Tax impact of Jibar to ZARONIA transition for legacy contracts

The South African Reserve Bank (SARB) has spearheaded the reform of local interest rate benchmarks, leading to the formal endorsement of ZARONIA in November 2023.

The previous benchmark, Jibar, was criticized for its reliance on expert judgment over actual transactions, rendering it vulnerable to manipulation and a loss of representativeness.

ZARONIA, conversely, is derived from actual overnight wholesale funds market transactions, ensuring transparency and adherence to international risk-free rate standards.

With Jibar's publication ceasing on 31 December 2026, a mandatory transition for affected financial instruments is underway.

This document specifically assesses the potential tax consequences for 'legacy contracts'—agreements predating ZARONIA's adoption that require amendment.

Its core purpose is to establish a technical basis for dialogue with the South African Revenue Service (SARS) and National Treasury, advocating for formal guidance to provide tax certainty during this critical transition.

Global concerns over interbank benchmark reliability have spurred widespread reference rate reform, as highlighted by the Financial Stability Board.

Domestically, the SARB initiated its reform program, tasking the Market Practitioners Group (MPG) to facilitate the transition from Jibar to ZARONIA.

ZARONIA, an overnight risk-free rate, replaces Jibar, a term rate with a credit and term premium.

Changes to financial instruments include replacing the benchmark, introducing fallback provisions, or making incidental adjustments like modifying interest margins.

Contracts without fallback language will require amendment.

These modifications are expected to be minor, preserving the transaction's economic substance, particularly when adhering to market-standard practices and guidance from bodies like ISDA, LMA, MPG, and SARB.