Two developments may be converging in a way that will result in delayed effective dates for US final dividend equivalent regulations. And, while there has not been any explicit announcements by the US Internal Revenue Service (IRS) regarding when withholding on dividend equivalents will be expanded to include financial instruments beyond specified notional principal contracts (swaps), what financial instruments will be affected or the applicable grandfather rules, certain statements and proposals that have been made recently could impact forthcoming rules.

The US Congress Joint Committee on Taxation (the Joint Committee) is the primary legislative body charged with the actual drafting of most US tax legislation. The attorneys working on the Joint Committee also have considerable sway on many technical rules that are includes in tax legislation. It has been reported that Viva Hammer, Esq., legislative counsel to the Joint Committee on Taxation, stated on Friday, January 30, 2015, that the operation of Section 871(m), the Internal Revenue Code provision that would require withholding on dividend equivalents paid or accrued on various financial products is “unpopular.” She further remarked that Congress may consider replacing Section 871(m) with a rule that would treat all swap payments as sourced to the residence of the payer to replace the current rule that sources swap payments to the residence of the payee. Such a rule would treat affected swap payments as US-source periodic (FDAP) income that would be subject to a 30 percent withholding tax (or lesser rate under certain income tax treaties). There was recognition that any solution should not drive business to competitive financial centers.

The International Swaps and Derivatives Association, Inc. (ISDA) is making two proposals to the IRS. The first proposal is for payments on equity swaps other than specified swaps to be subject to withholding only if the swap is opened on or after January 1, 2016. This would change the current proposal, which would subject dividend equivalent payments to withholding if made on or after January 1, 2016, regardless of when the swap was opened. The second proposal would subject payments on equity-linked instruments to withholding if the equity-linked instrument was issued on or after January 1, 2017. The current proposal is to subject dividend equivalent payments on equity-linked instruments if the instrument is issued on or after the date that is 90 days after the publication of final regulations.

In the absence of the statements by Viva Hammer, we would not be writing to you about requests by an industry group for a delayed effective date on dividend equivalent withholding. The IRS, however, may be much more sympathetic to the industry request if it perceives that there is genuine Congressional interest in changing these rules.