Debt Recovery Tax Issues. Tax support to loan owners and administrators

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1 Debt Recovery Tax Issues Tax support to loan owners and administrators

2 Introduction Banks and other owners of non-performing Irish loans, as well as loan administrators acting on their behalf, are continuing to increase activity towards restructuring loans or enforcing security. In this process, it is vital that tax matters are addressed thoroughly to help maximise the loan recoveries, while also fulfilling any tax compliance obligations arising from these actions. Tax issues can have a significant impact on the optimal strategy and timing of debt recovery actions and, if not considered fully, can directly deplete the funds available for loan repayment. A changing tax context The challenge of addressing all tax issues of significance is increasing due to recent and potential further changes in the relevant tax rules. EY has been heavily involved in shaping the debate through the Department of Finance s 2012 consultation on proposed new rules for tax in receiverships and the follow-up consultation in The first Finance Act of 2013 made two main changes impacting on this area: 1. New VAT rules imposing extra VAT obligations on receivers and mortgagees-in-possession in relation to the complex Capital Goods Scheme for VAT. 2. Rules limiting the degree to which individuals engaged in a property development trade can generate tax-relievable losses. Finance (No.2) Act 2013 introduced a further significant provision. The new rule reduces any allowable Capital Gains Tax (CGT) loss by the amount of any release of debt used to fund the purchase of the asset. If the debt release occurs in a later year than the disposal, the amount released is treated as a chargeable gain for the borrower in the year of release, but capped at the amount of any earlier CGT loss on the disposal. Case and portfolio managers will need to be conscious of the potential impact of this new rule on the borrower s position. In addition, certain scenarios are not specifically addressed by the new legislation. The Department of Finance s 2013 consultation on Tax and Receiverships has not resulted in any new provisions in Finance (No.2) Act 2013 but further changes cannot be ruled out. Any such changes would also be likely to prompt a need for revisions to operational procedures and, potentially, debt recovery strategies. Debt Recovery Tax support to banks and other loan owners

3 The challenge of addressing all tax issues of significance is increasing due to recent and proposed further changes in the relevant tax rules.

4 Relevant taxes The range of potential tax issues to be addressed is wide-ranging, whether: In reviewing the financial position of the borrower in a potential restructuring, or Following enforcement of security by appointment of a receiver/ liquidator or by becoming mortgagee-in-possession. It is vital that tax outflows, which reduce funds available to satisfy the outstanding debt, are minimised while ensuring that the loan-owner remains compliant with any tax obligations arising from security enforcement. In any single case, the taxes involved can include some or all of the following: Income tax/corporation tax VAT CGT Stamp duty Relevant contracts tax (sub-contractors tax) Local property tax Given the range of tax issues and potential for further changes to the relevant tax laws, case management for nonperforming loans must have access to expert resources across all of the various taxes involved. Even when such expertise is available in-house, the increasing volume of such issues may require supplementary support. Debt Recovery Tax support to banks and other loan owners

5 It is crucial that tax outflows, which reduce funds available to satisfy the outstanding debt, are minimised while ensuring that the loan-owner remains compliant with any tax obligations arising from security enforcement.

6 Why EY? EY has experienced personnel who have been dealing with complex tax issues arising in debt recovery situations in a number of ways, including: Support of receiver/liquidator appointments Independent Business Reviews (IBRs) and other support to banks on arrears cases Advising borrowers in arrears Establishing tax procedures for loan case managers and receivers As mentioned above, EY has also been a central participant in responses to Finance Bill changes and in the Department of Finance consultation process on changes to the tax rules on receiverships and mortgagee-in-possession situations. The firm continues to liaise actively with Revenue on the practical issues arising in this area. EY can provide expert support across each of the tax issues, drawing on our wealth of property, banking tax management and insolvencyrelated tax experience. How EY can help The ways in which EY can assist owners and administrators of loans include the following (in each case, working in coordination with any in-house tax function): Full tax support to loan case managers on individual cases or defined portfolios Second opinion for in-house tax function on new or more complex matters Review of borrower s tax advice in a debt restructuring Assessing and advising on the VAT implications of property transactions in circumstances were there are gaps in the VAT history Assessment of costs/benefits of opting to charge VAT on a disposal or on rents, when the choice is available Drafting, updating or review of operating procedures to ensure identification and management of the relevant tax issues Secondment of staff to work with in-house tax function and/or case management teams Local property tax compliance for owners/mortgagees-in-possession of residential property Training of case management personnel Debt Recovery Tax support to banks and other loan owners

7 EY Contacts Ray O Connor Partner, Direct taxes (including banking tax matters) E: ray.oconnor@ie.ey.com T: Declan O Neill Partner, Direct taxes E: declan.oneill@ie.ey.com T: Enda Jordan Director, Income Tax/ Corporation tax/cgt/rct E: enda.jordan@ie.ey.com T: Dominic Rigby Senior Manager, Direct taxes and property market expertise E: dominic.rigby@ie.ey.com T: Billy McMahon Director, Direct taxes (including funds/securitisations) E: billy.mcmahon@ie.ey.com T: Gavin O Connor Director, VAT E: gavin.oconnor@ie.ey.com T: Breen Cassidy Partner, VAT E: breen.cassidy@ie.ey.com T: Margaret Coleman Manager, Stamp Duty E: margaret.coleman@ie.ey.com T: Brian Keenan Director, VAT E: brian.keenan@ie.ey.com T:

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