Abolition of LIBOR – Amendments to the Tax Code. What Steps

11 June 2021 Tax Messenger Tax Edition

Abolition of LIBOR – amendments to the Tax Code.

What steps should be taken?

The latest version of draft federal law No. 1170972-7 “On International Tax Review amendments to Parts One and Two of the Tax Code of the ranked EY Russia Tax & Law Russian Federation and certain legislative acts of the practice as a leading tax firm Russian Federation” (“the Bill”) has been published on the (Tier 1) in Russia in its annual Legislative Activity Support System website1. It contains, World Tax guide for 2018. among other things, planned amendments to clauses 1.2 and 1.3 of Article 269 of the Russian Tax Code in connection with the LIBOR reform. On 7 June 2021, in the course of considering the Bill in the second reading, the State Duma Council decided to reschedule consideration of the Bill to 15 June. The Bill was previously passed in the first reading and the original version did not contain the aforementioned amendments to Article 269 of the Tax Code.

1 https://sozd.duma.gov.ru/bill/1170972-7

Main changes reading by the State Duma Council and may undergo changes. An analysis of the Bill’s provisions insofar as they affect the approach to the setting of “safe Effective date harbour” interest rates, which are currently According to the text of the Bill, the changes based on the “IBOR” family of reference rates, outlined above would come into force on 1 shows that the legislator has adhered to the January 2022, but not earlier than a month earlier published recommendations of the after the publication of the Federal Law. Russian Central Bank on which we reported in our alerts dated 20 February 2021 and 6 May Next steps 2021. The proposed amendments raise a number of Under the proposed amendments to clause 1.2 issues for taxpayers that need to be addressed. of Article 269 of the Tax Code, as currently For example: worded, the reference rates currently used in  The Bill does not lay down transitional setting safe harbours for foreign currency debt provisions for certain aspects of the obligations arising in controlled transactions application of Article 269 of the Tax Code would be replaced as follows: to controlled transactions, for example  EURIBOR by €STR with respect to controlled transactions concluded before and after 1 January  pound sterling LIBOR by SONIA 2022, given that contracts with new  Swiss franc LIBOR by SARON interest rates may be concluded before 1  Japanese yen LIBOR by TONAR January 2022 and contracts with old interest rates may continue to run after  USD LIBOR for obligations in other that date. This raises the possibility that currencies by SOFR interest rates that previously fell within the  Chinese yuan SHIBOR – no change2. safe harbours will no longer do so. However, the proposed amendments to  The new alternative interest rates are subsection 3 of clause 1.3 of Article 269 of the mainly published as overnight rates, while Tax Code provide only for SHIBOR to be used in debt obligations may be long-term. The alignment with the term of debt obligations in current version of the Bill retains the controlled transactions for which safe harbours correlation between the term of a debt are being determined, whereas at present the obligation and the interest rate only for provision in question also applies to IBOR rates. SHIBOR. Corresponding changes are also proposed to  Keeping the credit spread (interest margin) clause 1.3 of Article 269 of the Tax Code with for alternative rates at the level previously the addition of a subsection 4 as follows: applied to IBOR rates may potentially give rise to different safe harbours. As a “in the case of interest rate ranges for debt consequence, interest rates for controlled obligations established by subsections 2 and transactions that previously fell within the 4 to 6 of clause 1.2 of this Article, the €STR safe harbours may now cease to do so, rate (SONIA rate, SARON rate, TONAR rate, resulting in the need to carry out a SOFR rate) published at the beginning of the transfer pricing (TP) study as provided for working day shall be taken.” in Part One of the Tax Code. We emphasise that these proposals have only been submitted for consideration in the second

2 On 31 August 2020 a document concerning the priorities the similarity of SHIBOR and LIBOR, the People’s Bank of for the development of the system of interbank reference China had no intention of ceasing the publication of interest rates in China was published on the website of the SHIBOR. People’s Bank of China, in which it was noted that, despite

2 Among other matters, there is also a need for  Review of TP and other tax risks further guidance regarding the application of associated with the transition to Article 269 of the Tax Code and the transfer alternative rates pricing rules, particularly in terms of whether  Analysis and evaluation of the operational the replacement of the reference rate or the effect on a taxpayer’s internal processes adjustment of the credit spread (margin) relating to intra-group financial through the insertion of fallback provisions3 on transactions and their effectiveness IBOR replacement in existing or newly concluded contracts (or by way of active transition4) would  Analysis and, if necessary, revision of be classified as a change in the essential terms current TP methods for each type of of a controlled transaction (debt obligation), transaction triggering the need to carry out a new analysis  Identification, analysis and selection of the under Article 269 of the Tax Code or a most suitable alternative rates for the benchmarking study of the new interest rate for purposes of conducting studies of the transfer pricing purposes. market level of interest rates and If the Bill is passed in its current form, the remunerations process of the transition to alternative interest  Updating of intra-group agreements and rates will have to be worked out in detail from TP documentation the point of view of tax and other implications as discussed in our alerts dated 6 August 2019, 20  Supporting taxpayers in future TP audits February 2021 and 6 May 2021. conducted by the tax authorities How can EY help in the process of the  Assisting taxpayers with the negotiation transition from LIBOR to alternative and conclusion of pricing agreements with interest rates? the tax authorities using alternative rates

EY can provide the following types of assistance in the process of the LIBOR reform and the Authors: transition to alternative interest rates: Alexei Kuznetsov Maria Frolova Yuri Mikhailov Stepan Kalyuzhnyy

For more information, contact the authors of this publication:

Alexei Kuznetsov Maria Frolova +7 495 755 9687 +7 (495) 641 2997 [email protected] [email protected]

Yuriy Mikhailov Stepan Kalyuzhnyy +7 (495) 664 7893 +7 (903) 961 2546 [email protected] [email protected]

3 Fallback provisions – the inclusion in the terms of pre- 4 Active transition – the revision of the terms of pre-existing existing and new contracts (transactions) referencing LIBOR contracts (transactions) referencing LIBOR to replace of a provision concerning the replacement of LIBOR with an LIBOR with an alternative reference rate. alternative reference rate in the event of the occurrence of specified events.

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. ey.com/ru