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WSBI-ESBG express concern to IRS over qualified intermediary agreement provisions

WSBI-ESBG express concern to IRS over qualified intermediary agreement provisions

​Calls for postponement of entry into force of U.S. Internal Revenue Code Section 871(m) until at least 2018

​​​​BRUSSELS, 2 September 2016 – WSBI-ESBG members conveyed through a letter sent this week to IRS Chief Counsel John J. Sweeney concerns over the implementation timeline, scope and even legality of the provisions of the new Qualified Intermediary (QI) agreement under U.S. Treasury Regulation Section 871 (m) of the Internal Revenue Code.

The regulations to be implemented under Section 871(m) present many challenges and will require large investment from WSBI-ESBG members to develop and adapt internal procedures and systems. It is questionable whether it is practical for its members to make these adjustments before the required January 2017 deadline. WSBI-ESBG members are urging the IRS to postpone the entry into force of the new regulations until at least 1 January 2018 or –in the event that postponement is not possible for legal reasons – refrain from sanctioning foreign financial institutions for non-compliance.

The letter follows the 1 July-released Notice 2016-42, which contains a revised proposed QI agreement. The QI agreement allows foreign persons to enter into an agreement with the IRS to simplify their obligations as a withholding agent under chapters 3 and 4 and as a payer under chapter 61 and section 3406 for amounts paid to their account holders. It is the view of certain members that the notice doesn’t go far enough and does not provide sufficient information for foreign entities to implement the requirements of Section 871 (m).

​Why its important

In the past, the U.S. government expressed worry over investors’ use of derivatives to avoid payment of U.S. tax on dividends from U.S. corporations. In 2010, Section 871(m) of the U.S. Internal Revenue Code was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act, the same piece of U.S. legislation that also contains the Foreign Account Tax Compliance Act (FATCA) legislation. It imposes U.S. non-resident withholding tax on “dividend equivalent payments.” The 871(m) regulation focuses on withholding taxes on any financial contract that references an underlying security that could give rise to U.S. source dividend payments and meet certain conditions. While U.S. source dividends paid to non-U.S. persons is generally subject to a 30 per cent U.S. withholding tax rate, the U.S. government wants to impose the same withholding on dividend equivalent amounts (DEAs) made from derivatives referencing U.S. equities to prevent investors from using it as a loophole to avoid tax. Impacted financial instruments include: swaps (notional principal contracts), futures, options (listed and OTC), forwards, derivatives over equity-linked indices, structured notes, other equity-linked contracts, securities lending, repurchase agreements, certain compensation agreements, and convertible debt.