![]() If an IBOR is published on a “synthetic” basis following the date of its general discontinuation, the one-year period will commence when the “synthetic” IBOR is no longer published (rather than on the earlier general discontinuation date). Starting one year after an IBOR's discontinuation, the IBOR will no longer qualify as a discontinued IBOR under the Final Regulations (and thus changes made to an effected contract following the one-year period will not be eligible for relief under the Final Regulations). However, the Final Regulations limit the relief to “discontinued IBORs.” Generally, an IBOR is a discontinued IBOR if its administrator has announced that the administrator has or will cease to provide the IBOR. The Final Regulations refer to IBORs generally, without naming the specific IBORs for which relief is available. ![]() 4įinal Regulations Are Applicable Only to Discontinued IBORs In the preamble to the Final Regulations, the IRS clarified that any change to the terms of a contract that results from the activation of a fallback provision must be tested separately at the time of activation as well. The Proposed Regulations were silent with respect to whether a modification by which the parties add or amend a fallback provision needs to be tested only at the time of the addition or amendment of the fallback provision or also separately at the time of activation of the fallback provision. The Final Regulations also include as a covered modification an incidental cash payment intended to compensate a counterparty for small valuation differences resulting from a modification of the administrative terms of a contract, such as the valuation differences resulting from a change in observation period. To qualify as a covered modification, a modification cannot be one the listed excluded modifications. is a modification incorporating the recommended ISDA or ARRC fallback provisions described in section 4.02 of Revenue Procedure 2020-44. ![]() includes any associated modifications with respect to those modifications of the operative rate or fallback provisions or.replaces a fallback rate that refers to a discontinued IBOR with a qualified rate.includes a qualified rate as a fallback to an operative rate that refers to a discontinued IBOR.replaces an operative rate that refers to a “discontinued IBOR” (discussed below) with a “qualified rate” (discussed below) and, if applicable, adds an obligation for one party to make a “qualified one-time payment” (discussed below).The Final Regulations provide that a covered modification of a “contract” (a term that includes a debt instrument, derivative contract, stock, insurance contract and lease agreement) will not result in a tax realization event because (1) it is not treated as an exchange of property for other property differing materially in kind or in extent for purposes of Treasury Regulations Section 1.1001-1(a), and (2) it is not treated as a significant modification for purposes of Treasury Regulations Section 1.1001-3.Ī covered modification is generally a modification of the terms of a contract that 2 ![]() Tax Consequences of Replacing LIBOR and Other Interbank Offered Rates. For a description of the Proposed Regulations, see New Proposed Regulations Provide Much-Needed Guidance on U.S. The Final Regulations retain the basic approach of the proposed regulations published on Octo(Proposed Regulations), with certain structural revisions to simplify the rules and several technical changes further discussed below. The Final Regulations generally provide that a “covered modification” (discussed below) will not result in a tax realization event. In particular, the guidance relates to whether a modification of a debt instrument to replace a discontinued IBOR with a replacement rate (such as the secured overnight financing rate, or SOFR) results in a taxable exchange. Internal Revenue Service (IRS) and Department of the Treasury published final regulations (Final Regulations) on January 4, 2022, providing guidance on the tax consequences of the discontinuation of LIBOR and certain other interbank offered rates (IBORs). In light of the discontinuation of LIBOR, 1 the U.S.
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