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.