Global Tax Adviser
January 31, 2012
IRS Proposes FATCA Regulations for Derivative
GTA, U.S. Corporate Tax
The U.S. Treasury Department and the IRS released temporary and
proposed regulations that provide guidance on derivative type contracts such
as certain payments determined by
reference to the payment of U.S. sourced dividends. The regulations apply to
Canadian payors (i.e., non-resident aliens and foreign
corporations) that hold a notional principal contract (NPC). The IRS is
accepting comments on the proposed regulations until April 6, 2012,
and will discuss the regulations at a public hearing on April 27, 2012.
These proposed regulations will generally apply after December 31, 2012.
The regulations implement provisions enacted under section 871
of the Internal Revenue Code by the Hiring Incentives to Restore
Employment Act (HIRE) of 2010. The HIRE Act also includes Foreign
Account Tax Compliance Act (FATCA). Additional FATCA regulations are
expected to be released in the near future.
As enacted under the HIRE Act, the regulations apply to:
- Securities loans
- Sale-repurchase transactions (REPOs)
- Certain NPCs defined as “specified
notional principal contracts” (specified NPCs).
- Any similar transactions
that provide for a payment contingent upon or determined by reference to a
U.S. source dividend (i.e., a dividend equivalent). Generally, such dividend
equivalents, if made after September 14, 2010, will be treated as
dividends from sources within the United States for certain purposes.
For payments made after March 18, 2012, any NPC will be a “specified NPC”
unless the U.S. Treasury Department and the IRS determine that the contract does not have the potential for tax avoidance.
The temporary regulations:
- Incorporate the definition of a “specified NPC”
- Extend application of the statutory definition of a “specified NPC”
through December 31, 2012 to allow taxpayers and withholding
agents the time to modify their systems to comply with the proposed rules
- Amend certain other regulations.
Notwithstanding the temporary regulations, the preamble allows the
IRS to challenge transactions designed to avoid the application of
these rules. The IRS can also still assert that a contract
labeled as an NPC or other equity derivative is an ownership
interest in the equity referenced in the contract.
The proposed regulations apply to Canadian payors (i.e., non-resident aliens and foreign
corporations) that hold certain financial products that provide for payments
that are contingent on, or determined by, reference to payments of dividends
from sources within the United States. Among other things, the proposed
- Define when payments are to be treated as a dividend equivalent from
sources within the United States
- Define a “specified NPC” and provide a transition period for
payments made prior to January 1, 2013
- Identify when a NPC will be treated as a “specified NPC”
for periods beginning on January 1, 2013
- Require a withholding
agent to withhold tax owed on a dividend equivalent (under section 1441)
- Treat a dividend equivalent as a “dividend” for purposes of
determining the appropriate rate of withholding tax under an applicable
income tax treaty.
The IRS is accepting comments on the proposed regulations until April 6,
2012, and will discuss the regulations at a public hearing on April 27,
For more information, contact your KPMG adviser.