Structured finance
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Structured finance describes any "non-standard" way of raising money. These tailor-made securities go beyond "standard" securities like conventional loans, debentures, debt, and equity. The reason to structure a more advanced security may be that conventional securities may be unattractive, unavailable or too expensive.
Structured finance often refers to using loopholes in a country's tax law to obtain some unintended tax benefit which is used to provide a cash flow benefit to a borrower. Generally these structures result in the following:
- create tax deductions where there has been no economic expense; or
- convert taxable income into tax exempt income; or
- convert non-tax deductible expenses into tax deductible expenses.
Recently, governments have begun efforts to reduce the loss of their tax revenues caused by use of these unintended tax consequences in structured financing transactions. Countries such as the United States of America, the United Kingdom and South Africa, amongst others, have introduced a variety of measures to combat aggressive tax avoidance schemes. These measures include compulsory and timely disclosure of schemes to the tax authorities, as well as statements by politicians making it clear that the use of "unacceptable" (albeit legal) tax avoidance schemes will be attacked.
Examples
- Asset-Backed Securities (ABS)
- Collateralized Debt Obligation (CDO)
- Convertible bonds
- Securitization
- Assurance contracts
- Special purpose entity (SPE)
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