Building Efficient Debt Resolution Systems

Transcription

1 Building Efficient Debt Resolution Systems Tax and Regulatory Impediments to Effective Non-Performing Loan Reduction Vienna, February 13-14, 2012 Ruth L. Neyens Consultant, The World Bank

2 Public policy recognizes need for and benefits of speedy NPL reduction Throughout the region, the authorities moved quickly to adopt a variety of corrective measures But non-performing loans remain at substantially elevated levels Delays can be attributed to: Human nature Failure to properly align legal, tax and regulatory regimes 2

3 Failure to properly align tax and regulatory regimes Unintended consequences Make the cost of restructuring uneconomical Prohibit the transaction from taking place Increase the likelihood that borrower will be liquidated Frequently lead to Increased pressure for bail outs, or Excessive or inappropriate regulatory forbearance 3

4 Tax rules are designed to safeguard government revenues Maximize income recognition while minimizing deductions for losses Conflict with goal of speedy loan restructuring which involves loss recognition by banks and borrowers 4

5 Tax impediments fall into three broad categories Income recognition Phantom Income Asymmetrical treatment of losses incurred in bankruptcy and out-of-court proceedings Tax Impediments Transfer taxes Other fees Tax Authority as Creditor Tax Code Miscellaneous Issues Loss Treatment Treatment of loan losses Use of NOLs 5

6 Common restructuring techniques may generate income Phantom Income or Income generated without any associated cash flow Explicit Implicit In some jurisdictions, banks are required to pay on behalf of borrowers Asymmetrical treatment of debt forgiveness between court and out-of court restructuring proceedings 6

7 Inability to recognize losses for tax purposes impedes loan restructuring Generally accounted for by use of either charge-off or reserve method Definition of what constitutes a loss and when it is recognized varies widely across countries Limits on total amount recognized in any one year Proof of loss required 7

8 Other common tax impediments to loan restructuring Use of tax loss carry forwards severely restricted Value added or transfer taxes upon the transfer or disposal of assets Real Estate or other taxes/obligations on foreclosed property Tax code Poorly written, confusing, scattered throughout other regulations May require numerous opinions subject to lengthy delays and conflicting opinions 8

9 Role of tax authority in restructuring process May be involuntary creditor through corporate tax arrears As a priority-ranked creditor, little incentive to participate in timely resolution May legitimately prefer different instruments or forms of debt restructuring, e.g., maturity extensions, rather than debt forgiveness or restructuring May also owe substantial sums to the borrower 9

10 Prudential regulation & supervision plays crucial role in restructuring process Provide proper incentives for banks to engage in real rather than cosmetic debt restructuring Proper classification and provisioning for loan losses Clear rules concerning upgrades in classification and/or return to accrual status Regulatory authorities can incentivize faster resolution through publication of guidelines on debt workouts Removal of restrictions on banks that prevent them from owning or operating foreclosed property Removal of restrictions on the amount and holding period of foreclosed assets 10

11 Many corporate restructuring techniques require approval Multiple layers of approvals for common corporate actions followed by lengthy delays between approval and effectiveness Approvals for creditors, especially foreign creditors, to acquire shares or specific types of assets such as real estate Approvals for creditors, especially foreign creditors, to acquire shares or specific types of assets such as real estate Requiring large creditor(s) foreclosing on stock to launch a compulsory takeover bid for the entire capital of the listed company or payout unsecured creditors whose obligations are not yet due Restrictions on sale or transfer of substantial portion of company shares Strict application of anti-state aid rules in cases where successful restructuring is dependent upon some form of assistance 11

12 Some recommendations for strengthening the resolution process Effectively eliminate taxation of debt forgiveness for loan restructuring negotiated in out-of-court proceeds by enabling offsets against losses Allow loan losses to be deductible at the time they are incurred More closely aligns tax and financial accounting for loan losses Provides greater assurance as banks financial accounts are typically supported by specialized professionals, audited, and scrutinized by markets and supervisors. Minimizes banks compliance costs Use forbearance wisely to incentivize not impede restructuring Provide greater guidance on restructuring and return of loans to performing status Consider expedited process ( one stop shop ) for approvals required for corporate restructuring 12