October 9, 2019 - The Treasury Department and the Internal Revenue Service issued proposed regulations on Tuesday to relieve loan market participants of the tax burdens associated with LIBOR transition.
The proposed regulations clarify that adjustments to debt contracts reflecting the transition away from LIBOR would not constitute modifications for tax purposes and thus would not result in income tax gains or losses.
The regulations would apply to changes to affected contracts made upon the finalization of the regulations, and to changes that occur before then, provided that parties apply the regulations consistently.
The Treasury and the IRS issued the proposed regulations in response to a letter the ARRC submitted in April and reflect their desire to facilitate the smoothest transition possible.
“A smooth and successful transition away from LIBOR and towards an alternative rate, such as SOFR, is important for the stability of global financial markets, said Treasury Secretary Steven Mnuchin. “These proposed regulations provide certainty and clarity to taxpayers as they make the critical transition away from LIBOR.”
The proposed regulations follow similar transition relief provided by the Financial Accounting Standards Board in September, which dealt with the critical financial accounting issues related to transition. If all such regulations are issued on a final basis to the satisfaction of the ARRC, then the financial accounting and tax hurdles with transition will have largely been cleared.
The Treasury and the IRS are inviting interested parties to submit written comments through November 25, 2019. The full text of the proposed regulations can be found here, and the Treasury’s press release on the matter can be found here.