US LIBOR Replacement Bill Slowed Over Tax Language

Chris Gaetano
Published Date:
Nov 22, 2021

Legislation that would enable the United States to replace the soon-to-be-defunct London Inter-Bank Offered Rate (LIBOR) has hit a snag over how the precise language of the legislation approving the new metric could affect taxes, Bloomberg reported

The LIBOR is the most widely used benchmark interest rate used by financial institutions when making short-term loans to each other in the international market. It serves as a globally accepted key benchmark interest rate that indicates how much it costs to the banks to borrow from each other. However, the rate became suspect during the financial crisis when it was found that, for years, currency brokers at major banks had been coordinating with each other over instant messaging to fix the rates in order to boost profits and obscure financial difficulties. The scandal rocked the LIBOR's previously sterling reputation as a reliable rate and led countries to begin exploring their own alternatives. 

A bill sponsored by Rep. Brad Sherman (D-Calif.) is meant to help ease the tradition away from the LIBOR as the United States settles on a specific alternate metric--likely, the  U.S. Federal Reserve's Secured Overnight Financing Rate (SOFR). This is meant to address situations where, for example, loans that had previously based their rates on the LIBOR may need to be renegotiated, as a new benchmark will likely produce different financial conditions that must be considered. The bill, essentially, would deem certain references to LIBOR as referring to a replacement benchmark rate upon the occurrence of certain events affecting LIBOR, and for other purposes.

Progress on the bill has stalled over the possible tax implications, particularly one section that says a benchmark replacement shall not “be treated as a sale, exchange, or other disposition of property.” The House Committee on Ways and Means, which oversees tax policy, said that the language is unnecessary and may overly constrain the IRS’s flexibility to regulate financial instruments. At the same time, the Structured Finance Association has expressed concerns that the absence of this language might mean the triggering of more taxable events, thus creating new expenses that would snarl tax planning that had been done under a different set of assumptions. 

The bill has already passed committee with bipartisan support, though Rep. Sherman said that, because the matter is important to a number of other lawmakers, he does not expect a floor vote soon. One will likely need to take place eventually, though, as the LIBOR officially phases out at the end of this year. 

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