The Internal Revenue Service and Treasury Department’s regulation project on Libor will likely result in final guidance this coming year.
Market participants expect that Treasury’s Office of Management and Budget will release the final regulation sooner rather than later. The cessation of Libor matters because existing debt and contracts may reference it, potentially impacting variable-rate debt, swaps and contracts, among other things.
“[Libor regulation] is something that's been pretty high on the Treasury Department’s priority list for a long time,” said Johnny Hutchinson, partner at Squire Patton Boggs and member of the National Association of Bond Lawyers’ board of directors. “That's probably the first thing that we're expecting to see in the near term.”
The proposed regulations were released in Oct. 2019 and the IRS and Treasury have since collected swaths of comments from market participants on how all types of corporate and international debt markets, in addition to derivatives markets, can move away from Libor. The release of the final guidance was slated for the end of 2021, but is shaping up to be one of the most significant tax events of 2022.
But the IRS and Treasury are busy with other priorities as well. “We have heard from the IRS and from Treasury, that a lot of their manpower has, for a while now, been spent on trying to deal with things that came out of the 2017 tax legislation,” Hutchinson said.
“And they were kind of also preparing for what at one point seemed to be a likely deluge of all kinds of new stuff coming out of Congress,” he added. “Suffice it to say a lot of that did not come to fruition, although we did have a few tax exempt provisions in the infrastructure bill that has been signed into law.”
The bipartisan Infrastructure Investment and Jobs Act adds $15 billion to the national volume cap limitation available for qualified highway or surface freight facilities. But administering this won’t involve the IRS or Treasury in a major capacity as they’ve never issued regulations on this since its inception in 2005 and applications are available via the Department of Transportation, law firm Ballard Spahr said.
The DOT will also release guidance by Feb. 11 on its electric vehicle charging station program.
The other two are qualified broadband facilities and carbon capture facilities, which were not mentioned on the IRS’s strategic guidance plan on Sept. 9 due to the bipartisan bill not yet being signed into law, however, the muni market should keep an eye out for additional guidance.
“I would guess we'll see something on those,” Hutchinson said. “That's part prediction, part hope, much more hope than prediction,” he added.
“Particularly with the broadband provisions, there's a lot of murkiness in the statute that really needs to be clarified before people are going to be able to issue those bonds.”
The statute contains a lot of undefined terms and unfamiliar concepts that pose practical challenges for issuers.
“One of the concepts in that statute is you have to design your broadband projects and It provides access to places that don't have it and then once the project is up and running, you have to then verify that you've actually provided sufficient broadband access,” Hutchinson said.
“If you get your project off the ground and you've spent all of your bond proceeds, but you're not providing fast enough access to enough people, what do you do?” he said. “Do you have to build in a provision where you can take your bonds off the market?"
It’s unclear what an issuer would do if they’re unable to make the internet fast enough to meet the statutory requirements and further guidance is needed. But the language and execution around the carbon capture facilities is a bit more familiar, given issuers can already issue tax-exempt bonds for solid waste disposal and sewage facilities and would therefore appeal to similar borrowers.
“It's possible that we may be able to do deals without further guidance,” Hutchinson said.
Like most other agencies, the IRS is still dealing with the effects of COVID-19 and at the moment are still conducting remote public hearings as part of the issuance requirement for tax-exempt bonds. NABL submitted a letter requesting that it be made permanent.
The current deadline for PAB hearings is March 31, but further extensions or moves to make hearings permanently remote could be another development out of the IRS in 2022.
But that’s not the only transition the IRS has made. In October, the agency moved to mandatory e-filing of its Form 8038-CP, its form for returning credit payments to issuers of qualified bonds, despite the program not yet being rolled out.
New forms have been designed for this purpose and even paper forms need to be used for the 2022 filing year.
They also mentioned they’d be updating the procedure on the recovery of rebate payments that are likely to come out in 2022.
“Moving forward, the more that they can continue to concentrate on automation of otherwise paper things, it’s a win,” said Emily Brock, director of the federal liaison center at the Government Finance Officers Association.
“To be able to see them begin to automate and become more aware of the fact that we are an economy that has gone largely electronic due to the needs of all of our communities, then we are definitely delighted to see that transition.”
