Policy Issues

Roundtable Urges Treasury to Clarify Tax Consequences of Transition Away from LIBOR as Reference Rate

June 5, 2019

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The Real Estate Roundtable asked the U.S. Treasury Department and IRS to reduce the risk of market disruption by clarifying the tax treatment of financial contracts that replace the expiring London Inter-bank Offered Rate (LIBOR) with a substitute reference rate.  Over $200 trillion of LIBOR contracts are outstanding, including roughly $1.3 trillion of commercial real estate debt.  

The United Kingdom's Financial Conduct Authority (FCA), which regulates LIBOR, announced in 2017 that it is phasing out the global borrowing index by the end of 2021.  LIBOR will need to be replaced in both new agreements and innumerable existing legacy contracts.

The Roundtable's June 6 comments recommend that a safe-harbor rule confirm that a replacement index or formula identified by regulators, broad industry groups, or similar objective sources-or by the parties themselves in good faith-is not considered an alteration or modification of the original instrument.  The Roundtable letter states, "Instead, the replacement should be treated for Federal tax purposes as a continuation of the instrument's original terms."

The Roundtable letter was developed by a task force that included Tax Policy Advisory Committee (TPAC) Chairman Frank Creamer Jr., TPAC member Don Susswein, and chair of the Real Estate Capital Policy Advisory Committee (RECPAC) Working Group on LIBOR, Joseph Philip Forte.