On August 31st, the U.S. Internal Revenue Service amended Temporary Treasury Regulations under Section 871(m) of the U.S. Internal Revenue Code of 1986, as amended, that were originally issued on January 23, 2012, postponing the effective date for the new regulatory scheme contemplated by Proposed Treasury Regulations also issued on January 23, 2012. The Temporary Regulations now extend the definition of “specified notional principal contract” that is set forth in Section 871(m)(3)(A) to payments made before January 1, 2014.
Commentators on the Proposed Regulations have noted that they pose many challenges for the withholding tax system and expand the contexts in which a non-U.S. person may be required to act as a withholding agent. It was further noted that Section 871(m) is principally aimed at arrangements that provide synthetic exposure to the full economic risk and reward of an underlying security (so-called total return or delta one transactions). However, the Proposed Treasury Regulations could apply more broadly to other arrangements, including options and other instruments that are not economic substitutes for actual ownership. In this regard, the amendment to the Temporary Treasury Regulations acknowledges that U.S. Department of the Treasury and the Internal Revenue Service received numerous comments that the proposed effective date of January 1, 2013, would not allow taxpayers enough time to build and test the systems required to implement the withholding rules for specified notional principal contracts. In response to these comments, the amended Temporary Regulations effectively delay the applicability of the definition of “specified notional principal contract” that is set forth in the Proposed Treasury Regulations until January 1, 2014. For additional information on this development, please click here.