Australia consults on tax and transfer pricing effects of inter-bank offered rate reforms

The Australian Taxation Office describes, in an August 12 discussion paper, common tax consequences and transfer pricing considerations resulting from changes made to financial arrangements in response to reforms to inter-bank offered rates (IBORs). The ATO seeks input on corresponding taxpayer guidance regarding compliance obligations.

As part of a transition to “risk-free rates,” reforms are underway with respect to common interest rate benchmarks – including the London Inter-Bank Offered Rate (LIBOR), which is scheduled to be phased out at the end of the year. The transition will broadly impact the financial services industry and will require modifications for most financial arrangements like loans, bonds, and derivatives.

Amendments to existing contracts in response to IBOR reform can result in tax consequences, ATO notes in the discussion paper. For instance, amendments to a contract to change from IBOR to a new risk-free rate could trigger assessable gain or a deductible loss for tax purposes. Such amendments could also result in interest withholding tax implications. The tax implications overall will depend on whether the amendments rescind or merely vary the existing contract. 

Taxpayers will also need to consider transfer pricing implications when making amendments to cross-border financial arrangements to transition from LIBOR and other IBORs. Such amendments could give rise to a transfer pricing benefit, ATO states, but it will still be necessary to assess whether the amended financial arrangement is consistent with the arm’s length principle. ATO lists certain specified circumstances where it generally would not expect a transfer pricing benefit to arise.

The discussion paper also includes various examples to illustrate the common tax issues and transfer pricing considerations it anticipates arising as a result of changes to financial arrangements in response to IBOR reform.

ATO seeks feedback on whether its discussion paper accurately reflects the most likely changes to financial arrangements in response to IBOR reform. It also asks about how industry will determine when contracts underlying financial arrangements remain substantially the same post-amendment and how industry will calculate when amendments change the value of related-party financial arrangements. ATO further seeks input on certain specific scenarios and other areas of tax uncertainty that could result from the transition.

ATO is accepting comments on the discussion paper until September 10.