Treasury Releases Guidance On The Transition From LIBOR To Other Reference Rates

On October 9, 2019, the Department of the Treasury ("Treasury") published proposed regulations on the transition from interbank offered rates ("IBORs") to other reference rates (the "Proposed Regulations").¹ A broad range of financial instruments are based on the London interbank offered rate ("LIBOR"). LIBOR, however, may be phased out after the end of 2021.² The Proposed Regulations address the tax consequences of the transition away from LIBOR in response to concerns raised by the Alternative Reference Rate Committee ("ARRC").³

The ARRC's overarching concern was that modifying a financial instrument to replace LIBOR with another reference rate (e.g., SOFR) might trigger adverse tax consequences for either the issuer or the holder. Without additional guidance, existing tax rules could potentially cause all holders of LIBOR-based instruments to realize gain or loss upon the replacement of LIBOR with another reference rate.⁴