[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Proposed Rules]
[Pages 3085-3092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00186]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-107895-24]
RIN 1545-BR20
Base Erosion and Anti-Abuse Tax Rules for Qualified Derivative
Payments on Securities Lending Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations regarding the base
erosion and anti-abuse tax imposed on certain large corporate taxpayers
with respect to certain payments made to foreign related parties. The
proposed regulations relate to how qualified derivative payments with
respect to securities lending transactions are determined and reported.
The proposed regulations would affect corporations with substantial
gross receipts that make payments to foreign related parties.
DATES: Written or electronic comments and requests for a public hearing
must be received by April 14, 2025.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (indicate IRS and REG-107895-24) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-107895-24),
Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Sheila Ramaswamy at (202) 317-6938; concerning submissions of comments,
requests for a public hearing, and access to a public hearing,
Publications and Regulations Section at (202) 317-6901 (not toll-free
numbers) or by email to [email protected] (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed additions and amendments to 26 CFR
part 1 (Income Tax Regulations) under sections 59A and 6038A of the
Internal Revenue Code (Code). The proposed additions and amendments are
issued pursuant to the express delegations of authority to the
Secretary of the Treasury (or her delegate) provided under sections
59A(i) and 6038A(b)(2). The proposed regulations are also issued under
the express delegation of authority under section 7805(a) of the Code.
Background
I. Statutory Framework
The base erosion and anti-abuse tax (``BEAT'') of section 59A
imposes on each applicable taxpayer a tax equal to the base erosion
minimum tax amount for the taxable year. For taxable years after 2018
and before 2026, the base erosion minimum tax amount for the taxable
year is the excess of ten percent of the modified taxable income of the
applicable taxpayer minus the applicable taxpayer's regular tax
liability under section 26(b) reduced (but not below zero) by certain
credits. See section 59A(b)(1) and (2). To be an applicable taxpayer,
generally the taxpayer must meet the following three requirements: (1)
the taxpayer must be a corporation which is not a regulated investment
company, a real estate investment trust, or an S corporation; (2) the
taxpayer must have average annual gross receipts for the three-taxable-
year period ending with the preceding taxable year that are at least
$500 million; and (3) the taxpayer generally must have a base erosion
percentage for the taxable year of at least three percent (or two
percent for banks and registered securities dealers). See section
59A(e).
The applicable taxpayer determines its modified taxable income by
computing its taxable income without regard to any base erosion tax
benefit with respect to any base erosion payment or the base erosion
percentage of any net operating loss deduction allowed under section
172 for the taxable year. See section 59A(c)(1). Generally, a base
erosion payment is any deductible amount paid or accrued by an
applicable taxpayer to a foreign person as defined in section
6038A(c)(3)
[[Page 3086]]
that is a related party of the applicable taxpayer. See section
59A(d)(1) and (f). The base erosion tax benefit is the deduction
allowed under Chapter 1 for the taxable year for the base erosion
payment. See section 59A(c)(2). Qualified derivative payments
(``QDPs'') are not treated as base erosion payments if they are
properly reported to the IRS. See section 59A(h)(1) and (h)(2)(B).
II. Guidance Addressing the BEAT
On December 6, 2019, the Treasury Department and the IRS published
final regulations (TD 9885) under sections 59A, 383, 1502, 6038A, and
6655 (the ``2019 final regulations'') in the Federal Register (84 FR
66968). On October 9, 2020, the Treasury Department and the IRS also
published final regulations (TD 9910) under sections 59A and 6031 in
the Federal Register (85 FR 64346). In a series of notices, the
Treasury Department and the IRS announced the intention to defer the
applicability date of Sec. 1.6038A-2(b)(7)(ix) (regarding the
reporting requirements for QDPs) until taxable years beginning on or
after January 1, 2027. See, e.g., Notice 2024-43, 2024-25 IRB 1737.
Explanation of Provisions
These proposed regulations provide guidance under section 59A that
would modify the rules set forth in the final regulations relating to
how to determine QDPs in connection with securities lending
transactions. Part A of this Explanation of Provisions summarizes the
QDP exception. Part B of this Explanation of Provisions explains the
reporting requirements for QDPs, particularly with respect to
securities lending and borrowing transactions. Part C of this
Explanation of Provisions describes the proposed amendment to the
reporting requirements for QDPs.
A. Overview of Qualified Derivative Payments
Section 59A and the final regulations thereunder provide a number
of exceptions to base erosion payments. One exception relevant to these
proposed regulations is in section 59A(h), which provides that QDPs are
not base erosion payments. Section 59A(h)(2)(A) defines a QDP as any
payment made by a taxpayer pursuant to a derivative with respect to
which the taxpayer--
(i) Recognizes gain or loss as if such derivative were sold for its
fair market value on the last business day of the taxable year (and
additional times as required under a statute or the taxpayer's method
of accounting),
(ii) Treats any gain or loss recognized as ordinary, and
(iii) Treats the character of all items of income, deduction, gain,
or loss with respect to a payment pursuant to the derivative as
ordinary.
Section 59A(h)(2)(B) provides that a payment is not a QDP unless
the taxpayer satisfies certain reporting requirements. Section 1.59A-
6(b)(2)(i) provides that a payment is not a QDP unless the taxpayer
reports the information required by Sec. 1.6038A-2(b)(7)(ix), which
includes: (a) the aggregate amount of QDPs for the taxable year and (b)
a representation that all payments satisfy the requirements of Sec.
1.59A-6(b)(2). The aggregate amount of QDPs is reported on the Form
8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross
Receipts. Under Sec. 1.59A-6(b)(2)(ii), if a taxpayer fails to satisfy
the reporting requirement with respect to a payment, that payment is
ineligible for the QDP exception to base erosion payment status, unless
another exception applies. However, until Sec. 1.59A-6(b)(2)(i) is
applicable, Sec. 1.59A-6(b)(2)(ii) will not apply to a taxpayer who
reports the aggregate amount of QDPs in good faith. Sec. 1.59A-
6(b)(2)(iv). Section 1.6038A-2(b)(7)(ix) initially applied to taxable
years beginning on or after June 7, 2021, as a result of which Sec.
1.59A-6(b)(2)(i) did not apply until taxable years beginning on or
after June 7, 2021. Sec. 1.6038A-2(g). Therefore, for taxable years
beginning before June 7, 2021, taxpayers could satisfy the reporting
requirements for QDPs by reporting the aggregate amount of QDPs in good
faith. Sec. Sec. 1.59A-6(b)(2)(iv) and 1.6038A-2(g). As described in
more detail below, the Treasury Department and the IRS have announced
the intention to defer the applicability date of Sec. 1.6038A-
2(b)(7)(ix) to taxable years beginning on or after January 1, 2027.
See, e.g., Notice 2024-43, 2024-25 IRB 1737. This means that Sec.
1.59A-6(b)(2)(i) will not apply until taxable years beginning on or
after January 1, 2027.
Once Sec. 1.6038A-2(b)(7)(ix) becomes applicable, the reporting
requirements for QDPs will no longer be satisfied by reporting the
aggregate amount of QDPs in good faith. Instead, taxpayers must
correctly report the aggregate amount of QDPs on Form 8991 to satisfy
the reporting requirements and only those payments for which the
reporting requirements have been satisfied will qualify for the QDP
exception. The Treasury Department and the IRS are considering
requiring taxpayers to report additional information on the Form 8991
or a schedule thereto to assist the IRS in verifying that taxpayers
have accurately reported the payments that qualify for the QDP
exception. Before modifications are made to the information required to
reported on Form 8991 or a schedule thereto, the IRS expects to make a
draft available with the proposed changes so that taxpayers may submit
comments.
The aggregate amount of QDPs is defined under Sec. 1.59A-
6(b)(2)(iii) and (b)(3) to incorporate Sec. 1.59A-2(e)(3)(vi) (the
``BEAT Netting Rule''). The BEAT Netting Rule provides that for any
position with respect to which the taxpayer applies a mark-to-market
method of accounting, the taxpayer must determine its gain or loss with
respect to that position for any taxable year by combining all items of
income, gain, loss, or deduction arising with respect to the position
during the taxable year, such as from a payment, accrual, or mark. The
BEAT Netting Rule was adopted to ensure that only a single deduction is
claimed with respect to each transaction that is marked to market and
to prevent distortions in deductions from being included in the
denominator of the base erosion percentage, including as a result of
the use of an accounting method that values a position more frequently
than annually. See Preamble to the 2019 final regulations, 84 FR 66971.
For example, when a taxpayer is a party to an interest rate swap with a
foreign related party, the BEAT Netting Rule ensures that the periodic
payments made by the taxpayer to the foreign related party give rise to
only a single deduction in a taxable year regardless of whether the
taxpayer marks to market the swap more frequently than annually.
B. Reporting and Determining QDPs
A comment recommended modifying the 2019 final regulation to
provide that mark-to-market gains and losses with respect to the
securities leg of a cross-border securities lending or borrowing
transaction with a related party (an ``intercompany securities lending
transaction'') are not subject to the QDP reporting requirements. The
Treasury Department and the IRS agree that mark-to-market gains and
losses with respect to intercompany securities lending transactions
should not be subject to the QDP reporting requirements; however, the
Treasury Department and the IRS do not agree with the rationale
suggested by the comment. Part B.1 of this Explanation of Provisions
describes intercompany securities lending transactions and the QDP
rules applicable to those transactions as provided by the 2019 final
regulations. Part B.2 of this Explanation of Provisions summarizes the
comment requesting changes to the QDP reporting requirements with
respect to mark-to-
[[Page 3087]]
market gains and losses on intercompany securities lending
transactions. Part B.3 of this Explanation of Provisions describes the
proposed modifications to the QDP reporting requirements and explains
why the Treasury Department and the IRS disagree with the rationale
generally offered in the comment.
1. Application of QDP Reporting to Securities Lending or Borrowing
Transactions
After the publication of the 2019 final regulations, comments
requested clarification as to how the QDP reporting requirements apply
to mark-to-market gains and losses with respect to the securities leg
of an intercompany securities lending transaction. The Treasury
Department and the IRS subsequently issued three notices announcing the
intent to defer the applicability date of the reporting rules of Sec.
1.6038A-2(b)(7)(ix) while the Treasury Department and the IRS studied
whether further guidance was appropriate regarding the interaction of
the QDP exception, the BEAT Netting Rule, and the QDP reporting
requirements with respect to intercompany securities lending
transactions. See Notice 2021-36, 2021-26 IRB 1227; Notice 2022-30,
2022-28 IRB 70. The most recent notice, Notice 2024-43, announced the
intent to defer the applicability date to taxable years beginning on or
after January 1, 2027. Notice 2024-43, 2024-25 IRB 1737.
In a typical intercompany securities borrowing transaction, a
taxpayer may borrow securities, such as stock, from a foreign related
party. The terms of the securities loan agreement will require the
taxpayer to return identical securities to the foreign related party
and to pay amounts equivalent to all interest, dividends, and other
distributions that the foreign related party would be entitled to
receive during the term of the lending transaction if it had not loaned
the securities (substitute payments). The securities borrower may also
be required to pay a separately stated borrow fee. Additionally, under
normal market terms in the United States, the securities borrower will
provide cash collateral and receive interest (the cash amount of which
may be reduced by an embedded borrow fee) on that collateral. A
taxpayer may also lend securities to a foreign related party under
similar terms. For ease of discussion, both such transactions generally
are referred to in this Explanation of Provisions as a securities
lending transaction. Under a taxpayer's method of accounting,
intercompany securities lending transactions may be marked to market on
the last business day of its taxable year.
Section 1.59A-6(d) defines a derivative, for purposes of the QDP
rules, as any contract the value of which, or any payment or transfer
with respect to which, is determined by reference to, among other
items, any share of stock of a corporation or any evidence of
indebtedness. Special rules apply to securities lending transactions,
pursuant to which a derivative does not include the cash collateral
component of the transaction. Sec. 1.59A-6(d)(2)(iii)(B). Accordingly,
only the securities leg of a securities lending transaction--that is,
the part of the contract providing for the borrowing and return of the
securities, without regard to any obligation to provide cash
collateral--may be treated as a derivative for purposes of the QDP
rules.
Like other derivatives, the amount of any QDP arising from a
securities lending transaction is excluded from the numerator and the
denominator of the base erosion percentage. Section 59A(h)(1); Sec.
1.59A-6(b)(3)(i). The aggregate amount of QDPs is determined as
provided by the BEAT Netting Rule. Sec. 1.59A-6(b)(2)(iii). For
intercompany securities lending transactions, however, the cash
collateral component of a securities lending transaction, and the
payment of interest thereon, are not taken into account for purposes of
the BEAT Netting Rule. Sec. 1.59A-6(b)(3)(ii) and (d)(2)(iii)(B).
2. Comments Requesting Modifications to the QDP Reporting Requirements
A comment on the QDP reporting requirements of the regulations
discussed the treatment of gains and losses on the securities leg of
intercompany securities lending transactions. When the taxpayer is the
securities borrower, the securities leg can result in deductions with
respect to substitute payments or other payments made to the securities
lender and, if the taxpayer marks to market the securities lending
transaction, deductions for mark-to-market losses on the obligation to
return the borrowed securities if the value of the borrowed securities
increases. A transaction in which a U.S. taxpayer lends securities to a
foreign related party also can give rise to a deduction for mark-to-
market losses on the right to the return of the loaned securities if
the value of the loaned securities decreases.
The comment agreed that substitute payments should be reported
under the QDP reporting requirements but asserted that mark-to-market
gains and losses on intercompany securities lending transactions should
not be required to be reported. The comment noted that the language in
the preamble to the 2019 final regulations stated that ``a mark-to-
market loss arising from a deemed sale or disposition of a third-party
security held by a taxpayer is not within the general definition of a
base erosion payment because the loss is not attributable to any
payment made to a foreign related party. Rather, the mark-to-market
loss is attributable to a decline in the market value of the
security.'' See Preamble to the 2019 final regulations, 84 FR 66972
(noting ``that the BEAT Netting Rule will apply primarily for purposes
of determining the amount of deductions that are taken into account in
the denominator of the base erosion percentage''). The comment viewed
this statement as applicable not only to mark-to-market losses on
third-party securities held by the taxpayer but also to mark-to-market
losses on intercompany securities lending transactions. The comment
asserted that that treatment would be correct as a legal matter,
arguing that mark-to-market losses on derivatives with a related party
are not payments to a related party. The comment supported this
conclusion on the basis of legislative history to section 475 stating
that mark-to-market gains or losses on a security that is a contract
with a related party are treated as arising from a sale to an unrelated
party.
The comment stated that mark-to-market losses should not be
captured by the QDP reporting requirement because these losses should
not be considered base erosion payments, and the QDP exception is
predicated on an amount being a base erosion payment. The comment noted
that including mark-to-market gains and losses on intercompany
securities lending transactions in the amount of QDPs reported on Form
8991 could result in a QDP number that is either over- or under-
inclusive of what the comment considered to be the correct aggregate
QDP amount, depending upon the facts. For example, a taxpayer that has
a mark-to-market gain for the year on an intercompany securities
borrowing that exceeds the amount of substitute payments it makes would
report no QDPs on the transaction by operation of the BEAT Netting Rule
even though, in the view of the comment, the actual amount of QDPs
should equal the amount of the substitute payments. The comment
requested that the regulations under section 59A be revised to provide
that mark-to-market gains and losses for the securities leg of an
intercompany
[[Page 3088]]
securities transaction are not payments to foreign related parties and
should not be included in QDP reporting.
The same stakeholder also submitted a comment requesting that the
applicability date of the reporting rules of Sec. 1.6038A-2(b)(7)(ix)
be deferred for another two years because financial institutions (a) do
not have systems that maintain records of intercompany securities
transactions from which mark-to-market gains or losses can be
determined, including whether a particular securities lending
transaction is cross-border; and (b) need certainty regarding the QDP
reporting rules before building compliance systems. The stakeholder
also commented that, while it believes mark-to-market amounts on other
derivatives also are not base erosion payments, it is appropriate to
apply the BEAT Netting Rule to the reporting of QDPs relating to those
derivatives for practical reasons, including that taxpayers have the
necessary information on their books and records to apply the BEAT
Netting Rule to the QDP determination.
3. Changes to the Rule for Determining QDPs
While the Treasury Department and the IRS agree with the
recommendation suggested by the comment, the Treasury Department and
the IRS do not agree with the commenter's more general assertion that
mark-to-market payments on derivatives with a foreign related party are
not, or should not be, treated as base erosion payments. Payments on
derivatives made to a foreign related party are base erosion payments,
unless they qualify as QDPs. Sections 59A(d)(1) and 59A(h). They must
be taken into account for BEAT purposes either when paid or when
otherwise taken into account for U.S. Federal income tax purposes. If
the commenter's position were correct, payments on derivatives to a
foreign related party would be required to be taken into account for
BEAT purposes when paid or accrued, which would deviate from when such
payments are taken into account for other Federal income tax purposes
for taxpayers that mark those payments to market.
For derivatives, the effect of the BEAT Netting Rule generally is
to aggregate all items of income, gain, loss, or deduction to ensure
that a single deduction is claimed with respect to each transaction
that is marked to market. Because a derivative must be marked-to-market
for tax purposes in order for a payment on the derivative to qualify as
a QDP, it is appropriate to determine the aggregate amount of QDPs by
reference to the BEAT Netting Rule. Section 59A(h)(2)(A)(i).
The QDP exception eliminates most mark-to-market gain or loss from
derivative transactions from being characterized as base erosion
payments. In those situations for which the QDP exception does not
apply, mark-to-market losses on derivative contracts with foreign
related parties generally are properly treated as base erosion
payments. However, the Treasury Department and the IRS agree that it is
appropriate to propose a special rule for mark-to-market losses (and
gains) on intercompany securities lending transactions. Securities
lending transactions have different characteristics from other
derivative transactions such that it is appropriate to provide for a
different treatment under the QDP rules. Unlike other derivative
contracts such as forward contracts, options or notional principal
contracts, securities lending transactions require the lender to
transfer the securities to the borrower at the inception of the
transaction and the borrower is required to return those securities (or
identical securities) to the lender when the securities lending
transaction is terminated. While other derivative transactions may
provide either for physical delivery of a security or for cash
settlement, those transactions typically function as a risk-shifting
mechanism, whereas securities lending transactions are generally
entered into to temporarily acquire or lend the securities.
Additionally, a loss recognized on the sale or transfer of property,
including securities, that results in a deduction is generally not a
base erosion payment. Sec. 1.59A-3(b)(2)(ix). As stated in the
preamble to the 2019 final regulations, a mark-to-market loss from a
deemed disposition of a third-party security is not a base erosion
payment because the loss is not attributable to any payment made to a
foreign related party; that loss is instead attributable to a decline
in the market value of the security. 84 FR 66968, 66972. If the
taxpayer sold the stock or debt to a foreign related party, loss on
sale of the stock or debt generally would not be a deduction that would
cause the payment to be treated as a base erosion payment under Sec.
1.59A-3(b)(2)(ix).
If a taxpayer borrows securities from a foreign related party, and
the security rises in value during the term of the intercompany
securities lending transaction, the taxpayer has an economic loss on
its contractual obligation to return the securities. In some cases (for
example, if the intercompany securities lending transaction is part of
a short sale transaction), the taxpayer also might have a tax loss when
it returns the security to the foreign related party. Similarly, if a
taxpayer lends securities to a foreign related party and the security
falls in value, the taxpayer would have an economic loss on its
contractual right to the return of the security. If the taxpayer sold
the returned security, the taxpayer would recognize that loss for tax
purposes. Marking to market the securities lending transaction in these
circumstances accelerates the recognition of the tax loss attributable
to the transaction.
For example, assume that a taxpayer that applies mark-to-market
accounting for U.S. Federal income tax purposes borrows stock from a
foreign related party pursuant to an intercompany securities lending
transaction on September 1, when the value of the stock is $100x. The
taxpayer sells the stock for $100x on September 1. The intercompany
securities lending transaction is outstanding on December 31, when the
value of the stock is $106x, and a $1x dividend is paid on the stock by
the issuer after September 1 and prior to December 31. The taxpayer
will make a $1x substitute dividend payment to the foreign related
party. Under the BEAT Netting Rule, the taxpayer will have a $7x loss
on this transaction ($7x) = (($100x-$106x)-$1x). The substitute
dividend payment is a $1x base erosion payment on a stand-alone basis
that is eligible for the QDP exception assuming all the requirements of
section 59A and the regulations are met. The $6x mark-to-market loss on
the securities leg of intercompany securities lending transaction is a
loss on a derivative that requires the delivery of the stock at the
termination of the transaction, and arises because the increase in
value of the stock makes it more expensive for the taxpayer to satisfy
its obligation to deliver the stock to the foreign related party. If,
hypothetically, the intercompany securities lending transaction were
not marked to market, and the taxpayer realized a $6x loss on the
delivery of the stock to the foreign related party at the termination
of the transaction, that $6x loss would not be a base erosion payment.
Alternatively, if the value of the stock were $94x on December 31,
the taxpayer would have a gain of $5x on the transaction $5x = (($100x-
$94x)-$1x)) under the BEAT Netting Rule. The taxpayer would have a $6x
mark-to-market gain on the securities leg of the intercompany
securities lending transaction, which would arise because the decrease
in value of the stock makes it less expensive for the taxpayer to
satisfy its obligation to deliver the stock
[[Page 3089]]
to the foreign related party. If, hypothetically, the intercompany
securities lending transactions were not marked to market, and the
taxpayer realized a $6x gain on the delivery of the stock to the
foreign related party at the termination of the transaction, that $6x
gain would not be a base erosion payment. The substitute dividend
payment is a $1x base erosion payment that is eligible for the QDP
exception assuming all the requirements of section 59A and the
regulations are met.
Accordingly, the Treasury Department and the IRS are of the view
that the BEAT regulations should be revised to provide that mark-to-
market gains and losses on the securities leg of a securities lending
transactions with a foreign related party are not treated as a QDP.
Consequently, only substitute payments and other payments made to a
foreign related party under an intercompany securities lending
transaction that are not payments of cash collateral or interest
thereon would be QDPs.
The proposed regulations would provide that mark-to-market gains
and losses on the securities leg of an intercompany securities lending
transaction are not treated as QDPs and therefore are not netted with
QDPs nor required to be included in QDP reporting. Proposed Sec.
1.59A-6(b)(3)(iii)(A). Mark-to-market gains and losses on other
derivative transactions (including other derivative transactions that
provide for physical delivery) must be included in QDP reporting. The
proposed regulations would not alter the rule that substitute payments
and other payments to foreign related parties must be reported under
Sec. Sec. 1.59A-6(b)(2)(i) and 1.6038A-2(b)(7)(ix). Those amounts must
be taken into account on a consistent basis when determining the amount
of the taxpayer's base erosion payment, for example on a cash, accrual
or mark-to-market basis, in a manner that does not omit or duplicate
any payment. Proposed Sec. 1.59A-3(b)(2)(iv)(B). Furthermore, the
proposed rule achieves the compliance objectives of the QDP reporting
requirement without imposing additional burden on taxpayers to create
new systems to track mark-to-market gains and loss with respect to
intercompany securities lending transactions.
Proposed Sec. 1.59A-3(b)(2)(iv) would provide a conforming
amendment to the definition of a base erosion payment in the context of
the securities leg of a securities lending transaction to provide that
the BEAT Netting Rule under Sec. 1.59A-2(e)(3)(vi) does not apply to
net QDPs with mark-to-market gains and losses on securities lending
transactions. Consequently, only amounts paid to a foreign related
party under a securities lending transaction that do not qualify as a
QDP will be taken into account for purposes of the numerator of the
base erosion perentage, such as in the case where a taxpayer lends
securities and pays or accrues interest to a foreign related party with
respect to the cash leg of a securities lending transaction. The BEAT
Netting Rule continues to apply to determine the deductions
attributable to securities lending transactions for purposes of the
denominator of the base erosion percentage. Sec. 1.59A-2(e)(3)(vi).
C. Rule for Determining the Recipient of a Substitute Payment
Comments suggested that it may be challenging for a financial
institution to determine whether it has borrowed a security from a
foreign related party or an unrelated third-party customer. According
to the comments, when a U.S. broker-dealer enters into securities
lending transactions with third-party customers, the broker-dealer may
borrow the securities required to execute the trade from a pool of
available securities owned by other customers, some of which are U.S.
customers, and some of which are foreign customers who have accounts
with a foreign affiliate of the U.S. broker-dealer. If the borrowed
security is owned by a foreign customer, the comments indicated that
the U.S. broker-dealer may be treated as having entered into a
securities borrowing transaction with its foreign affiliate who has the
relationship with the foreign customer, who in turn borrowed the
security from its foreign customer. However, the U.S. broker-dealer may
not determine from which specific customer it has borrowed a security
or whether it has entered into an intercompany securities borrowing
transaction with its foreign affiliate. The U.S. broker-dealer may
determine its counterparty only when a substitute dividend is required
to be paid (for example, on the dividend record date), and only for
purposes of determining the recipient of the substitute payment for
U.S. Federal income or withholding tax purposes.
To address this concern, the proposed regulations would provide
that a taxpayer may report the amount actually paid to foreign related
parties for QDP reporting purposes if the taxpayer can associate the
substitute payment on securities borrowed and other payments made
pursuant to a securities loan (such as borrow fees) with a specific
recipient. The ``lottery'' method of Sec. 1.6045-2(f)(2)(ii) is not
applicable for this purpose. In response to the challenges that may
exist in determining whether the recipient of a substitute payment and
other payments is a foreign related party of the taxpayer, proposed
Sec. 1.59A-6(b)(3)(iv) would provide an alternative rule that treats
the substitute payments that a taxpayer pays with respect to borrowed
securities as having been paid first to foreign related parties (but
not in excess of the amount of the payments received by the foreign
related parties).
Proposed Applicability Date
Proposed Sec. Sec. 1.59A-3(b)(2)(iv) (application of BEAT netting
rule to securities lending transactions) and 1.59A-6(b)(3)(iii) and
(iv) (QDP rules relating to securities lending transactions) would
apply to taxable years beginning on or after the date that final
regulations are filed with the Federal Register. Proposed Sec.
1.6038A-2(b)(7)(ix) (rules relating to QDP reporting) would apply to
payments made in taxable years beginning on or after January 1, 2027.
Special Analysis
I. Regulatory Planning and Review--Economic Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
These proposed regulations do not impose any additional information
collection requirements in the form of reporting, recordkeeping
requirements, or third-party disclosure statements. However, a taxpayer
will continue to be required to report on Form 8991, Tax on Base
Erosion Payments of Taxpayers with Substantial Gross Receipts, the
aggregate amount of QDPs.
For purposes of the Paperwork Reduction Act, the reporting burden
associated with the collections of information with respect to section
59A will be reflected in the Paperwork Reduction Act Submission
associated with Form 8991 (OMB control number 1545-0123). The overall
burden estimates associated with the OMB control number 1545-0123 is an
aggregate number related to the entire package of forms associated with
the applicable OMB control number and will include, but not isolate,
the estimated burden of the tax forms that
[[Page 3090]]
will be created or revised as a result of these proposed regulations.
These numbers are therefore not specific to any burden imposed by these
proposed regulations. The burdens have been reported for other income
tax regulations that rely on the same information collections and the
Treasury Department and the IRS urge readers to recognize that these
numbers are duplicates and to guard against overcounting the burdens
imposed by tax provisions before Tax Cuts and Jobs Act, Public Law 115-
97 (2017) (the ``Act''). No burden estimates specific to the forms
affected by the proposed regulations are currently available. For the
OMB control number discussed in this paragraph, the Treasury Department
and the IRS estimate PRA burdens on a taxpayer-type-basis rather than a
provision-specific basis. Those estimates capture both changes made by
the Act and those that arise out of discretionary authority exercised
in the proposed regulations (when final) and other regulations that
affect the compliance burden for that form.
The Treasury Department and the IRS request comments on all aspects
of information collection burdens related to the proposed regulations,
including estimates for how much time it would take to comply with the
paperwork burdens described above for each relevant form and ways for
the IRS to minimize paperwork burden. In addition, when available,
drafts of IRS forms are posted at https://www.irs.govdraft-tax-forms,
and comments may be submitted at https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-publications. Final IRS forms are available at
https://www.irs.gov/forms-instructions. Forms will not be finalized
until after they have been approved by OMB under the PRA.
III. Regulatory Flexibility Act
Generally, the proposed regulations affect only aggregate groups of
corporations with average annual gross receipts of at least $500
million and that make payments to foreign related parties. Generally,
only large businesses have both substantial gross receipts and make
payments to foreign related parties. In accordance with the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.) the Secretary hereby certifies
that these proposed regulations will not have a significant economic
impact on a substantial number of small entities.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, these proposed regulations
will be submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small business.
V. 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. The proposed regulations do 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.
VI. 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. The proposed regulations do not have
federalism implications and do not impose substantial direct compliance
costs on State and local governments or preempt State law within the
meaning of the Executive order.
Comments and Request for Public Hearing
Before these proposed amendments to the final regulations are
adopted as final regulations, consideration will be given to comments
that are submitted timely to the IRS as prescribed in this preamble
under the ADDRESSES heading. Any comments submitted will be made
available at https://www.regulations.gov or upon request. A public
hearing will be scheduled if requested in writing by any person who
timely submits written comments. Requests for a public hearing are also
encouraged to be made electronically. If a public hearing is scheduled,
notice of the date and time for the public hearing will be published in
the Federal Register.
Drafting Information
The principal authors of the proposed regulations are D. Peter
Merkel and Sheila Ramaswamy of the Office of Associate Chief Counsel
(International). However, other personnel from the Treasury Department
and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and IRS propose to amend 26
CFR part 1 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 * * *
* * * * *
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Par. 2. Section 1.59A-2 is amended by removing the language ``Sec.
1.59A-3(b)(2)(iii)'' from the last sentence of paragraph (e)(3)(vi) and
adding the language ``Sec. 1.59A-3(b)(2)(iv)'' in its place.
0
Par. 3. Section 1.59A-3 is amended by revising paragraph (b)(2)(iv) to
read as follows:
Sec. 1.59A-3 Base erosion payments and base erosion tax benefits.
* * * * *
(b) * * *
(2) * * *
(iv) Amounts paid or accrued with respect to mark-to-market
position--(A) In general. For any transaction with respect to which the
taxpayer applies the mark-to-market method of accounting for U.S.
Federal income tax purposes, the rules set forth in Sec. 1.59A-
2(e)(3)(vi) apply to determine the amount of the base erosion payment.
(B) Application of BEAT netting rule to securities lending
transactions. Notwithstanding paragraph (b)(2)(iv)(A) of this section,
mark-to-market gains and losses from a securities lending transaction
described in Sec. Sec. 1.861-2(a)(7) and 1.861-3(a)(6) are not taken
into account when applying Sec. 1.59A-2(e)(3)(vi) for purposes of
determining the amount of a taxpayer's base erosion payment. When
determining the amount of the taxpayer's base erosion payment,
substitute payments and other amounts that relate to the securities
lending transaction must be taken into account on a consistent basis
that does not result in the duplication or omission of these amounts.
For purposes of the immediately preceding sentence, the term ``other
amounts that relate to the securities lending transaction'' does not
include delivery of the securities to, or receipt of securities from,
the lender. This paragraph (b)(2)(iv)(B) applies to a taxpayer that is
either the borrower or lender with respect to the securities lending
transaction.
* * * * *
[[Page 3091]]
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Par. 4. Section 1.59A-6 is amended by adding paragraphs (b)(3)(iii) and
(iv) to read as follows:
Sec. 1.59A-6 Qualified derivative payment.
* * * * *
(b) * * *
(3) * * *
(iii) Special rule for mark-to-market gains and losses on the
securities leg of a securities lending transaction--(A) In general. The
amount of any qualified derivative payment with respect to the
securities leg component of a securities lending transaction as defined
in Sec. Sec. 1.861-2(a)(7) and 1.861-3(a)(6) that is excluded from the
denominator of the base erosion percentage is determined under Sec.
1.59A-3(b)(2)(iv)(B). Gains and losses on a security leg of a
securities lending transaction are not included in determining the
amount of the qualified derivative payment with respect to that
security. The gain or loss with respect to the security leg for
purposes of determining the amount of the qualified derivative payment
is determined by combining only other items of income, gain, loss, or
deduction during the taxable year, such as substitute payments and
borrow fees, that arise from a payment or accrual to a foreign related
party.
(B) The following examples illustrate the application of this
paragraph (b)(3)(iii).
(1) Example 1: Securities loan--(i) Facts. Foreign Parent (FP) is a
foreign corporation that owns all of the stock of domestic corporation
(DC). FP is a foreign related party of DC under Sec. 1.59A-1(b)(12).
DC is a registered securities dealer. On September 1 of year 1, DC
enters into a securities lending transaction with FP in which it
borrows stock from FP. DC provides cash collateral for the loan and
receives interest on that collateral from FP. On September 1, year 1,
the stock has a value of $100x. On November 1, year 1, a dividend of
$1x is paid by the issuer on the stock. DC pays a substitute dividend
of $1x to FP on November 1, year 1 under the terms of the security
loan. There are no other payments made or received in year 1. On
December 31, year 1, the stock has a value of $106x. DC is required to
mark-to-market the securities leg of securities lending transaction for
U.S. Federal income tax purposes. DC is a calendar year taxpayer.
(ii) Analysis. DC has a deduction of $1x as a result of the
substitute dividend it pays to FP. Assuming that the securities lending
transaction otherwise meets the requirements of this section (including
reporting the information required by Sec. 1.6038A-2(b)(7)(ix)), the
amount of DC's qualified derivative payment with respect to the
securities lending transaction is $1x. Payments with respect to the
cash collateral are not treated as part of the securities lending
transaction. See paragraph (d)(2)(iii)(B) of this section. With respect
to the securities leg of the securities lending transaction, DC has a
mark-to-market loss of ($6x). Under paragraph (b)(3)(iii)(A) of this
section, the amount of this mark-to-market loss is not included when
determining the amount of the qualified derivative payment. Under Sec.
1.59A-3(b)(2)(iv)(B), DC's ($6x) mark-to-market loss on the securities
leg of the securities lending transaction also is not taken into
account in determining the base erosion tax benefit amount for purposes
of the numerator of the base erosion percentage. The ($6x) loss is
taken into account in the denominator of the base erosion percentage,
while the $1x substitute dividend payment is not taken into account for
that purpose because it is a qualified derivative payment. See Sec.
1.59A-2(e)(3)(vi) and (e)(3)(ii)(C).
(2) Example 2: Securities loan. The facts are the same as in
paragraph (b)(3)(iii)(B)(1) of this section (Example 1) except that on
December 31, year 1, the stock has a value of $94x. With respect to the
securities leg of the securities lending transaction, DC has a mark-to-
market gain of $6x. Under paragraph (b)(3)(iii)(A) of this section, the
amount of this mark-to-market gain is not included when determining the
amount of the qualified derivative payment. DC has a deduction of $1x
as a result of the substitute dividend payment it makes to FP. Assuming
that the securities lending transaction otherwise meets the
requirements of this section (including reporting the information
required by Sec. 1.6038A-2(b)(7)(ix)), the amount of DC's qualified
derivative payment with respect to the securities lending transaction
is $1x. Neither the $6x gain nor the $1x substitute dividend payment,
which is a qualified derivative payment, are taken into account in the
denominator of the base erosion percentage.
(iv) Rule for determining the amount of substitute payments and
other payments paid to foreign related parties with respect to a
securities lending transaction--(A) In general. When a taxpayer makes a
substitute payment or other payment with respect to a securities
lending transaction, the taxpayer must determine whether the substitute
payment or other payment paid with respect to the securities lending
transaction is paid to a foreign related party. The amount of
substitute payments or other payments paid by the taxpayer to a foreign
related party is determined under paragraph (b)(3)(iv)(B) or (C) of
this section.
(B) Specific identification method. The taxpayer may determine the
amount of substitute payments or other payments that it has paid to a
foreign related party by using the amount actually paid by the taxpayer
to the foreign related party if the taxpayer can specifically identify
each recipient of the substitute payment or other payment.
(C) Alternative method. If the taxpayer has paid substitute
payments or other payments but cannot determine the recipients of those
payments, the taxpayer must use the methodology provided in this
paragraph (b)(3)(iv)(C) to determine whether the recipient is a foreign
related party.
(1) Step 1: Determining the total amount of substitute payments and
other payments received by foreign related parties. The taxpayer must
determine the total amount of substitute payments and other payments
described in paragraph (b)(3)(iii) of this section received by all
foreign related parties of the taxpayer during the taxable year.
(2) Step 2: Determining the total amount of substitute payments and
other payments paid by taxpayer. The taxpayer must determine the total
amount of substitute payments and other payments described in paragraph
(b)(3)(iii) of this section paid by the taxpayer during the taxable
year.
(3) Step 3: Determining the amount of substitute payments and other
payments paid by taxpayer to foreign related parties. The amount of
substitute payments and other payments described in paragraph
(b)(3)(iii) of this section paid by the taxpayer is treated as being
paid first to foreign related parties of the taxpayer up to the total
amount of substitute payments and other payments received by foreign
related parties. Any amount of substitute payments and other payments
paid by the taxpayer that exceeds the amount of substitute payments and
other payments received by foreign related parties is treated as paid
to unrelated parties for purposes of this paragraph (b)(3)(iv)(C)(3).
* * * * *
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Par. 5. Section 1.59A-10 is amended by revising paragraph (a) and
adding paragraph (c) to read as follows:
Sec. 1.59A-10 Applicability date.
(a) General applicability date. Sections 1.59A-1 through 1.59A-9,
other than the provisions described in the first sentence of paragraph
(b) of this section or in paragraph (c) of this section, apply to
taxable years ending on or after December 17, 2018. However,
[[Page 3092]]
taxpayers may apply these regulations in their entirety for taxable
years beginning after December 31, 2017, and ending before December 17,
2018. In lieu of applying the regulations referred to in the first
sentence of this paragraph (a), taxpayers may apply the provisions
matching Sec. Sec. 1.59A-1 through 1.59A-9 from the Internal Revenue
Bulletin (IRB) 2019-02 (https://www.irs.gov/irb/2019-02_IRB) in their
entirety for all taxable years beginning after December 31, 2017, and
ending on or before December 6, 2019.
* * * * *
(c) Additional applicability dates. Sections 1.59A-3(b)(2)(iv) and
1.59A-6(b)(3) (iii) through (iv) apply to taxable years beginning on or
after January 10, 2025.
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Par. 6. Section 1.6038A-2 is amended by revising the third sentence of
paragraph (g) to read as follows:
Sec. 1.6038A-2 Requirement of return.
* * * * *
(g) * * * Paragraph (b)(7)(ix) of this section applies to payments
made in taxable years beginning on or after January 1, 2027. * * *
Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2025-00186 Filed 1-10-25; 4:15 pm]
BILLING CODE 4830-01-P