Businesses should consider if a transfer pricing benefit may arise when transitioning from LIBOR and other IBORs.
A transfer pricing benefit may arise when a cross-border financial arrangement is amended to transition from IBOR. This will generally be relevant where the parties to the cross-border financial arrangement are related.
In determining whether an amendment might result in a transfer pricing benefit, it will first be necessary to consider whether the amended financial arrangement is consistent with what arm’s length parties would do. Generally, we would expect a low likelihood of a transfer pricing benefit arising from an amendment to transition from IBOR where the amendment is:
- in line with market practice and the most recent recommendations published by the relevant industry and regulatory body including
- the Alternative Reference Rates Committee, including its Guiding Principles
- the Working Group on Sterling Risk-Free Reference Rates
- the Working Group on Euro Risk-Free Reference Rates
- the National Working Group on Swiss Franc (CHY) Reference Rates
- the Cross-Industry Committee on Japanese Yen (JPY) Interest Rate Benchmarks
- the International Swaps and Derivatives Association (ISDA), including the ISDA 2020 IBOR Fallbacks Protocol and the Fallback Supplement to the 2006 ISDA Definitions
- Bloomberg, including its IBOR Fallback Rate Adjustment Rule Book
- the Loan Market Association (LMA), including its template terms.
- consistent with the transitioning of your relevant third-party financing arrangements and those of other members of your multinational group, and
- limited to the contractual terms necessary to implement the transition.
You should keep contemporaneous documentation which records and explains the amendments made to your cross-border related-party financing arrangements and why they are consistent with the arm’s length principles. This may include support for the commercial rationale and appropriateness of the approach applied and alignment with the factors listed above. Taxation Ruling TR 2014/8 details more information about transfer pricing documentation and Subdivision 284-E.
The implications for transfer pricing when a cross-border financial arrangement is amended to transition from IBOR.