tax relief for impairments in the credit crunch
Post on 31-Dec-2015
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Tax relief for impairmentsin the credit crunch
David Southern
The crisis
• Willingness to lend
• Value of collateral
• Circularity
• German banking crisis of 1931
• No credit
• Restructuring
Tax consequences
• Creditors – relief for write-downs
• Debtors – restructuring
• Equity related losses
• Debt related losses
Six principles
• Every transaction is debt or equity
• Substance v form
• Loan notes
• QCB v non-QCB
• Bells and whistles
• Assigned according to payments rights and obligations
Some dilemmas
• Scylla v Charybdis
• Accounts consolidation
• Symmetry
• Asymmetry
• Earlier recognition of losses
Tax deferral
• Revaluation of investments
• CDOs
• Trading
• Non-trading
Restructurings
• Novations
• Tax event
• Up-front recognition
• ‘related transactions’
• Charges and expenses
• Recharacterisation
Third parties
• Substitute debtor
• Transfer of assets
• Guarantee called
• Guarantor becomes loan creditor
• Group substitution rules
Connected parties
• Transfer pricing rules
• Connected party rules
• Work in quite different ways
• Treated as equity loss
• Restricted rules on connection
Transfer pricing
• ‘Provision’
• More extensive than connected party rules
• Corresponding adjustments
• If both UK resident
Bifurcation
• Assumption of conversion
• Redemption is share price falls
• Investor suffers income loss
• Treated as capital loss for tax
Debt-equity swaps
• Scheme of arrangement
• In satisfaction of a debt
• In consideration of a release
• No credit in debtor
• Deemed releases
• Change in control of debtor
Debt waivers
• Gives rise to tax charge
• Subject to five exceptions
• Statutory insolvency arrangement
• Connection
• Past connection/insolvent creditor
• No connection prior to insolvent debtor
• Debt swapped for ordinary shares
Insolvency arrangements
• Liquidation
• Administration
• Administrative receivership
• Fixed charge receiver
• Pre-liquidation tax – unsecured claims
• Post-liquidation tax is an expense
• ERIP
Conclusion
• Monetising tax losses
• Greater marginal impact than additional profits
• Recouping losses suffered elsewhere in the organisation
• Importance of tax function
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