Arising from the global Interbank Offered Rate (“IBOR”) reform, 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

To minimise the tax adjustments that companies have to make as a result of the IBOR reform, the 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 [such as floating rate bonds, loans and interest rate swaps (“IRS”)] under IRAS e-Tax Guide: Income Tax Treatment Arising from Adoption of FRS 109 – Financial Instruments will apply and are as follow:

Financial Assets/ Liabilities on Revenue Account Financial Assets/ Liabilities on Capital Account

Interest income and expense (calculated using the effective interest method under FRS 109) recognised in the Profit & Loss account (“P&L”) will be taxed/ allowed deduction.

 

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.

 

IRS is Used for Trading PurposesIRS is Used for Hedging Purposes

IRS gain/ loss recognised in the P&L will be taxed/ allowed deduction.

Tax treatment of IRS 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 IRS 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 IRS 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.

Examples

Example 1 - SOR Loan Transiting to SORA

The borrower has a S$100m SOR-based borrowing maturing in June 2025 that is converted to a S$100m SORA-based borrowing with the following key terms and features: 

  • An adjustment spread (X%) is derived from the SOR-SORA basis swap spread for a tenor that matches the remaining maturity of the SOR-based borrowing (i.e. June 2025) 
  • There are no changes to other key terms (maturity, collateral, credit margin etc)
  • The IASB practical relief applies for accounting purposes. This means that the existing borrowing remains on the balance sheet and there would be no immediate gain or loss arising from the contract amendment.  Post transition of IBOR reform, the borrowing will continue to be accounted for at amortised cost, with the interest expense being accrued at the new effective interest rate (i.e. SORA + X%)

Tax treatment for borrower

Where the loan is on revenue account, the interest expense that is accrued at the new effective interest rate (SORA + X%) recognised in the P&L will be tax deductible.  

Where the loan is on capital account, only interest expense incurred on sum payable on capital employed in acquiring the income will be allowed a deduction on contractual basis.

Tax treatment for lender

Where the lender is in the business of money lending, interest income accrued at the new effective interest rate (SORA + X%) recognised in the P&L will be taxable under Section 10(1)(a) of the Income Tax Act 1947 (ITA). Otherwise, the interest income will be taxed on a contractual/ coupon basis under Section 10(1)(d) of the ITA.

Example 2 – SOR Loan Transiting to SORA With Hedging IRS

Assuming the loan in Example 1 is hedged with IRS and both were amended to SORA on the same date and the cash flow hedge accounting continues to apply for the borrower following the transition to SORA.

Tax treatment for borrower

Where the loan is on revenue account, the interest expense that is accrued at the new effective interest rate (SORA + X%) recognised in the P&L will be tax deductible. The IRS gain/ loss will be taxed or allowed a deduction, regardless of whether it is realised or unrealised. 

Where the loan is on capital account, only interest expense incurred on sum payable on capital employed in acquiring the income will be allowed as a tax deduction on contractual basis. The IRS gain/ loss will only be taxed or allowed a deduction as prescribed borrowing costs only if its purpose is to protect the borrower against interest rate fluctuations.

Tax treatment for lender

Where the lender is in the business of money lending, interest income accrued at the new effective interest rate (SORA + X%) recognised in the P&L will be taxable under Section 10(1)(a) of the Income Tax Act 1947 (ITA). Otherwise, the interest income will be taxed on a contractual/coupon basis under Section 10(1)(d) of the ITA.

Tax treatment for IRS entered into by financial institutions

As the counterparty of the IRS is generally a financial institution, the gain or loss arising from the SORA-based IRS will be taxed or allowed a deduction, as the case may be, under section 10(1)(a) of the ITA.

Example 3 – Replacement of Hedging SOR IRS with New SORA IRS

At the point of the SOR-based borrowing’s transition to SORA, the corporate borrower in Example 2 terminates the original SOR-based IRS, settles the outstanding swap mark-to-market in cash, and enters into a new “on-market” SORA based IRS.  

Upon termination of original SOR-based IRS, hedge accounting may be discontinued as the derivative is de-recognised.  Assuming the new SORA-based IRS can be designated as a new hedge relationship, i.e. SFRS(I) 9 hedge accounting requirements are met, there is no immediate impact to the P&L as the cumulative gain or loss previously recognised in the cash flow hedge (“CFH”) reserve remains. The CFH reserve will be amortised to the P&L over the remaining term of the SORA-based borrowing.

Tax treatment for borrrower

Where the loan is on revenue account, the interest expense that is accrued at the new effective interest rate (SORA + X%) recognised in the P&L will be tax deductible.  The CFH reserve would be deductible when it is amortised to the P&L. The gain/ loss arising from the new SORA-based IRS will be taxed or allowed a deduction, regardless of whether it is realised or unrealised.

Where the loan is on capital account, only interest expense incurred on sum payable on capital employed in acquiring the income will be allowed as a tax deduction on contractual basis. The CFH reserve amortised to P&L is not tax deductible as the payment is made to terminate the swap and is not a prescribed borrowing cost to protect the borrower against interest rate fluctuations. The gain/ loss arising from the new SORA-based IRS will only be taxed or allowed a deduction as prescribed borrowing costs only if its purpose is to protect the borrower against interest rate fluctuations.

Tax treatment for lender

Where the lender is in the business of money lending, interest income accrued at the new effective interest rate (SORA + X%) recognised in the P&L will be taxable under Section 10(1)(a) of the Income Tax Act 1947 (ITA). Otherwise, the interest income will be taxed on a contractual/ coupon basis under Section 10(1)(d) of the ITA.

Tax treatment for IRS entered into by financial institutions

As the counterparty of the IRS is generally a financial institution, the gain or loss arising from the new SORA-based IRS will be taxed or allowed a deduction, as the case may be, under Section 10(1)(a) of the ITA.