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Goodbye LIBOR-type Interest Rate Benchmarks?

Posted By Tax & Legal  
30/08/2021
Three essential things you need to know.

Reforms to inter-bank offered rates (IBORs) such as the LIBOR (London-Inter-bank-offered rates) may impact current company financial arrangements.

The ATO recently released a discussion paper on the common tax consequences and transfer pricing considerations that could result from these reforms. This was to facilitate community consultation toward the development of a practical compliance guide due later in the year.

 

LIBOR 1

Interest rate benchmarks, including the LIBOR, the Euro Inter-bank Offered Rate (EURIBOR), the United States of America's Effective Federal Funds Rate and other Inter-bank Offered Rate (IBOR) benchmarks are at various stages of reform and transitioning to alternative risk-free rates (RFRs). 

For most of the interest benchmarks this transition will happen by 31 December 2021 where the balance will transition to the RFRs up until 2023. The RFRs are typically administered and published by major central banks worldwide and include the following:

    • the Secured Overnight Financing Rate (SOFR), in respect of US Dollar (USD) borrowings
    • the Euro short-term rate (€STR), in respect of Euro (EUR) borrowings
        • the Sterling Overnight Interbank Average Rate (SONIA), in respect of British pound sterling (GBP) borrowings
      LIBOR 2

       

       

      Transitioning to RFRs will be a complex process as RFRs are structurally different from IBORs and it is expected most finance arrangements such as loans, bonds and derivatives that provide for IBOR-based payments will need to be modified to accommodate this transition.

       

       

      LIBOR3

       

      Tax consequences and transfer pricing considerations from any amendments made to legacy contracts of the financial arrangements in response to IBOR reform, and specifically whether the relevant amendments cause a simple amendment to the existing contract or repeal to the existing legal contract and a new contract will have to be drafted.

      Any amendments to a contract could trigger assessable gain or a deductible loss for tax purposes, interest withholding tax implications, and could give rise to a transfer pricing benefit.
      All