The IRS released Notice 2017-42 on Aug. 4, 2017, extending the transition period for applying certain parts of the Sec. 871(m) rules. Sec. 871(m) treats "dividend equivalent payments" arising on certain financial transactions that reference dividend-paying U.S. equities as U.S.-source dividends subject to withholding.
This extension continues the status quo for a number of provisions through 2018 and provides a one-year extension on many transition aspects.
Highlights of Notice 2017-42
The extension of the Sec. 871(m) regulatory transition includes the following key elements:
- Non-delta-one trades entered into before 2019 (other than certain potentially abusive situations) and not later modified are not covered. Specified notional principal contracts, delta-one trades, securities lending, and sale-repurchase transactions continue to be covered.
- The IRS will apply a "good faith effort" enforcement standard for delta-one transactions (and qualified derivatives dealer (QDD) efforts to comply with the 2017 Qualified Intermediary Agreement) through 2018 and for non-delta-one transactions through 2019.
- Notice 2017-42 extends the simplified standard for withholding agents to combine transactions through 2018 (not applicable to long-party taxpayers).
- Notice 2017-42 extends the QDD relief from dividend (and deemed dividend) withholding tax in the dealer book through 2018. It also defers the QDD requirement to use a net delta calculation or to periodically review its QDD activities until 2019.
Notice 2017-42 also states that Treasury and the IRS continue to evaluate the administrative burdens present in the regulations and whether other changes might reduce unnecessary burdens.
Notice 2017-42 has been well-received by industry. Many financial institutions had been struggling with operationalizing the Sec. 871(m) regulatory regime and were requesting more time. This extension generally provides an additional year to reach various implementation milestones. Some taxpayers remain hopeful that this delay is a signal of permanent status, in which non-delta-one transactions and the more complex aspects of the QDD regime will never be covered by the rules, absent anti-abuse provisions. The government has not provided any indication that there is potential for this development, but the additional time for implementation certainly gives financial institutions ample opportunity to make their case and reassure the government that the current iteration of the rules is sufficient to achieve policy objectives.
Michael Dell is a partner at Ernst & Young LLP in Washington.
For additional information about these items, contact Mr. Dell at 202-327-8788 or firstname.lastname@example.org.
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