Australia: Tax and transfer pricing implications of IBOR reform

Taxpayers need to consider whether IBOR reform-related changes to their financial arrangements have tax consequences

IBOR reform-related changes have tax consequences

The transition from the Inter-bank Offered Rate (IBOR) to Alternative Reference Rates (ARRs) is nearly complete. From a tax perspective, a key consideration is whether changes to existing financial arrangements to incorporate ARRs result in a tax event or a change in the tax status of the financial arrangement. 

For many financial arrangements with existing “fall back” provisions and for taxpayers that have made the TOFA (taxation of financial arrangements) reliance on financial reports election, the tax consequences are likely to be less complex. For others, recently finalised guidance from the Australian Taxation Office (ATO) sets out the common tax implications to consider. 

The ATO’s guidance is largely consistent with its previously released discussion paper and provides no practical concessions to taxpayers whose financial arrangements have been affected by these changes in market practice. The guidance makes it clear that taxpayers will need to consider whether IBOR reform-related changes to their financial arrangements have tax consequences—including transfer pricing benefits when the parties to the cross-border financial arrangement are related. 

It is also a clear signal of matters that the ATO will likely expect taxpayers to have considered when the tax authority next engages with the taxpayer.

  • Amendments to legal agreements: The intention of the parties and the significance of the amendments to the legal terms of a financial arrangement are key factors for the ATO in determining whether a change constitutes a mere variation, or the cessation of an existing financial arrangement giving rise to tax consequences.  This requires taxpayers to review amendments to each agreement with a “tax lens” and maintain evidence of the legal effect of the amendments that have been reached for a given contract or a portfolio of contracts.
  • Internal system treatment: How changes are recorded in internal systems alone cannot be relied upon.  For example, the tax consequences cannot be determined by a taxpayer’s system which may record the termination of an existing financial arrangement and the entering into of a new financial arrangement.  Evidence of a review of the amendments to the financial arrangement is still required. 
  • Section 128F exemptions: When financial arrangements that are subject to the Section 128F interest withholding tax exemption are amended, the ATO guidance makes clear that amendments not solely for the purpose of responding to the withdrawal of IBOR could result in the financial arrangement ceasing to be eligible for the withholding tax exemption.  In this case, the “public offer” needs to be re-tested for the new financial arrangement.
  • Risk of not reviewing: If an amendment to a financial arrangement triggers a rescission and goes unnoticed, a TOFA balancing adjustment or other taxing event may be missed.  Alternatively, if an internal system closes an existing financial arrangement when it was not required, there may be realised gains or losses reported by that system, that would need to be reversed for tax purposes.

Overall, the ATO guidance directs taxpayers to consider the legal form of any amendments rather than offering any practical or concessional approaches that would reduce compliance costs for taxpayers facing changes as a result of the IBOR reforms. 

KPMG observation

Taxpayers may consider seeking professional advice to make an informed decision regarding the legal effect of any amendment to contracts as a result of IBOR reform. With the ongoing ATO assurance programs and finalisation of the guidance, it is likely that requests for additional information concerning how taxpayers responded to the IBOR reform for affected instruments will be requested and reviewed by the ATO. Thus, taxpayers need to document the legal effect of amendments to support their current tax treatments and seek external review when appropriate.


For more information, contact a KPMG tax professional in Australia:

Julian Humphrey | jrhumphrey@kpmg.com.au

Alia Lum | alum@kpmg.com.au

Nathan Caprara | ncaprara@kpmg.com.au

 

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