline reading "Singapore
Warned: Drop Shin Takeover."


12. (SBU) Thaksin was elected in 2001 partially on a platform
of taking Thailand back from the IMF and the other
foreigners. With the need to expend so much political capital
justifying his self-enrichment, Thaksin may need to reduce
his exposure to any further charges that he is "selling out
the country to the foreigners." His policies involving
"megaprojects" infrastructure development, privatization of
state-owned enterprises and an FTA with the US could face
review if and when the PM needs to re-establish his
nationalist and populist credentials.

BOYCE