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Treasury, IRS Move to Reduce Tax Impact of LIBOR Switch

The US Treasury and the IRS proposed regulations allowing taxpayers to avoid adverse tax consequences from changing the terms of debt, derivatives, and other financial contracts to replace reference rates based on interbank offered rates (IBORs) with certain alternative reference rates. “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 T. Mnuchin. “These proposed regulations provide certainty and clarity to taxpayers as they make the critical transition away from LIBOR.” The proposed regulations address the possibility that modifying a debt instrument, derivative, or other financial contract to replace a reference rate based on an IBOR could be a taxable transaction for Federal income tax purposes or could result in other tax consequences. Without this critical guidance, market participants would face significant tax uncertainties in making necessary modifications to these contracts. Meanwhile, the Bank of England has warned that firms are continuing to write new LIBOR contracts even though the benchmark interest rate is expected to be discontinued after the end of 2021. The bank said that many new contracts maturing beyond 2021 continue to reference LIBOR.

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