UK opposes planned US dividend tax for offshore investors
The US government is facing calls to delay the introduction of a new tax on foreign investors in US equity-linked derivative transactions, after the G5 group of countries signalled their opposition and the US Securities Industry and Financial Markets Association (SIFMA) indicated its members would not be ready for the planned 1 January 2017 implementation
The Internal Revenue Service’s (IRS’s) new Section 871(m) of the US tax code is designed as a withholding tax and treats ‘dividend-equivalent payments’ on US equity derivatives as US-source dividend income.
The US tax authorities argue that foreign investors are enjoying the same economic benefits as if they were holding the actual US equities and receiving cash dividends. The most likely targets for the tax are foreign hedge fund managers and retail investors. US banks and broker-dealers would be responsible for calculating the withholding tax and making the deductions from payments.
In the case of cash or equivalent payments on made on US equity-linked derivative transaction after 1 January 2017, foreign investors will be subject to a maximum withholding tax of 30%.
However, in November the G5 group of the UK, Germany, Spain, France, and Italy wrote to the US Treasury stating their position that dividend equivalent payments, as defined by Code Section 871(m)2 and the underlying regulations, do not qualify as dividends under the applicable US tax treaty when paid by non-US entities.
The G5 group argues that such payments fall under the ‘other income’ article of the relevant treaty, and in the case of the UK this would very significantly reduce or remove the withholding tax paid by fund management firms domiciled in the UK.
SIFMA, which represents hundreds of securities firms, banks and asset managers, had already alerted the US Treasury to concerns from its members about the lack of IRS guidance on how the tax will operate.
It has now sent a second letter in which it says that beneficial owners of dividend equivalent payments in the UK and other countries, hearing of the G5 governments’ position, will argue that they should not be subject to US withholding tax under Section 871(m).
SIFMA says there is ‘significant concern’ that qualified derivative dealers will become liable for any of the withholding tax that G5 residents refuse to pay. It argues that until the US and the G5 resolve which treaty regulation applies in this case, or the new measure is re-drawn, implementation should be delayed for at least one year.
‘It is imperative that the industry have time to renegotiate documentation and rebuild withholding tax systems to take into account any such new rules. For example, if the US decides to apply only a single layer of withholding tax on payments made from the US, US withholding agents would need time to rebuild systems to effect withholding and reporting on non-US dealers, including affiliates.
‘In conjunction with the rebuilding, foreign dealers will need time to renegotiate their documentation to make clear they will not withhold on clients but will pass on only the net amount of dividends they receive directly or indirectly on hedging transactions to their clients. Such actions could not be completed by 1 January, 2017,’ SIFMA wrote.
