special purpose vehicle (tax)

Monday, May 1, 2023

SPECIAL PURPOSE

VEHICLE/ENTITY

Tejveer Ruhil, Vikrant Kadian

Monday, May 1, 2023

SPECIAL PURPOSE

VEHICLE/ENTITY

Tejveer Ruhil, Vikrant Kadian

STORY OF ENRON

Monday, May 1, 2023

Enron Corporate, a U.S. energy, commodities and services company, spent 16 years to grow from $10 billion assets to $65 billion, but only spent 24 days to go bankrupt.

CAUSES OF DOWNFALL• Revenue Recognition

• Mark-to-market accounting

• Special Purpose Entities

• Corporate Governance

Monday, May 1, 2023

SPE

• SPE is defined as a legal entity being set up to separate the company from financial risk.

• For accounting purpose, company can consider SPE as an independent entity and leave assets and liabilities of the SPE out of company’s balance sheet if two conditions are met. • an owner independent of the company must make a substantive

equity investment of at least 3% of the SPE’s assets• the owner who exercise control of the SPE must be

independent of the company

Whitewing Associates L.P.

• Problem: Underperforming Assets• Solution: Formation of a SPV• Steps:• Whitewing was formed in 1997 ($580 billion by Enron + $500 billion by

outsiders – agreement with outsiders)• In 1999 Enron sold off slightly more than half of Whitewing so it would not

be treated as a subsidiary• Whitewing used to buy the underperforming assets of Enron at a generous

price ($2 billion in two years)• Whitewing was destined to take losses on its assets acquired from Enron

• Example: How to hide a failed investment project?• Although the transactions were approved by the Enron board, the asset

transfers were not true sales and should have been treated instead as loans

What is SPV

• A special purpose vehicle (SPV) is formed for a special purpose. Therefore, its powers are limited to what might be required to attain that purpose and its life is destined to end when the purpose is attained.

• This purpose may be anything, to carry out a particular transaction, a series of transactions, to own assets or to isolate or minimize a financial risk.

• SPV is legal; the way it is used can be illegal

ADVANTAGES

• Hives off the risks• Best suited for Project Financing• Asset transfer Taxation• Regulatory reasons• Accounting Reasons• Competitive Reasons

DISADVANTAGES

• Fixed Cost• Continuous Compliances• No deductions available for taxation purpose

Monday, May 1, 2023Tejveer Ruhil, Vikrant Kadian

THANK YOU!