Home Interest rate The passage of LIBOR and TP: a Thai perspective

The passage of LIBOR and TP: a Thai perspective


To determine the interest rates of various debt instruments, including intercompany financing transactions, the most widely used benchmark interest rate is the London Interbank Offered Rate (LIBOR). LIBOR is a forward rate, available in different maturity periods overnight, weekly, one month, three months, six months, 12 months, etc.

LIBOR will be phased out by the end of 2021 for the following reasons:

  • Measures an estimated interest rate instead of the actual interest rate; and
  • An alleged bubble burst in 2012, several large financial institutions (including Deutsche Bank, Barclays, Citigroup, JPMorgan Chase and RBS) were caught manipulating the LIBOR rate by using inaccurate estimates of their borrowing costs to fix LIBOR rates.

This has raised questions about the validity and reliability of applying LIBOR as a reliable benchmark for financial / financing transactions. Therefore, regulators and market participants are preparing to abandon LIBOR in existing and future agreements.

LIBOR is often used in business-to-business financing transactions, and the change will impact the financial sector as a whole in the following ways:

  • Selection of a base rate accepted worldwide; and
  • Whether the change will benefit companies in their current structures and plans (including coverage).

There is currently uncertainty as to how multinational organizations will approach the transition or how the arm’s length margin / spread will be calculated.

New transfer pricing (TP) legislation has been in effect in Thailand since 2019, introducing mandatory TP documentation requirements and the filing of TP disclosure forms by some taxpayers. PT regulations and guidance notes continue to be developed, with those published to date aligning with the OECD PT guidelines.

The Thai tax service has yet to provide specific TP guidance on benchmarking interest rates. However, as Thailand largely follows the OECD, we predict that the level of information required by the Thai Tax Department would be as strict as mentioned in the OECD transfer pricing guidelines.

Using LIBOR in Thailand

In Thailand, US Dollar LIBOR is used to calculate Thai Baht Interest Rate Fixing (THBFIX), used in financial, cash and derivative transactions, as the benchmark rate for pricing and determining cash flow. Therefore, the termination of LIBOR will have a significant impact on business deals in the Thai financial market and on business-to-business finance arrangements.

Therefore, Thai companies should assess alternatives to their existing B2B financing arrangements for a smoother transition into the post-LIBOR era.

A brief definition of some alternatives to LIBOR

Some countries have already started the process of replacing LIBOR with alternative rates, including the Guaranteed Overnight Finance Rate (SOFR) in the United States, the Euro Short Term Rate (ESTR) in Europe and the Average Rate. Overnight Interbank Sterling (SONIA) in UK. .

Implications of the TP on the phase-out of LIBOR

As mentioned earlier, there is uncertainty as to how multinational organizations will approach the transition or how the arm’s length margin / spread will be calculated.

Below are some key considerations from a TP perspective that require immediate attention for a smoother transition into the post-LIBOR era.

Reorganization of inter-company financing agreements

Intra-group financing operations will be significantly affected, including loans and cash pooling agreements, which refer to LIBOR as the basis. Additionally, phasing out LIBOR would force companies to revise or cancel their existing intra-group financing agreements to reflect conduct between the parties, as the agreements serve as the first line of defense during TP audits. Failure to update or modify may expose multinationals to considerable risk of redress from tax authorities.

Evaluate tax deductibility based on the selection of a potential option

Many companies follow centralized treasury operations to define financing strategies, keeping tax planning and group synergies at the center of attention. However, when making the transition, companies will need to assess the implications, including whether selecting an option increases the borrower’s interest burden or analyze the implications of thin capitalization (if any), making sure to that the transition does not entail any restriction on tax deductibility. . Currently, Thailand does not have thin capitalization rules.

Companies could also evaluate a decentralized approach, where subsidiaries could directly access bank funds locally, whenever this is beneficial. This could help groups to avoid the administration entering into or modifying agreements on an annual / periodic basis and to avoid intercompany transactions and associated TP risks. However, a decentralized approach is only recommended on a case-by-case basis.

Risk mitigation / hedging strategies

Many companies set up cash pooling arrangements and often the cash pooler performs hedging activities. Therefore, the discontinuation of LIBOR is likely to create mismatches between the loan product and the related hedge, which can lead to TP implications, which may force multinationals to restructure their cash pool arrangements into determining the rates that the cash pooler should use to perform hedging activities effectively. Therefore, multinationals must initiate the analysis of an alternative interest rate mechanism proactively.

Data availability and timing

As companies move from LIBOR, which was easily assessable, switching to an alternative rate may initially pose issues such as where to pull data or understanding when and how often that data is released. Therefore, it is important to consider the availability and speed with which taxpayers and tax authorities can assess the data for analysis.

Will your LIBOR analysis be useful to you?

Due to issues with the LIBOR transition, TP documentation (from January 2022) prepared to support LIBOR analysis may no longer be acceptable. Therefore, companies will need to review their strategy and undertake studies to support their forward-looking options for business-to-business financing arrangements between related parties in a proactive manner.

It will also be necessary to discuss the challenges and different options with regulators to involve them in the arrival or acceptance of a base rate in order to reduce future complications.

Thailand’s revenue department currently requires companies to submit details of their related parties and transactions during the year if they report 200 million baht ($ 6.7 million) or more in revenue during a year. accounting period.

Information relating to loans is limited to the name of the related party, the amount of interest expense, interest income and the balance of loans payable and receivable at the end of the financial year. This information will be used to analyze and evaluate the next steps to determine the selection of taxpayers for TP audits.

Assessment of the impact of LIBOR phase-out for Thailand

The change will have a significant impact on financial arrangements from January 2022, and business-to-business financing will not be ruled out.

The Bank of Thailand (BOT), in collaboration with the Thai Bankers Association and the Association of International Banks, established a steering committee to assess the readiness of commercial banks to abandon LIBOR. The main objective of the committee is to ensure a smooth transition by focusing on the following areas:

  • Modification of financial contracts referring to LIBOR and THBFIX, including loans, notes and derivative contracts;
  • Preparing commercial banks for the LIBOR transition; and
  • Alternative Thai Reference Rate Development Plan.

The committee recommended that market participants evaluate open contracts with reference to LIBOR or THBFIX. In addition, market participants should consult commercial banks or counterparties in advance to quickly modify existing contracts. We also expect the BOT to provide timely advice to market participants and provide or suggest alternative rates to Thai companies such as US, Europe and UK.

Additionally, multinationals operating in Thailand or overseas typically set policies centrally, which subsidiaries typically follow. As a result, the transition is likely to affect the structuring or tax planning of many multinationals. Multinationals will need to reassess their business-to-business financing arrangements to ensure they are appropriate.

In addition, given the trend of cases selected for TP audits, many tax authorities around the world are questioning multinational business-to-business financing arrangements. As a result, phasing out LIBOR may be an opportunity for tax authorities, including the Thai Tax Department, to further target business-to-business financing transactions.

Since the phase-out of LIBOR will be effective by the end of 2021, we recommend that companies operating in Thailand begin to assess the available alternatives and select the most suitable and appropriate option for their businesses ( as underlined above) or by initiating a dialogue with regulators to develop a coherent policy.

Subsequently, changes will need to be reflected in business-to-business agreements to pass LIBOR benchmarks in order to mitigate adverse tax or legal consequences. In addition, it will be necessary for multinational groups to document such analysis appropriately in their PT documentation to support and document their PT policies.

André Jackomos

Senior Partner, HLB Thailand

Rohit sharma

Director, HLB Thailand

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