KUALA LUMPUR, May 5 — Finance and tax leaders are urged to undertake an extensive review of their existing financial instruments to address potential tax exposure comprehensively.
In a statement today, Deloitte Malaysia said managing potential financial impacts and tax risks need to happen proactively before the transition or execution of documents and agreements.
“Where the transition impacts intra-group transactions, the potential transfer pricing implications should also be considered,” said its financial services industry tax leader Mark Chan and transfer pricing leader Subhabrata Dasgupta.
Meanwhile, they highlighted that Interbank Offered Rates (IBORs), including the London Interbank Offered Rate (LIBOR), have a key role in financial markets in underpinning trillions of dollars in notional value of financial products.
“Work is underway in multiple jurisdictions to enable the transition of risk-free rates (RFRs) for the interest rate index used in calculating floating or adjustable rates for loans, bonds, derivatives, and other financial contracts.
“RFRs that are alternatives to LIBOR include the Sterling Overnight Index Average benchmark. While the LIBOR transition is not a taxing event, the way the transition is undertaken could result in tax exposure,” they said.
Modifying or replacing a contract with substantially different terms and/or the de-recognition and subsequent recognition of a new instrument could give rise to Profit and Loss (P&L) adjustments.
“To ensure potential disputes with tax authorities both in Malaysia and the counterparty’s jurisdiction are amicably addressed, the taxability of these P&L adjustments should be taken early into consideration.
“Where these adjustments result in one-time payments, the nature of these payments and receipts should be considered to determine if withholding taxes are applicable,” they said.
“There is also the question as to whether (if at all) stamp duty would be applicable on the modified contracts.”
They noted that it is not uncommon that these instruments fall outside the purview of the organisation’s tax and finance department, given that the custodians of these documents are often the treasury or legal department.