On or about 23 Feb 2022, the Inland Revenue Authority of Singapore (IRAS) has updates its website content to Interbank Offered Rate reform.
In view of the global Interbank Offered Rate (“IBOR”) reform, the Singapore Overnight Rate Average (“SORA”) will replace Singapore Swap Offer Rate (“SOR”) and Singapore Interbank Offered Rate (“SIBOR”) as the key benchmark risk-free interest rate (“RFR”).
SOR is expected to be discontinued after 30 June 2023 while SIBOR will be discontinued after 31 December 2024.
Impact on Tax Treatment
Singapore Tax Treatment Will Follow Accounting Treatment Where IASB Practical Relief is Adopted
The Singapore income tax treatment will follow the accounting treatment where the IASB practical relief for the IBOR reform is adopted. The existing tax treatments of the affected financial instruments (e.g., floating rate bonds, loans and interest rate swaps) will apply and are as follow:
Financial Assets/ Liabilities on Revenue Account
- Interest income and expense (calculated using the effective interest method under FRS 109) recognised in the Profit & Loss account will be taxed/ allowed deduction.
Financial Assets/ Liabilities on Capital Account
- Interest income recognised in the P&L will be taxed only on contractual/ coupon basis.
- Only interest expense incurred on sum payable on capital employed in acquiring the income will be allowed as a deduction on contractual basis.
- Only prescribed borrowing costs incurred as a substitute for interest expense or to reduce interest costs will be allowed as a deduction on an incurred basis.
Interest Rate Swaps is Used for Trading Purposes
- The gain/ loss recognised in the P&L will be taxed/ allowed deduction.
Interest Rate Swaps is Used for Hedging Purposes
- Tax treatment of gain/ loss recognised in the P&L will follow that of the underlying hedged item.
- Where the underlying hedged item is on revenue account, the gain/ loss will be taxed or allowed deduction, regardless of whether it is realised or unrealised.
- Where the underlying hedged item is on capital account, the gain/ loss will only be taxed or allowed deduction as prescribed borrowing costs on an incurred basis only if its purpose is to protect the borrower against interest rate fluctuations.
If an IBOR is amended via the rescission of the existing contract and the creation of a new legal contract, this may be viewed as a re-financing of loan. In such situation, where the principal amount of the loan under the new contract is:
- Same as or lower than the balance of the existing loan – the characterisation of the loan under the new contract (i.e. whether it is a revenue or capital loan) will follow that of the prior loan.
- Higher than the balance of the existing loan and the difference is used for other purposes unrelated to the existing loan – the deductibility of the interest expense payable on the loan in excess of the existing loan would be determined by the purpose of the additional loan amount (i.e. whether the purpose of the additional loan amount is for a revenue or capital use).
Tax Treatment for Borrowing Costs Other than Interest Expenses
The tax treatment of borrowing costs other than interest expenses incurred in respect of the IBOR reform will follow the existing tax treatment provided in IRAS e-Tax Guide: Tax Deduction for Borrowing Costs other than Interest Expenses.
Tax Treatment Relating to Insurance Contracts and Leases
Based on the amendments to SFRS(I) 4: Insurance Contracts arising from the IBOR reform, insurers who have elected to defer the implementation of SFRS(I) 9 and are still applying ‘frozen’ SFRS(I) 1-39 should account for amendments to financial instruments necessary to implement the IBOR reform, by applying the amendments for IBOR reform made to SFRS(I) 9. Following the application of such amendments, the tax treatment as stated in the above paragraphs will apply.
Based on the amendments to SFRS(I) 16: Leases arising from the IBOR reform, to the extent where:
- The modification to the lease agreement is necessary as a direct consequence of the IBOR reform, and
- The new basis for determining lease payments is ‘economically equivalent’ to the previous basis,
the existing tax treatment under the IRAS e-Tax guide: Tax Treatment Arising from the Adoption of FRS 116 or SFRS(I) 16 will apply.
Stamp Duty Treatment
The current stamp duty treatment is applicable and the stamp duty liability would depend on the instruments executed.
There would be no stamp duty payable if the amendment of the rate is made through loan facility documentation and without any change to the underlying mortgage/ security agreement.
In the event that a dutiable instrument such as a mortgage is executed and there is a change in the loan amount, stamp duty will be payable.