RESTRICTED
REF' XT22 loth December 1984
NOTE TO: B. P. Garraway, Esq.
A. C. Long, Esq.
C. C. R. G. Baker, Esq.
P. D. Lovejoy, Esq.
BATUS Shareholding in DIASCO
1. Disadventgge of Rresent small shareholdint by BATUS in MASCO
You will remember that there were two tax disadvantages in RATUS holding
less than 1OX of the ordinary share capital of IMASCO,. namely,
(a) The Canadian withholding tax on dividends would be at 15% instead
of 10%;
(b) BATUS would not obtain a double tax credit for the Canadian tax
underlying the MASCO dividend. (Credit for the underlying tax plus a
10% withholding tax would almost cover the US liability).
Of course, the benefit from the interest deduction on monies borrowed
to purchase the shares, at the US Federal rate of 48%, far outweighed these
disadvantages.
2. Disadvantggge of selling shares to BATUS to increase shareholding in
114ASCO to 10%
At the time the original proposals were made we considered selling
MASCO shares owned by We-stanley Trading and Investment Co. Ltd. to BATUS to
make up their shareholding to 10%. The chargeable gains cost of doing this
was prohibitive and it was decided to defer consideration of this until UK
Corporation Tax rates came down.
3. An Alternative Proposal
There is an alternative which would involve BATUS obtaining at least
25% of DIASCO in exchange for a new issue of its own shares. This would
involve no chargeable gains tax cost in the UK although it may not be
acceptable for reasons other than tax. Eowever, ram setting out the details
-here so that you can consider it. S. 482 ICTA 1970 consent would be required
and also clearance under S. 88 CGTA 1979. I would not anticioate@@my
difficulty from these requirements, provided that I could confirm that
dividends received from BATUS and IMASCO in total would not be reduced by
the transaction.
4. Savings to be made by giving BATUS a 10% shareholdinL in IMASCO
I am advised by BATUS that with a less than 10% holding, they retain
after Canadian withholding and US taxes 54'_ of the gross dividend; whereas
with a 10% holding they would retain 72%. The cost to the group therefore is
18% of the gross dividend (72--54), less UK withholding tax at 5% if the extra
was remitted to the UK by way of dividend: net cost 17.1%.
Presently dividends are 31c per quarter per share C$1.24 per annum.
With 3.4m shares the cost of holding less than 10% Of NASCO by BATUS is CD
3.4m xCS1. 24 x 17.1% = CS 720,936 p.a.
BAT Industries document for Province of British Columbia 12 April 1999

5. Possible other Benefits
Peter Lovejoy has told me that the proposal to exchange DJASCO shares
with BATUS could be used to solve the compensation problem. (This arises
because BATUS is paying out more in interest net of tax to finance the
purchase of DIASCO sharer. than it receives in dividends - net of tax
CS9.765m compared to C$2.2am). Although we may have to give an undertaking
to the UK Revenue, as mentioned in 3 above, that dividends from BATUS and
IMASCO in total would not be reduced, we could leave the 18% saving in
BATUS. There would also be a slight saving in total withholding taxes by
paying NA= dividends via BATUS (Canada to US 10% US to UK 5%. Canada to
UK 15%. Dividends from Canada 100 - withholding tax 10 = 90. Dividend to UK
90 - withholding tax 5% = 4.5. Total withholding tax 14.5%). This would
amount to C$150, DOO approximately if the whole of the group's shareholding in
DWCO was held by BATUS.
6. A Further Note
The Chancellor of the Exchequer has said that he will be looking at
Capital Gains Tax prior to his next budget. One suggestion widely canvassed
is that there should be a cut off point: after a lengthy period of ownership
of an asset Capital Gains Tax would cease to apply. If this happened we
could transfer sufficient shares to give BATUS 10% of DfASCO without UK tax
penalty. (S. 482 consent would still be required).
Do you wish to pursue the proposal in 3 or would you prefer to wait
until the UK 1985 budget before making any decision?
K. Etherington
Note
I have not mentioned the IMBAT shareholding in M&SCO since this of
itself could not bring BATUS's shareholding to the 10% level and it would be
necessary to go to 25%. The proposal in 3 would be simpler than a combined
transaction and would leave the IMBAT holding for future sale to BATUS if
desired.
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BAT Industries document for Province of British Columbia 12 April 1999