SIFMA Asks Treasury to Delay Effective Date of IRC Regulations Taxing Nonresident Alien Individuals

SIFMA told the IRS and the U.S. Treasury Department that it is "commercially unreasonable" to implement the early effective date of final and temporary regulations promulgated under Internal Revenue Code Section 871(m) ("Tax on Nonresident Alien Individuals") for other types of financial instruments. In a comment letter, SIFMA urged regulators to defer the effective date to January 1, 2017 for all such instruments except (i) over-the-counter ("OTC") delta-one financial instruments with respect to U.S. corporations that are not held through financial intermediaries ("OTC delta-one instruments") and (ii) single-stock futures contracts.

SIFMA argued that prior to the effective date, the securities must be given time to:

• develop entirely new and complex systems to (i) identify contracts that could be subject to the regulations, (ii) distinguish between complex and simple contracts, (iii) compute and retain delta, (iv) apply the substantial equivalence test to complex contracts, and (v) apply the delta to the dividend equivalent with respect to a contract that is subject to the Section 871(m) withholding tax;

• require financial institutions to set up "entirely new and very sophisticated systems to identify transactions that are entered into within two business days of each other in the same account," and then to exercise "reasonable diligence" in order to determine whether any combination of such transactions should be combined into a single instrument that is subject to Section 871(m);

• issue guidance identifying the person who is responsible for calculating and transmitting the delta and dividend equivalent amounts for listed options and futures because the regulations "do not adequately address this issue";

• receive guidance issued by the government on how delta and dividend equivalent amounts will be transmitted in the case of financial instruments, such as structured notes, that are held through intermediary institutions;

• issue guidance on how withholding taxes will be imposed on a sale of such instruments in the secondary market;

• develop and agree on changes to the transaction documentation for financial instruments that reference U.S. equities to ensure that (i) there is no gross-up for any Section 871(m) withholding tax and (ii) withholding agents are indemnified for any Section 871(m) tax liabilities that they incur with respect to such instruments;

• educate employees, many of whom are non-U.S. individuals and have minimal experience with U.S. tax rules, in numerous offices around the globe regarding the "very complex and detailed rules" in the regulations; and

• determine how to apply the "novel and complex substantial equivalence test to a broad range of financial instruments."