SIFMA Recommends Changes to IRC Regulations on Withholding for Certain Derivatives

SIFMA submitted a number of recommendations to the U.S. Treasury Department regarding the Internal Revenue Code's final Section 871(m) regulations. The recommendations concern the rules for withholding on “dividend equivalent payments” on derivatives that reference U.S. equity securities. Specifically, SIFMA's recommendations addressed:

• the rules for combining two or more contracts for Section 871(m) purposes;

• the timing for determining the delta of a contract and/or applying the substantial equivalence test to it;

• the implementation of rules on structured notes, listed options and derivatives with respect to partnership interests;

• definitions of or relating to qualified indices, non-qualified indices and complex contracts;

• the use of tests other than the substantial equivalence test to determine which tax is applicable to a complex contract; and

• various related administrative matters.

SIFMA noted that many of these changes could be implemented through administrative guidance instead of revised regulations.

SIFMA's recommendations, which were submitted in the form of a comment letter, did not address convertible instruments that could be subject to Section 305(c) or the qualifying derivatives dealer regime.