ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Some Tax Issues on Credit Enhancement of ABS

  • Kim, Byung-Il Daehyun Co., Ltd.

Asian Tax Journal Vol. 7 No. 4 (2006), pp. 201-235

Abstract

Asset-backed securities encompass a wide variety of credit risks beyond those present in the securitized asset pool itself. Credit enhancement facilitates the transfer of assets by reallocating a portion of the asset's credit risk to a third party or enhancement vechicle. The purpose of this research is the establishment of proper tax policy by means of analyzing the tax issues related to credit enhancement of asset-backed securitization(ABS) and a true transfer as its premise and trying to find the solutions. Furthermore, this research aims to effectively create preventive measures of possible tax evasion by clarifying the interpretation issues of taxation on credit enhancement. The research can be summarized as follows; In tax matters when the true sale did not take place as in the case of the transfer of underlying assets for tax evasion purposes, risk may remain such as being subjected to revocation because of fraudulent act or to exclusion from tax exemption. As for senior and subordinated structure, it is recommendable to establish a certain limit issuing proportion of subordinated bonds for the true sale and financial soundness of originator. Because, if subordinated notes has higher issuing proportion among the asset-backed securities, there may be negative impact on bankruptcy remote and this can affect the credit rating. At par value orginator's acceptance of subordinated bonds issued by an affiliated SPC even when the redemption of the principal and interest is almost uncertain should be interpreted as a object of calculation denial for the unreasonable conduct in tax law. Also, the subordinated beneficiary interest repaid by SPC is within reasonably justifiable boundaries from economic viewpoint, this interest could not be disallowed even if the interest rate is much higher than the usual. Finally, SPC should appropriate the value for over-collateral portion as unpaid obligations for the transferor. In case that the originator is a guarantor, it is possible that transfer of asset is not recognized as off-balancing. Even if the transfer is recognized as off-balancing, concerned guaranty actions should be properly reflected on the financial statements. In case the guarantee is made by a third party, the guaranty amount should not be paid by originator who is transferor.

Keywords

  • credit enhancement
  • ABS
  • true transfer
  • senior and subordinated structure
  • SPC
  • originator
  • guarantee

Related Articles

ATJ
E-SubmissionSitemapContact Us RSS

Asian Tax Journal

Address : 3F, KICPA Bldg., 12 Chungjeongro 7-gil, Seodaemun-gu, Seoul 03736, Republic of Korea

Editor-in-Chief : Prof. Wanyong Kim Editorial Office : Dept. of Finance, Accounting & Taxation, Hanyang Cyber University, 220 Wangsimni-ro, Seongdong-gu, Seoul, Republic of Korea Tel : +82-2-2290-0418 / +82-10-8664-1117 E-mail : taxresearch2@hanmail.net