#TaxmannPPT | LIBOR Transition & Transfer Pricing Implications | Amicus Advocates & Solicitors

ASHUTOSH MOHAN RASTOGI

Co-Founder & Partner – Amicus Advocates & Solicitors

ashutosh@amicusservices.in

Co-founder and tax lawyer with more than 17 years of experience in Tax and Transfer Pricing Litigation, consulting and advisory space. Ashutosh heads the Tax Practice at Amicus with an impeccable track record of wins some of them being Landmark Rulings.

Tax Litigation

Ashutosh also regularly serves as tax counsel on Tax/ Transfer Pricing matters at higher appellate forums including Tax Tribunal and High Court. He has advised and represented in landmark Tax Rulings such as Cinestaan Entertainment (on Angel Taxation) and Pyramid IT Consulting (on Transfer Pricing). Both Rulings have established landmark principles in taxation frequently referred to by Tax Practitioners.

International Taxation and Transfer Pricing

His forte has been International Tax Structuring and Transfer Pricing Planning for related party cross-border transactions. Ashutosh has successfully represented several multinational companies before tax authorities in Transfer Pricing/ International Tax audits and advised companies on several complex Transfer Pricing matters. His International Taxation experience encompasses all aspects of Transfer Pricing advisory, GAAR, POEM compliance and litigation services (including representation at higher appellate levels).

ASHUTOSH MOHAN RASTOGI

Co-Founder & Partner – Amicus Advocates & Solicitors

ashutosh@amicusservices.in

GST and Customs (Special Valuation Branch)

Linked with the Transfer Pricing Practice is the expertise in Special Valuation Branch (SVB) Proceedings for related party imports. Leveraging on his understanding of valuation and Transfer Pricing principles, Ashutosh is currently providing end to end valuation and representation services before the SVB under customs regulations.

GST advisory services ranging from Training to in-depth planning and impact analysis. Assisted by a team of Lawyers, Ashutosh is assisting companies in evaluating implications of the new GST law, analysing the legal/financial impact, and devise systems, process and control framework for successful compliance with GST Regulations that are still in a nascent stage.

Awards & Recognition

 Under his leadership Amicus Tax Practice has been consistently recommended as a Leading Firm (Asia Pacific) for Tax (2014-2022) and Recommended Firm by Asia Law (2022)

 Ranked as ‘Leading Individual’ for Tax by Legal 500 (2022)

 Ranked as ‘Notable Practitioner’ for Tax by Asia Law (2021-2022)

 Recommended by International Tax Review (2022)

 Publications: He has authored dozens of articles for leading tax journals such as BNA Bloomberg, IBFD and Tax sutra (online portal)

VARUN SHARMA

Principal Associate – Amicus Advocates & Solicitors varun.sharma@amicusservices.in

Varun Sharma has an extensive experience in India transfer pricing matters and has been advising various SMEs and large multinationals on a range of transfer pricing and cross-border dispute resolution matters. He has worked on numerous global and regional assignments and has represented many multinational corporations during their transfer pricing audits and litigation in India. He has also worked on many competent authority and APA negotiations.

Varun has been an instrumental part of International Tax/Transfer Pricing / Direct Tax Team at Amicus Advocates and Solicitors. He is a qualified Chartered Accountant and also holds a Bachelor in Commerce – Honors Degree from the Delhi University.

 LIBOR – A Brief Background

 Need for LIBOR Reform – The Rise and Fall of LIBOR

 LIBOR Cessation Timelines

 Alternative Reference Rates (ARRs) to LIBOR

 Transfer Pricing Implications

 Way Forward

Background

 London Interbank Offer Rate (LIBOR) – A benchmark reference rate for floating rate transactions on the London Inter-Bank Market

 Used to calculate intertest rates for derivatives, government and corporate debt, commercial loans, residential loans, etc

 Linked to more than USD 400 trillion of financial transactions globally

 Most widely used for short term interest rates

 Been available in 5 currencies (USD, GBP, EUR, CHF, YEN) and for 7 different type of maturities (overnight to 12 months)

How is LIBOR Calculated?

Panel Banks estimate the rate that would be charged to borrow from other banks on an unsecured basis (from overnight to 12 months)

Each day submissions received from 18 international banks

Four highest and lowest submissions stripped out before calculating an average

Need for LIBOR Reforms

2008 Financial Crisis - Aftermath

• Significant reduction in transaction data in unsecured inter-bank lending market

2012 LIBOR Scandal

• Regulators were concerned about the long term sustainability

• Manipulation / Rigging of interest rates by Leading Banks

• Barclays was a key player in this complicated scam.

Fall of LIBOR

LIBOR Cessation timelines

 Financial Conduct Authority (FCA) – on 5th March 2021, announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative:

 Immediately after 31st December 2021, in the case of all EUR, GBP, CHF and JPY yen settings, and the 1-week and 2-month US dollar settings; and

 Immediately after 30th June 2023, in the case of the remaining US dollar settings

 Synthetic versions of one-, three- and six-month USD LIBORs will be available until 30 September 2024. These will be published by ICE Benchmark Administration Limited in the same place and at the same times as the original USD LIBORs but will be constituted from different data

Alternate Reference Rate (ARR’s)

With LIBOR winding down, markets have been making the shift toward Alternative Reference Rates (ARRs)

Table: Currency-wise ARRs

Parameter

Calculation

Methodology

LIBOR v. ARRs

Table: Key difference between LIBOR & ARRs

Submission from panel banks

Term Structure Term structure with seven different forward-looking tenors, from overnight to 12 months

Based on actual transactions in liquid markets

Backward-looking overnight rates

Credit Risk Premium Reflects cost of borrowing by panel banks and thus, includes credit premium component

Timing of rate publication

Based on consistent methodology across the 5 currencies and published at the same time

Are proxies to risk-free rates and have no credit premium

ARRs have different methodologies and publication timelines for each currency

Credit Spread Adjustment

 A spread adjustment is meant to minimize the difference between LIBOR and SOFR

 ISDA (International Swaps and Derivatives Associations) - has prescribed using 5year historical median difference between LIBOR and SOFR compounded-in-arrears to arrive at the static spread adjustment

 The spread adjustment will be one time and not dynamic in nature

 Bloomberg has been selected to calculate and publish the fallback rates and spreads

 Commercial tools/databases are available in the market that can assist with the spread adjustment

RBI’s Stance on Libor

In 2020, the RBI requested banks to address risks arising from the cessation of LIBOR, including preparation for the adoption of the ARRs

 Cease using the Mumbai Interbank Forward Outright Rate (MIFOR- a benchmark for setting prices on forward-rate agreements and derivative), which references the LIBOR  Undertake a comprehensive review of all direct and indirect LIBOR exposures and put in place a framework to mitigate risks arising from such exposures

 12th May, 2023 –

“Banks/FIs are expected to have developed the systems and processes to manage the complete transition away from LIBOR from July 1, 2023.”

TP Implications

Inter-Company Agreements

 Existing arrangements to be evaluated

 Companies need to consider alternative base rates to replace LIBOR

 Fallback clauses to be implemented in the intercompany agreements

 The cessation of LIBOR settings may impact the viability of the document if adequate fallback language not be included for interest payment calculations

 Tax authorities might still argue that it is not sufficient to solely renegotiate the base rate relying on third party comparisons

APAs

 Transition of LIBOR may have impact on concluded APAs ( (1) Loan and (2) Corporate Guarantee Transactions)

 Income Tax Rules require revision of APAs in case there is change in any “critical assumptions” subject to which the APA was entered into

Rule 10M of the Income Tax Rules prescribe:

(4) In case there is a change in any of the critical assumptions or failure to meet the conditions subject to which the agreement has been entered into, the agreement can be revised or cancelled, as the case may be.

(5) The assessee which has entered into an agreement shall give a notice in writing of such change in any of the critical assumptions or failure to meet conditions to the Director General of Income-tax (International Taxation) as soon as it is practicable to do so. ”

Unless APA includes appropriately defined fallback clauses, cessation of LIBOR may amount to material change impacting critical assumptions

Safe Harbour Rules

 Section 92CB read Rule 10TB prescribes Safe Harbour rules for transfer pricing purposes. Rules provide following margins in respect of loan transaction

CRISIL credit rating of AE

Safe Harbour rules –Interest greater than 6 months LIBOR as on 30 September plus

Between AAA to A or its equivalent

BB-, BBB or BBB+ or its equivalent

Between BB to B or its equivalent

Between C to D or its equivalent

Where credit rating of the AE is not available and the amount of loan advanced to the AE including loans to all AEs does not exceed a sum equivalent to one hundred crore Indian rupees in the aggregate as on 31st March of the relevant previous year

 Revised Safe Harbour Rules awaited

150 basis points

300 basis points

450 basis points

600 basis points

400 basis points

Way Forward

 The recommended first step is for companies to identify intercompany agreements containing LIBOR references and modify those agreements

 To the extent LIBOR is referenced in existing agreements, appropriate fallback language should be included – For both Related and Third party Agreements

 Apply globally accepted transition methodologies from LIBOR to ARR

 Robust documentation along with detailed benchmarking and backup should be maintained to explain any position to the tax office if challenged