[Federal Register Volume 84, Number 242 (Tuesday, December 17, 2019)]
[Rules and Regulations]
[Pages 68790-68794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-26977]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9887]
RIN 1545-BN76
Dividend Equivalents From Sources Within the United States
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations relating to certain
financial products providing for payments that are contingent upon or
determined by reference to U.S. source dividend payments.
DATES:
Effective date: These regulations are effective on December 17,
2019.
Applicability dates: For dates of applicability, see Sec. 1.871-
15(r).
FOR FURTHER INFORMATION CONTACT: D. Peter Merkel or Karen Walny at
(202) 317-6938 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains final regulations under Sec. 1.871-15
defining the term broker for purposes of section 871(m) of the Internal
Revenue Code (the Code). In addition, the final regulations provide
guidance relating to when the delta of an option that is listed on a
foreign regulated exchange may be calculated based on the delta of that
option at the close of business on the business day before the date of
issuance. The final regulations also provide guidance identifying which
party to a potential section 871(m) transaction is responsible for
determining whether a transaction is a section 871(m) transaction when
multiple brokers or dealers are involved in the transaction. Finally,
this document withdraws temporary regulations under Sec. 1.871-15T
regarding these matters.
I. Background on Section 871(m) Regulations
On January 23, 2012, the Federal Register published temporary
regulations (TD 9572) at 77 FR 3108 (2012 temporary regulations), and a
notice of proposed rulemaking by cross-reference to the temporary
regulations and notice of public hearing at 77 FR 3202 (2012 proposed
regulations, and together with the 2012 temporary regulations, 2012
section 871(m) regulations) under section 871(m). The 2012 section
871(m) regulations related to dividend equivalents from sources within
the United States paid to nonresident alien individuals and foreign
corporations. Corrections to the 2012 temporary regulations were
published on February 6, 2012, March 8, 2012, and August 31, 2012, in
the Federal Register at 77 FR 5700, 77 FR 13968, and 77 FR 53141,
respectively. The Department of the Treasury (Treasury Department) and
the IRS received written comments on the 2012 proposed regulations, and
a public hearing was held on April 27, 2012.
On December 5, 2013, the Federal Register published final
regulations and removal of temporary regulations (TD 9648) at 78 FR
73079 (2013 final regulations), which finalized a portion of the 2012
section 871(m) regulations. On the same date, the Federal Register
published a withdrawal of notice of proposed rulemaking, a notice of
proposed rulemaking, and a notice of public hearing at 78 FR 73128
(2013 proposed regulations). In light of comments on the 2012 proposed
regulations, the 2013 proposed regulations described a new approach for
determining whether a payment made pursuant to a notional principal
contract (NPC) or an equity-linked instrument (ELI) is a dividend
equivalent based on the delta of the contract. In response to written
comments on the 2013 proposed regulations, the Treasury Department and
the IRS released Notice 2014-14, 2014-13 IRB 881, on March 24, 2014
(see Sec. 601.601(d)(2)(ii)(b)), stating that the Treasury Department
and the IRS anticipated limiting the application of the rules with
respect to specified ELIs described in the 2013 proposed regulations to
ELIs issued on or after 90 days after the date of publication of final
regulations.
On September 18, 2015, the Federal Register published final
regulations and temporary regulations (TD 9734), at 80 FR 56866, which
finalized a portion of the 2013 proposed regulations and introduced new
temporary regulations based on comments received with respect to the
2013 proposed regulations (2015 final regulations and 2015 temporary
regulations, respectively, and together, the 2015 regulations). On the
same date, the Federal Register published a notice of proposed
rulemaking by cross-reference to temporary regulations and a notice of
public hearing at 80 FR 56415 (2015 proposed regulations, and together
with the 2015 final regulations, 2015 section 871(m) regulations). A
correcting amendment to the 2015 final regulations and the 2015
proposed regulations was published on December 7, 2015, in the Federal
Register at 80 FR 75946 and 80 FR 75956, respectively.
The Treasury Department and the IRS received written comments on
the 2015 proposed regulations. The public hearing scheduled for January
15, 2016, was cancelled because no request to speak was received.
On July 1, 2016, the Treasury Department and the IRS released
Notice 2016-42, 2016-29 IRB 67 (QI Notice), containing a proposed
amended qualified intermediary agreement. The QI Notice included the
requirements
[[Page 68791]]
and obligations applicable to a QI that acts as a qualified derivatives
dealer (QDD). The Treasury Department and the IRS received written
comments on Notice 2016-42, which included comments on certain aspects
of section 871(m) and QDDs. On December 30, 2016, the Treasury
Department and the IRS released Revenue Procedure 2017-15, 2017-3 IRB
437 (2017 QI Agreement), which contains the final QI withholding
agreement and the requirements and obligations applicable to QDDs.
On December 2, 2016, the Treasury Department and the IRS released
Notice 2016-76, 2016-51 IRB 834, providing guidance for complying with
the final and temporary regulations under sections 871(m), 1441, 1461,
and 1473 in 2017 and 2018 and explaining how the IRS intends to
administer those regulations in 2017 and 2018.
On January 24, 2017, the Federal Register published final and
temporary regulations (TD 9815) at 82 FR 8144 (2017 final regulations
and 2017 temporary regulations, respectively, and together, the 2017
regulations), which generally adopted the 2015 proposed regulations
with certain changes. The 2017 regulations also included several
technical amendments to the 2015 final regulations in response to
comments on those regulations. Finally, the 2017 temporary regulations
were based on comments received with respect to the 2015 proposed
regulations. A notice of proposed rulemaking cross-referencing the 2017
temporary regulations was published in the Federal Register on January
24, 2017 (82 FR 8172), with correcting amendments published in the
Federal Register on October 26, 2017 (82 FR 49508) (together, the 2017
proposed regulations). No public hearing was requested or held. On
August 21, 2017, the Treasury Department and the IRS published Notice
2017-42, 2017-34 IRB 212, which extended certain transition relief with
respect to certain portions of the 2017 final regulations.
On February 5, 2018, the Treasury Department and the IRS published
Notice 2018-5, 2018-6 IRB 341, which permits withholding agents to
apply the transition rules for securities loans to which section 871(m)
applies from Notice 2010-46, 2010-24 IRB 757, in 2018 and 2019.
On September 20, 2018, the Treasury Department and the IRS
published Notice 2018-72, 2018-40 IRB 522, which further extended
certain transition relief and permitted withholding agents to apply the
transition rules from Notice 2010-46 in 2020.
All written comments received in response to the 2012 proposed
regulations, 2013 proposed regulations, 2015 proposed regulations, and
2017 proposed regulations are available at www.regulations.gov or upon
request.
This Treasury decision finalizes the 2017 proposed regulations
without any substantive change.
II. Executive Order 13789
Executive Order 13789 (82 FR 19317), issued on April 21, 2017,
instructs the Secretary of the Treasury (the Secretary) to review all
significant tax regulations issued on or after January 1, 2016, and to
take concrete action to alleviate the burdens of regulations that (i)
impose an undue financial burden on U.S. taxpayers; (ii) add undue
complexity to the Federal tax laws; or (iii) exceed the statutory
authority of the IRS. Executive Order 13789 further instructs the
Secretary to submit to the President within 60 days an interim report
that identifies regulations that meet these criteria. Notice 2017-38,
2017-30 I.R.B. 147, which was published on July 24, 2017, did not
include regulations under section 871(m) in a list of eight regulations
identified by the Secretary in the interim report as meeting at least
one of the first two criteria specified in E.O. 13789 (no regulations
were identified as meeting the third criterion).
E.O. 13789 further instructs the Secretary to submit to the
President by September 18, 2017, a final report that recommends
specific actions to mitigate the burden imposed by regulations
identified in the interim report. On October 16, 2017, the Secretary
published in the Federal Register that final report (82 FR 48013),
which indicated, among other things, that the Treasury Department
continues to analyze all recently issued significant regulations and is
considering possible reforms of several recent regulations not
identified in the earlier report, including the regulations under
section 871(m).
Summary of Comments and Explanation of Provisions
The Treasury Department and the IRS received one comment regarding
the 2017 proposed regulations. After consideration of the comment, the
2017 proposed regulations are adopted as final regulations without any
substantive change. In addition, the regulations under Sec. 1.871-15T
are withdrawn. Comments on the section 871(m) regulations that were not
specific to Sec. 1.871-15T are beyond the scope of this rulemaking and
are not addressed in this preamble.
The Treasury Department and the IRS are continuing to study and
consider possible reforms to the other provisions of the section 871(m)
regulations pursuant to E.O. 13789 that are not specifically addressed
by this Treasury decision, including comments received that relate to
those rules. The Treasury Department and the IRS will consider these
comments in connection with any future guidance projects addressing the
issues discussed in the comments.
I. Delta Calculation for Listed Options
Generally, section 1.871-15(g)(2) provides the delta of a potential
section 871(m) transaction is calculated on the earlier of when the
contract is priced and when the contract is issued. See Sec. 1.871-
15(a)(6) (providing that a contract is issued at the inception,
original issuance, or issuance as a result of a deemed exchange
pursuant to section 1001). With respect to options listed on a
regulated exchange, Sec. 1.871-15(g)(4)(i) provided that the delta for
those options is determined based on the delta of the option at the
close of business on the business day before the date of issuance.
Section 1.871-15(g)(4)(ii)(A) defines a regulated exchange as any
exchange defined in Sec. 1.871-15(l)(3)(vii). The 2017 temporary
regulations and the 2017 proposed regulations provide that the term
regulated exchange also includes a foreign exchange that (A) is
regulated by a government agency in the jurisdiction in which the
market is located, (B) maintains certain requirements designed to
protect investors and to prevent fraud and manipulation, (C) maintains
rules to promote active trading of listed options, and (D) had trades
for which the average trading volume exceeded $10 billion per day
during the prior calendar year (the ``$10 billion threshold''). See
Sec. 1.871-15T(g)(4)(ii)(B). When a foreign securities exchange has
more than one tier or market level on which listed options may be
separately listed, the 2017 temporary regulations and the 2017 proposed
regulations treat each tier or market level of the exchange as a
separate exchange. See Sec. 1.871-15T(g)(4)(ii)(B)(4).
A comment expressed concern that the $10 billion threshold would
exclude from the definition of a regulated exchange many European
exchanges that are treated as regulated markets by the European
Securities and Markets Authorities (``ESMA'') for purposes of the
Markets in Financial Instruments Directive 2004/39/EC. The comment
requested that the final regulations eliminate the $10 billion
threshold. Instead, the comment recommended
[[Page 68792]]
that a foreign regulated exchange be defined to include an exchange
treated as a regulated market by ESMA or a similar national authority
and included in the respective ESMA register or similar national
register (the ``ESMA requirement'').
The $10 billion threshold is intended to ensure that the exchange
has a sufficient level of trading activity so that the pricing cannot
be manipulated. The Treasury Department and the IRS have determined
that the $10 billion threshold continues to serve this purpose. In
addition, the ESMA requirement requested by the comment appears
duplicative of Sec. 1.871-15T(g)(4)(ii)(B)(1), which requires a
foreign securities exchange to be regulated or supervised by a
governmental authority of the country in which the market is located,
because the ESMA register is compiled on the basis of notifications
made to ESMA by the national competent authorities of member states.
Further, a foreign exchange that does not qualify under Sec. 1.871-
15T(g)(4)(ii)(B) can qualify under Sec. 1.871-15(g)(4)(ii)(A) if the
option exchange is a qualified board or exchange as determined by the
Secretary pursuant to section 1256(g)(7)(C) or has a staff no action
letter from the CFTC permitting direct access from the United States.
Therefore, the Treasury Department and the IRS have determined that it
is not appropriate to remove the requirement. However, consistent with
the preamble to the 2017 regulations, the Treasury Department and the
IRS have clarified that the $10 billion threshold is determined based
on the notional amount of the options, which is the number of shares
referenced by the option multiplied by the stock price of those shares
at the time of the computation. See Sec. 1.871-15(g)(4)(ii)(B)(1)(iv).
The Treasury Department and the IRS, however, will continue to
study this comment regarding the $10 billion threshold in connection
with future guidance projects related to E.O. 13789. The Treasury
Department and the IRS request comments regarding whether an
alternative trading threshold for U.S. equity options would ensure that
there is sufficient trading on the exchange to prevent price
manipulation. For example, instead of establishing a threshold based on
the average daily trading volume for an exchange as a whole, an
alternative threshold may be based on only the average daily trading
volume of equity options on the exchange or only the average daily
trading volume of equity options for a specific stock or stock index on
the exchange. Comments recommending an alternative threshold should
include information supporting the suggestion, including information
regarding the average daily trading volumes for the exchange with
respect to equity options separated out by exchange (and stock or stock
index, if applicable).
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Orders 13563 and 12866 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits,
including potential economic, environmental, public health and safety
effects, distributive impacts, and equity. Executive Order 13563
emphasizes the importance of quantifying both costs and benefits, of
reducing costs, of harmonizing rules, and of promoting flexibility.
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. Therefore, a
regulatory impact assessment is not required.
II. Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control numbers 1545-0096 and 1545-1597. The collection
of information in these regulations is in Sec. 1.871-15(p). There is
no change to the total annual burden in the current regulations under
Sec. Sec. 1.1441-1 through 1.1441-9 as a result of these final
regulations. Without these final regulations, however, the total annual
burden in the current regulations under Sec. 1.1441-1 through 1.1441-9
would increase because more than one taxpayer could be treated as a
responsible party and be required to collect information regarding
potential section 871(m) transactions.
The information is required to establish whether a payment is
treated as a U.S. source dividend for purposes of section 871(m). This
information will be used for audit and examination purposes. The IRS
intends that these information collection requirements will be
satisfied by persons complying with chapter 3 reporting requirements
and the requirements of the applicable qualified intermediary (QI)
revenue procedure, or alternative certification and documentation
requirements set out in these regulations. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a valid control number.
The estimates for the number of impacted filers with respect to the
collections of information described in this part II of the Special
Analysis section are based on the distinct U.S. withholding agents who
filed a form 1042-S reporting income code 34 (substitute payments--
dividends) or income code 40 (Other dividend equivalents under IRS
section 871(m) (formerly 871(l)) for calendar year 2017. The estimates
for the number of impacted filers are also based on the number of U.S.
withholding agents who filed a form 1042 and checked the box in section
3, indicating that the withholding agent made payments related to a
potential section 871(m) transaction, for calendar year 2018. The IRS
estimates the number of affected filers to be the following:
Tax Forms Impacted
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Number of Number of
Collection of information respondents filings Forms to which the information may
(estimated) (estimated) be attached
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Sec. 1.871-15(p)(ii) Transactions with 1,500 51,000 Form 1042, Form 1042-S, and Form
multiple brokers. 1042-T.
Sec. 1.871-15(p)(iii) Responsible party 1,500 51,000 Form 1042, Form 1042-S, and Form
for transactions traded on an exchange and 1042-T.
cleared by a clearing organization.
Sec. 1.871-15(p)(iv) Responsible party 1,500 51,000 Form 1042, Form 1042-s, and Form
for certain structured notes, warrants, 1042-T.
and convertible instruments.
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[[Page 68793]]
The IRS does not have a reliable way of estimating the number of
filings that will not need to be made as a result of these final
regulations.
III. Regulatory Flexibility Act
It is hereby certified that these regulations will not have a
significant economic impact on a substantial number of small entities
within the meaning of section 601(6) of the Regulatory Flexibility Act
(5 U.S.C. chapter 6). This certification is based on the fact that
these regulations primarily will affect multinational financial
institutions, which tend to be larger businesses, and foreign persons.
Accordingly, a regulatory flexibility analysis under the Regulatory
Flexibility Act is not required.
Pursuant to section 7805(f), the notice of proposed rulemaking
preceding this regulation was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small businesses. No comments were received.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a state,
local, or tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. In 2019, that threshold is approximately $154 million. This
rule does not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This final rule does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
Statement of Availability of IRS Documents
IRS Notices and other guidance cited in this preamble are published
in the Internal Revenue Bulletin and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at http://www/
irs.gov.
Drafting Information
The principal authors of these final regulations are D. Peter
Merkel and Karen Walny of the Office of Associate Chief Counsel
(International). However, other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.871-15T [Removed]
0
Par. 2. Section 1.871-15T is removed.
0
Par. 3. Section 1.871-15 is amended by:
0
1. Revising paragraphs (a)(1), (g)(4)(ii)(B), (p)(1)(ii) through (iv),
and (p)(5);
0
2. Removing the language ``(r)(2), (3), and (4)'' from paragraph (r)(1)
and adding ``(r)(2) and (3)'' in its place; and
0
3. Removing paragraph (r)(4).
The revisions read as follows:
Sec. 1.871-15 Treatment of dividend equivalents.
(a) * * *
(1) Broker. A broker is a broker within the meaning provided in
section 6045(c), except that the term does not include any corporation
that is a broker solely because it regularly redeems its own shares.
* * * * *
(g) * * *
(4) * * *
(ii) * * *
(B) Foreign securities exchange--(1) In general. A foreign
securities exchange that:
(i) Is regulated or supervised by a governmental authority of the
country in which the market is located;
(ii) Has trading volume, listing, financial disclosure,
surveillance, and other requirements designed to prevent fraudulent and
manipulative acts and practices, to remove impediments to and perfect
the mechanism of a free and open, fair and orderly market, and to
protect investors, and the laws of the country in which the exchange is
located and the rules of the exchange ensure that those requirements
are actually enforced;
(iii) Has rules that effectively promote active trading of listed
options on the exchange; and
(iv) Has an average daily trading volume on the exchange exceeding
$10 billion notional amount during the immediately preceding calendar
year.
(2) Application to an exchange with more than one tier or market.
If an exchange in a foreign country has more than one tier or market
level on which listed options may be separately listed or traded, each
tier or market level is treated as a separate exchange.
* * * * *
(p) * * *
(1) * * *
(ii) Transactions with multiple brokers. For a potential section
871(m) transaction in which both the short party and an agent or
intermediary acting on behalf of the short party are a broker or
dealer, the short party must determine whether the potential section
871(m) transaction is a section 871(m) transaction. For a potential
section 871(m) transaction in which the short party is not a broker or
dealer and more than one agent or intermediary acting on behalf of the
short party is a broker or dealer, the broker or dealer that is a party
to the transaction and closest to the short party in the payment chain
must determine whether the potential section 871(m) transaction is a
section 871(m) transaction. For a potential section 871(m) transaction
in which neither the short party nor any agent or intermediary acting
on behalf of the short party is a broker or dealer, and the long party
and an agent or intermediary acting on behalf of the long party are a
broker or dealer, or more than one agent or intermediary acting on
behalf of the long party is a broker or dealer, the broker or dealer
that is a party to the transaction and closest to the long party in the
payment chain must determine whether the potential section 871(m)
transaction is a section 871(m) transaction.
(iii) Responsible party for transactions traded on an exchange and
cleared by a clearing organization. Except as provided in paragraph
(p)(1)(iv) of this section, for a potential section 871(m) transaction
that is traded on an exchange and cleared by a clearing organization,
and for which more than one broker-dealer acts as an agent or
intermediary between the short party
[[Page 68794]]
and a foreign payee, the broker or dealer that has an ongoing customer
relationship with the foreign payee with respect to that transaction
(generally the clearing firm) must determine whether the potential
section 871(m) transaction is a section 871(m) transaction.
(iv) Responsible party for certain structured notes, warrants, and
convertible instruments. When a potential section 871(m) transaction is
a structured note, warrant, convertible stock, or convertible debt, the
issuer is the party responsible for determining whether a potential
section 871(m) transaction is a section 871(m) transaction.
* * * * *
(5) Example. The following example illustrates the rules of
paragraph (p) of this section.
(i) Example 1: Responsible party for a transaction with multiple
broker-dealers. (A) Facts. CO is a domestic clearing organization
and is not a broker as defined in paragraph (a)(1) of this section.
CO serves as a central counterparty clearing and settlement service
provider for derivatives exchanges in the United States. EB and CB
are brokers organized in the United States and members of CO. FC, a
foreign corporation, instructs EB to execute the purchase of a call
option that is a specified ELI (as described in paragraph (e) of
this section). EB effects the trade for FC on the exchange and then,
as instructed by FC, transfers the option to CB to be cleared with
CO. The exchange matches FC's order with an order for a written call
option with the same terms and then sends the matched trade to CO,
which clears the trade. CB and the clearing member representing the
person who sold the call option settle the trade with CO. Upon
receiving the matched trade, the option contracts are novated and CO
becomes the counterparty to CB and the counterparty to the clearing
member representing the person who sold the call option.
(B) Analysis. Both EB and CB are broker-dealers acting on behalf
of FC for a potential section 871(m) transaction. Under paragraph
(p)(1)(iii) of this section, however, only CB is required to make
the determinations described in paragraph (p) of this section
because CB has the ongoing customer relationship with FC with
respect to the call option.
(ii) [Reserved]
* * * * *
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: November 14, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-26977 Filed 12-16-19; 8:45 am]
BILLING CODE 4830-01-P