On May 8, 2015, the Internal Revenue Service (“IRS”) and the Department of the Treasury (“Treasury”) issued proposed and temporary regulations (the “Regulations”) relating to the treatment of notional principal contracts (“NPCs”) with nonperiodic payments.^[1] The Regulations are designed to resolve questions that have arisen with the enactment of Dodd-Frank. The Regulations are a fundamental change in the treatment of NPCs. The rules apply to NPCs entered into on or after November 4, 2015, but taxpayers may apply the rules to NPCs entered into before November 4, 2015. The Regulations package also includes regulations under section 956 of the Internal Revenue Code of 1986 (the “Code”).

While the Regulations are designed to resolve issues, many unanswered questions remain. READ MORE →

On May 20, 2014, the New York State Bar Association Tax Session issued a Report on Proposed Regulations under Section 871(m) of the Internal Revenue Code of 1986.  The report addresses proposed regulations that the Internal Revenue Service issued in December 2013 concerning withholding on equity-linked financial instruments that reference U.S. stocks.^[1]  The report, available here, was co-authored by Orrick partner Peter J. Connors.

^[1] A past issue of Derivatives in Review (available here) also reported on those proposed regulations.

Since the first published proposal in 2011, we have tracked initiatives and developments regarding a possible European financial tax that would apply to derivatives, among other types of financial transactions.^[1]  Despite the publication of a European Commission (“EC”) directive in February 2013 that would apply to eleven participating member-states, the scope and implementation of a financial transaction tax continues to be fiercely debated.  Among other things, the proposed directive would, after an initial “transitional” period, impose a tax rate of at least 0.01% of the notional amount on derivative transactions.

On November 21, 2013, PricewaterhouseCoopers LLC released a study—commissioned by 27 trade groups in the financial industry—that, based on existing literature surrounding a financial transaction tax, questioned the benefits of such a tax and highlighted its potential to negatively impact financial markets, as well as economic growth.^[2]  With respect to the derivatives market, the study noted that the EC’s impact assessment estimated that a financial transaction tax would reduce trading volumes by between 70% and 90%.^[3]  The study further noted that certain commentators have predicted that the tax could have a substantial (or, for some product types, profound) impact on the bid-offer spreads of derivative transactions.^[4]

Most recently, it has been reported that the participating member-states have been discussing the implementation of a more narrow and modest tax, including one with more robust exemptions.  However, a revised proposal has not yet been published.

^[1] See “Financial Transaction Tax Developments” posted on August 26, 2013; “Financial Transaction Tax Developments” posted on June 11, 2013; “Financial Transaction Tax” posted on February 15, 2012; and “Europe Proposes Financial Transaction Tax” posted on October 15, 2011.

^[2] PricewaterhouseCoopers LLC, Financial transaction tax: the impacts and arguments, November 21, 2013 (available at: https://www.pwc.fr/fr/assets/files/pdf/2013/11/pwc_ftt_litterature_review.pdf).

^[3] Id. at 24.

^[4] Id.

On December 5, 2013, the Internal Revenue Service issued final regulations and proposed regulations under section 871(m), which address withholding on certain equity-linked notional principal contracts and other financial instruments.  These regulations are targeted at derivatives referencing U.S. stocks in which non-U.S. persons receive a “dividend equivalent” while arguably avoiding U.S. withholding tax but will impact many common corporate transactions, including merger and acquisition transactions and equity based compensation arrangements.  Click here to read more about this recent development.

The governments of Europe continue to consider the application of a financial transaction tax (“FTT”) on bond, equity and derivatives transactions.^[1]  On February 14, 2013, the European Commission (“EC”) published a directive (the “FTT Directive”) that would apply to eleven member-states through an “enhanced cooperation procedure” approved by the European Parliament on December 12, 2012.^[2]  Most recently, on July 3, 2013, the European Parliament, which has a consultative role in the process,^[3] approved the FTT Directive, subject to several proposed amendments. READ MORE →

On August 2, the IRS issued temporary regulations relating to accrued gain or loss associated with a position that becomes part of section 1092(b)(2) identified mixed straddle.  The temporary regulations segregate pre-identification gain and loss on a mixed straddle position from post-identification gain and loss, preventing taxpayers from using identified mixed straddles as an alternative to selling assets to accelerate gain or loss. For additional information on this development, click here to read the Orrick Alert.

In recent years, the governments of Europe have repeatedly considered and debated the application of a financial transaction tax (“FTT”) on bond, equity and derivatives transactions for purposes of generating revenue and discouraging excessive risk-taking.^[1]  Most recently, the European Commission (“EC”) published an FTT directive on February 14, 2013.^[2] This directive follows the FTT directive initially published by the EC on September 28, 2011, which failed to attract the necessary unanimous support of the twenty-seven European Union (“EU”) member-states. Eleven EU member-states subsequently applied, through an “enhanced cooperation procedure” approved by the European Parliament on December 12, 2012, to impose an FTT themselves, which resulted in the revised directive.^[3] READ MORE →

On August 31^st, 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.

The application of a financial transaction tax on bond, equity and derivatives transactions in Europe continues to be intensely debated. As noted in a previous alert,^[1] several months ago the European Commission proposed the introduction of a plan to tax derivatives and other financial transactions each time at least one of the parties to a transaction is located within the 27 member-state European Union (the “EU”). Equity and bond transactions would be assessed a 10 basis point tax and derivatives transactions would be assessed a 1 basis point tax. The tax under this plan would become effective in 2014 and was expected to raise approximately €57 billion per year. READ MORE →