The LIBOR transition impacts tax and transfer pricing (TP) related documentation, agreements and systems enablement significantly. Successfully mitigating this impact requires planning and the joint effort of internal and external stakeholders. Find out how to get started and what issues to consider.
What are some of the challenges posed by the LIBOR transition?
For the past 20 years, LIBOR has been the de facto industry standard for most intercompany funding arrangements. And, consequently, it’s a key part of tax and transfer pricing (TP) related documentation, agreements and systems enablement such as in-house banking solutions. Decommissioning the LIBOR benchmark in 2021 impacts most organizations with internal financing arrangements and has significant implications. Mitigating its impact requires planning.
The potential tax challenges for taxpayers arising from the LIBOR transition include revising:
- the principles of existing intercompany funding arrangements
- all aspects of documentation, policies and agreements underpinning those arrangements
- in-house banking and similar systems set-up
- various rulings and arrangements involving tax authorities including advance price agreements (APAs).
What timeline should you consider to prepare for the (tax) transfer pricing LIBOR transition?
As with the wider phaseout plan, you can and should start tax and TP transition now to prepare for the end of LIBOR updates at the end of 2021.
To successfully manage the LIBOR transition, we recommend that you perform your impact assessment and outline your transition plan from a tax and transfer pricing point of view in 2019.
As a practical matter, many of the steps required for the tax and TP impact assessment are similar to the broader impact assessment from a treasury perspective (e.g. inventory of LIBOR linked products and positions, review of agreements). Many organizations are therefore taking a coordinated approach to managing the tax, treasury and commercial impact.
What are the key issues for discussion?
An impact assessment seeks to identify the areas where there will be a material impact to the organizations’ tax and transfer pricing arrangements, etc. from the LIBOR transition. And it addresses these areas in terms of materiality and urgency – serving as a basis to prioritize any initiatives supporting LIBOR transition.
The impact assessment must be based on the right questions and information to be reliable.
Some of the questions we typically discuss with stakeholders during an impact assessment are listed below:
1. Which (tax and/or financing) structures are affected? Does your company have a material risk and what information is required to make the initial assessment?
The best-positioned team to answer these questions is typically the treasury team. However, there must be a focus on internal rather than on external funding arrangements and, depending on the organization, there may be more or less focus on these arrangements from the treasury side. An overview must also be developed of existing (internal) funding arrangements and the details defining terms, structure, entities and countries involved, etc. as part of the impact assessment
2. Does your organization have a significant operational risk?
The operational risk aspects of the impact assessment deal with the various systems, policies and tools where LIBOR is currently used for reference or calculation purposes. These may be automated, and depending on the specific systems, the changes which must happen as a result of LIBOR transition may either be trivial or require more work. Accordingly, the relevant stakeholder discussions may have to take place with IT, treasury, finance and potentially others as well. The master data required to determine operational risk areas should be organized as part of the impact assessment to provide stakeholders with an understanding of the risks and the necessary mitigating steps.
3. Does your LIBOR transition impact external stakeholders? Or is it impacted by them?
The list of potential external stakeholders can vary from external financing parties to tax administrations. While external financing parties are likely to be managed by the treasury team, communication with the tax administration and an initiation of the review process of existing rulings and APAs which rely on LIBOR references typically fall under the tax department’s domain. Regardless of who is communicating, it’s likely that there are relationships which must be managed in a coordinated manner. For example, your bank’s fixed OTC funding offering could impact your negotiation position with the tax administration.
4. What are the possible options to terminate / modify / novate agreements?
Legal departments typically work together with treasury when it comes to signing agreements with third parties to defend your company’s interests regarding the LIBOR transition. Internal agreements receive comparatively less attention as they are often perceived as easier to renegotiate, change or terminate. However, changing intercompany agreements should also align with the arm’s length principle. Before any changes are made, it’s important to ensure that the steps taken, the timelines and the tax consequences of novating or terminating agreements are properly reviewed and understood.
What are the next steps?
- Start by considering the various intercompany arrangements that the LIBOR transition may impact. Generally, these agreements will focus on intercompany (IC) financing. However, there may also be other transfer pricing-related arrangements that include LIBOR references, etc.
- Develop your impact assessment by organizing relevant master data and form an initial view on materiality, type and urgency of the various impacts from LIBOR transition.
- Reach out to the relevant stakeholders and develop your impact assessment in an integrated manner. Provide continuous feedback to ensure that the stakeholders’ interests are considered and reflected in your transition plan.
- Check our publications to stay up-to-date regarding intercompany funding challanges linked to the LIBOR phaseout.
Our services and further information:
- Find our article series on LIBOR here
- Finance and Treasury Management
- Global Transfer Pricing Services