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Tax relief for impairments in the credit crunch

Tax relief for impairments in 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

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Tax relief for impairments in the credit crunch

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  1. Tax relief for impairmentsin the credit crunch David Southern

  2. The crisis • Willingness to lend • Value of collateral • Circularity • German banking crisis of 1931 • No credit • Restructuring

  3. Tax consequences • Creditors – relief for write-downs • Debtors – restructuring • Equity related losses • Debt related losses

  4. 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

  5. Some dilemmas • Scylla v Charybdis • Accounts consolidation • Symmetry • Asymmetry • Earlier recognition of losses

  6. Tax deferral • Revaluation of investments • CDOs • Trading • Non-trading

  7. Restructurings • Novations • Tax event • Up-front recognition • ‘related transactions’ • Charges and expenses • Recharacterisation

  8. Third parties • Substitute debtor • Transfer of assets • Guarantee called • Guarantor becomes loan creditor • Group substitution rules

  9. Connected parties • Transfer pricing rules • Connected party rules • Work in quite different ways • Treated as equity loss • Restricted rules on connection

  10. Transfer pricing • ‘Provision’ • More extensive than connected party rules • Corresponding adjustments • If both UK resident

  11. Bifurcation • Assumption of conversion • Redemption is share price falls • Investor suffers income loss • Treated as capital loss for tax

  12. 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

  13. 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

  14. Insolvency arrangements • Liquidation • Administration • Administrative receivership • Fixed charge receiver • Pre-liquidation tax – unsecured claims • Post-liquidation tax is an expense • ERIP

  15. 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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