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Stamp duty on securitization transactions
Stamp duty is a crucial issue for securitization transactions. It can add up to a substantial cost in several jurisdictions.
The genesis of the stamp duty issue lies in the fact that a securitisation transaction represents an assignment or transfer of receivables from the originator for the benefit of the investors. [See here as to why is a transfer of receivables required in securitisation.] The legal document by which this transfer is effected is regarded in law as a conveyance, that is, the instrument by which the transfer is effected, and such instrument in many jurisdictions is liable to a stamp duty.
UK, Hong Kong, Malaysia, India, etc are examples of jurisdictions where assignment agreements are liable to stamp duty.
Stamp duty is an antiquated tax - it belongs to that age when commercial transactions were put up on documents which were authenticated by the seal or stamp of the State. In the present age of technology increasingly heading towards paperless contracting, it is appropriate that stamp law should be replaced by tax on the transaction rather than documents. Here is an interesting piece on the history of stamp law dating back to 17th century.
The issues that arise in this context are:
As discussed above, stamp duty arises as securitisation involves a document by which transfer of receivables (actionable claims, or choses in action, as they are called in law) are transferred.
Good question - the reason is, since securitisation results into transfer of an intangible asset, viz., receivables, old common law principles require that the transfer should be effected only by a written instrument. In case of many other transactions, the written instrument is only an evindence or record of a transfer having taken place, not the instrument by which the transfer takes place.
Stamp duty is a tax on the instrument - not the transaction.
Depens on the law that levies the duty. Normally, the duty is paid on the value of assets transferred by the instrument. For example, if receivables worth USD 100 are transferred by an instrument where the purchaser pays USD 80, the duty is payable on USD 100.
The following are commonly used devices to avoid stamp duty:
Oral agreements can obviously not be stamped, as there is no instrument that can be stamped. To avoid stamp duty, however, one cannot envisage keeping the transaction completely undocumented as that would be chaotic. The solution is to have a post-facto document, in the nature of a record of a transaction that has taken place, evidencing whatever was agreed between the parties. The legal view is that such a recording document is not a document by which the transaction was effected, and hence, would not require stamping.
However, stamp laws of many jurisdictions define an "instrument" for stamping purposes as including an instrument which records or manifests a transaction. So one must be careful using this defence.
As discussed earlier, stamp law in antiquated law: it does not keep pace with present day technological developments. If an agreement is electronically signed and stored, there is no application of stamp law, as stamps cannot be affixed on something which is intangible.
A revolving asset securitisation involves one document entered at present, under which there will be a regular substitution of assets over a period of time. Each time the existing assets get exhausted, new assets are transferred into the pool. A question arises as to whether such future transfer of receivables is also to be stamped? Going by the view that the duty is on the document, the duty is limited to the value of the assets transferred by the instrument, irrespective of the transfers that will take place in future. Moody's in a Special report titled An Overview of U.K. Stamp Duty and its Impact on UK Securitisation Transactions have also concurred with this view, citing Cory (Wm) & Son Ltd v IRC  AC 1088..
Going by the view above, the duty is applicable only to the present transfer of receivables by the document, not future transfers.
A pass through certificate is pro-rated interest in receivables held by the SPV in trust. Hence, transfer of pass through certificate is only a transfer of beneficial interest, or re-alignment of the proportions in which beneficial interest is recorded by the SPV. There is no transfer of assets as the SPV continues to hold the receivables. Therefore, there is no stamp duty applicable on transfer of pass-through certificates.
Moody's in the above referred document have opined that the grant of trust interest by the trustees by issue of notes is NOT a stampable transfer, as the trustees do not transfer any asset, but merely indicate beneficial interest. By the same ground, transfer of such notes is only a re-adjustment of beneficial interests, and will not, therefore, be liable to duty.
Duty may be applicable on issuance of a bond or note, but no duty by way of a conveyance arises on issue of pass through notes, for the reason mentioned above. The Moody's report cited above also agrees with this view.
Look at the relevant law. Normally, there will be penalty provisions. Besides, court process may be denied for an agreement that bears no or incomplete stamp. The legality of the transfer is, thus, not strictly affected, but legal enforceability is.
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