FIA seeks additional time for implementation of IRS 871(m) and clarity on operational challenges

22 November 2016

On Nov. 21, FIA submitted a letter to the U.S. Internal Revenue Service asking for a delay in the implementation of its Section 871(m) regulations, which impose tax withholding requirements on equity derivatives traded by non-U.S. persons.

These requirements are aimed at preventing non-U.S. persons from avoiding the withholding tax on dividends paid by U.S. companies. The withholding tax will apply to transactions in equity derivatives and will be based on the value of the dividends paid on the underlying equities.

In its letter, FIA noted that the IRS has decided to grant a one-year delay from January 2017 to January 2018 for certain “delta one” products covered by the new requirements and urged the IRS to provide a similar delay for exchange-traded futures and options on futures. FIA emphasized that futures commission merchants face significant operational challenges in developing procedures and systems to comply with the regulations, which will require tracking the products that are subject to the new withholding tax as well as collecting the withholding tax and reporting the tax to the U.S. government. FIA pointed out that FCMs rely on exchanges to provide information needed for compliance, and not all exchanges are prepared to provide that information. In addition, third party vendors do not appear ready to provide the necessary systems to FCMs by January.

FIA also commented that the IRS needs to clarify whether non-U.S. clearing organizations will be deemed withholding agents, given that they become a counterparty to a transaction once it has been cleared. FIA said such a result would impose a significant tax burden on non-U.S. customers of a U.S. FCM, and urged the IRS to relieve non-U.S. clearing organizations of any withholding obligations.

FIA has been working with members to assess the impact of these new regulations on their equity derivatives activities. FIA also has reached out to exchanges, clearinghouses and vendors to ascertain how they are assisting firms with their withholding obligations. More information is available on a dedicated Section 871(m) page on the FIA website.

The full text of the letter is available in Resources on the right. 

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