ISDA Sends New Comments to Treasury and IRS on Proposed Dividend Equivalent Regulations and FATCA

On May 16, 2014, the North American Tax Committee of ISDA ("ISDA") sent additional comments to the U.S. Treasury Department ("Treasury") and the IRS addressing potential issues under FATCA relating to collateral posted to secure swap transactions. ISDA expressed concern that a transitional rule contained in Temporary Regulations issued in February 2014 to exempt payments on collateral from FATCA until 2017 was flawed. The transitional rule provides that withholdable payments under FATCA do not include a "payment made prior to January 1, 2017, by a secured party with respect to collateral securing one or more transactions under a collateral arrangement, provided that only a commercially reasonable amount of collateral is held by the secured party as part of the collateral arrangement." Temp. Treas. Reg. § 1.1473-1T(a)(4)(vii) (emphasis added). Although this rule covers payments by the secured party, ISDA pointed out that, often, collateral is held by a separate custodian that would make payments on the collateral. ISDA asked that this "flaw" be fixed in the technical corrections that the IRS plans to issue to the Temporary Regulations. ISDA also asked Treasury and the IRS to provide guidance on the treatment of collateral securing grandfathered obligations after January 1, 2017, and in situations in which the collateral might be in excess of commercially reasonable amounts.

In a separate comment letter, ISDA expressed its support for comments submitted by SIFMA on May 7, 2014 regarding proposed regulations issued under Section 871(m) of the Internal Revenue Code with respect to taxation of "dividend equivalents." These proposed regulations generally would impose a 30% withholding tax on payments to non-U.S. persons of dividend equivalents on equity swaps and on other equity-linked instruments referencing U.S. dividend paying stocks that, when issued or acquired, have a "delta" of 0.70 or greater. ISDA specifically asked that the combined transactions rule in Prop. Reg. § 1.871-15(l), under which the IRS may combine separate transactions to increase the "delta" on the combined transaction, should be broadened to permit a taxpayer to net related long and short positions in determining whether such transactions constitute a Section 871(m) transaction. In addition, ISDA asked that the final regulations include provisions to expand the qualified dealer exception of the Proposed Regulations to mitigate cascading withholding.

See: ISDA Follow-up Comment Letter on FATCA Collateral Concerns; ISDA Comment Letter on Proposed Section 871(m) Regulations.Related news: ISDA Sends Additional Comments to Treasury and IRS Regarding FATCA's Impact on SPVs and Posted Collateral (November 20, 2013); SIFMA Submits Comments to IRS and Treasury on Proposed Regulations Implementing Internal Revenue Code Section 871(m) (May 8, 2014) Trade Association Asks IRS to Address Issues Arising under FATCA (May 7, 2014); IRS Proposes New Regulations for Payments on Equity Swaps and Other Equity Derivatives and Extends Current Rules through 2015 (December 4, 2013); Options Exchanges Ask for Big Changes to Proposed Dividend Equivalent Regulations (March 7, 2014); Chamber of Commerce Asserts That Dividend Equivalent Proposed Regulations Are Too Broad and Could Hurt American Businesses; Related IRS Notice (March 7, 2014); IRS Extends Grandfathering Date for Application of New Withholding Rules on Equity-Linked Instruments (March 4, 2014); MFA Requests Extension of Applicability Date for Proposed 871(m) Rules (March 3, 2014). See also: Cabinet FATCA Materials (available to Cabinet subscribers only). For more information, please contact Daniel Mulcahy and Mark Howe.