IRS Aims to Finish Section 871(m) Rules On Dividend Equivalents by End of 2014
Oct. 7 — The IRS is working to finalize rules aimed at curbing the ability of foreign investors to skirt the withholding tax on dividends under tax code Section 871(m) by the end of 2014, an Internal Revenue Service official said.
The IRS has “a team of people” dedicated to the goal, Tara Ferris, senior counsel in the agency’s Office of Chief Counsel, said at an Oct. 7 symposium on the Foreign Account Tax Compliance Act sponsored by the Securities Industry and Financial Markets Association.
“We know that people need time to implement their systems,” she said. “We’re trying to give them as much time as possible.”
The rules (REG-120282-10) were proposed in December (234 DTR GG-1, 12/5/13)(234 DTR GG-1, 12/5/13).
Enacted in 2010, Section 871(m) is intended to shut down deals that use instruments such as securities loans, sale-repurchase transactions, specified notional principal contracts (NPCs) or specified equity-linked instruments (ELIs) to avoid U.S. requirements that dividends paid from sources within the U.S. be subject to a 30 percent withholding tax.
Industry Timing Concerns
Panel moderator Michael I. Stein, senior vice president for global tax services at Northern Trust Corp. in Chicago, told Bloomberg BNA after the session that even if the rules are finalized by the end of the year, there still may be timing concerns for many taxpayers.
The proposed rules carry an effective date of Jan. 1, 2016, and the systems changes needed to implement the rules could take up to 18 months, Stein said. It is a question of not only changes to processes, but changes to software, he said.
Stein said the issue has implications for possible withholding under FATCA. That law requires foreign financial institutions to report U.S.-owned accounts to the IRS or face, in some cases, a 30 percent withholding tax on their U.S.-source income.
Under the Section 871(m) sourcing rules, if a taxpayer has a notional principal contract as part of a payment flow for a U.S.-source dividend, that could be subject to FATCA withholding if the recipient isn’t FATCA-compliant, Stein said.