We recently outlined to UK Finance members some tax impacts of IBOR transition across selected European jurisdictions[1], and set out below a brief summary.

Challenge one: Will IBOR transition trigger a taxable event for corporate tax purposes?

The answer will depend principally on these two factors:

• the legal position - especially whether there is a contract termination
• the accounting position - where the key issue is whether the applicable accounting standard will result in de-recognition of the instrument and crystallise accounting profits or losses.   

For jurisdictions where the corporate tax position follows IFRS (e.g. UK, Spain, Italy, the Netherlands), the impact is expected to be relatively limited, although this will depend on the outcome of the International Accounting Standards Board (IASB) discussions on the definition of ?substantial modification outcome?.

For jurisdictions where the corporate tax position follows the local Generally Accepted Accounting Principles (GAAP) (e.g. France and Germany), IBOR transition could potentially lead to the termination or amendment of certain existing contracts, potentially triggering a tax event, but again, this will depend on individual facts and circumstances.

With the exception of the UK, there has been no tax authority guidance thus far from the jurisdictions surveyed.

Focus on derivatives trading

• Derivatives held in trading books: IBOR transition is not expected to have a substantial impact given the application of mark-to-market rules.
• Derivatives in a hedging position: For countries where tax follows International Financial Reporting Standards (IFRS), the impact is expected to be relatively limited (depending on the outcome of the IASB work). For countries where tax follows local GAAP, especially France and Germany, tax impacts may be material.

Challenge two: Tax treatment of additional payments on loans as a result of LIBOR transition

Deductions for additional payments made by borrowers: Most countries, although notably not the Netherlands where the position is less clear, thought it likely that borrowers would obtain deductions. Some countries, including Belgium and France, require deductions to be spread over time; others such as Italy, Spain and Switzerland recognise a deduction on a ?one-off? basis. 

Deductions for additional payments made by lenders: All countries surveyed thought it likely that lenders would obtain deductions, with a similar split between those countries giving deductions for payments on a spread basis and others giving deductions on a ?one-off? basis.    

Taxability of additional payments in the hands of the recipient: All countries (apart from in the Netherlands where the position is unclear) thought it likely that payments would be taxable, again with a similar split between those countries recognising taxability on a spread basis and those recognising taxability on a ?one-off? basis.

VAT:  Most countries believe that the additional payment would, or would likely, be treated as an adjustment to the consideration for the original supply.  In Switzerland the position is unclear.

Challenge three: The impact of IBOR reform on DAC6 reporting requirements and existing clearances/rulings

• DAC6 reporting requirements: We asked if IBOR transition could give rise to a new arrangement for DAC6 (MDR) reporting purposes.   Most countries thought  ?likely, no? (Belgium, Germany, Ireland, Italy and Spain), with France responding ?likely, yes?, and the Netherlands responding ?unclear?.
• Existing clearances/rulings:  We also asked if taxpayers would still be able to rely on existing clearances/rulings.  Most jurisdictions said ?likely, yes?, with Belgium responding ?unclear?, and Switzerland responding ?likely, no?.  Germany is more complex.

Challenge four:  Transfer pricing 

When consulted on whether IBOR transition could constitute a repricing event, the view across different European countries was that there is a significant chance that tax authorities would require a fresh pricing analysis unless there was guidance suggesting otherwise.

When asked whether the amendment of any other terms and conditions within the contract would be a risk, the unanimous view was that a fresh pricing analysis should be prepared.

Conclusion

IBOR transition will give rise to a number of tax issues. These will need to be carefully considered on a case-by-case and market-by-market basis, so that tax risk can be properly assessed and managed.