International Tax Alert - January 2017

January 2017

Notice 2016-76 Announces Phase-In Application of Various Withholding Rules 


In Notice 2016-76 (the “Notice”), the Department of the Treasury and the Internal Revenue Service (collectively, “Treasury”) announced the phase-in application of various withholding rules over the next several tax years.  An anti-abuse rule will apply during the phase-in years.


Section 871(m) treats dividend equivalent payments as U.S. source dividends for purposes of chapters 3 and 4 and sections 871(a), 881, and 4948(a).  As a result, dividend equivalent payments are amounts subject to withholding (as defined in section 1.1441-2(a)) for purposes of sections 1441 through 1443 and withholdable payments (as defined in section 1.1473-1(a)) for purposes of sections 1471 and 1472.  Accordingly, a withholding agent generally is required to deduct and withhold a tax equal to 30 percent on any dividend equivalent payment made to a foreign person unless an exception from, or lower rate of, withholding applies pursuant to the Code or regulations thereunder, or an applicable income tax treaty.

Treasury issued the final and temporary regulations under sections 871(m), 1441, 1461 and 1473 (collectively, the “section 871(m) regulations”) in several parts.  On December 5, 2013, final regulations (TD 9648) were published at 78 FR 73079.  On September 18, 2015, final regulations and temporary regulations (TD 9734) were published at 80 FR 56866 (the “2015 final regulations”).  Also on September 18, 2015, the Federal Register published a notice of proposed rulemaking by cross-reference to temporary regulations and a notice of public hearing at 80 FR 56415.  Correcting amendments to the 2015 final regulations were published on December 7, 2015, in the Federal Register at 80 FR 75946, and on December 7, 2015, in the Federal Register at 80 FR 75956.

On July 1, 2016, Treasury released Notice 2016-42, 2016-29 IRB 67, containing a proposed Qualified Intermediary (“QI”) agreement that describes requirements and obligations that will be applicable to Qualified Derivatives Dealers (“QDD”). Treasury received written comments on Notice 2016-42.  Treasury published a final QI agreement at the end of 2016 in Rev. Proc. 2017-15, taking into account these comments.  The final QI agreement will be effective on or after January 1, 2017.

Various comments to the section 871(m) regulations noted that taxpayers and withholding agents will face challenges complying with certain aspects of the section 871(m) regulations by their applicability date of January 1, 2017.  Those challenges include designing, building, and testing new withholding and reporting infrastructure for dealers, issuers, and other withholding agents; implementing new system requirements for paying agents and clearing organizations; and enhancing and developing data sources for determining whether transactions are section 871(m) transactions.  In addition, certain taxpayers may face additional challenges applying for status as a QDD under the QI agreement and implementing the QDD regime in a timely manner.

To orderly implement the section 871(m) regulations, the Notice provides guidance for complying with the section 871(m) regulations in 2017 and 2018, and explains how the Internal Revenue Service (“IRS”) intends to administer those regulations in 2017 and 2018.  The Notice does not apply to any transaction that is a section 871(m) transaction pursuant to section 1.871-15(d)(1) (i.e., a specified notional principal contract entered into before January 1, 2017).

Highlights of the Notice

Some of the highlights of the Notice include:
  • For 2017, the IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the section 871(m) regulations in enforcing the section 871(m) regulations for any delta-one transaction;
  • For 2018, the IRS will take into account the extent to which the taxpayer or withholding agent made a good faith effort to comply with the section 871(m) regulations in enforcing the section 871(m) regulations for any non-delta-one transaction;
  • For 2017, withholding agents may rely on a simplified standard for determining whether transactions are combined transactions pursuant to section 1.871-15(n);
  • For 2017, withholding agents may remit amounts withheld for dividend equivalent payments quarterly;
  • For 2017 and following years, a QDD's section 871(m) amount is to be determined by calculating the net delta exposure of the QDD;
  • For 2017, the IRS will take into account the extent to which the QDD made a good faith effort to comply with the QDD provisions in the QI agreement when enforcing those provisions;
  • Prospective QDDs may apply for QDD status on or before March 31, 2017, and, if accepted by the IRS, be treated as having QDD status as of January 1, 2017;
  • Before receiving a QI-EIN, QDDs may provide a statement on a Form W-8IMY that the QDD is “awaiting QI-EIN,” and withholding agents may rely on this statement, to the extent permitted in this notice;
  • The section 871(m) regulations will not apply to certain existing exchange-traded notes specifically identified in section III.D of the Notice until January 1, 2020; and
  • The anti-abuse rule provided in section 1.871-15(o) will apply during the phase-in years described in the Notice.  As a result, a transaction that would not otherwise be treated as a section 871(m) transaction (including as a result of the Notice), may be a section 871(m) transaction under section 1.871-15(o).

BDO Insights

The Notice provides additional details on the rules mentioned above.  BDO can assist our clients with understanding their withholding and reporting obligations under the section 871(m) regulations as modified by the rules provided for in the Notice.  Withholding agents affected by the section 871(m) regulations should take particular notice of the phase-in approach detailed in the Notice.

For more information, please contact one of the following practice leaders:
Robert Pedersen
Partner and International Tax Practice Leader
         Chip Morgan      Partner 

Joe Calianno
Partner and International Tax Technical Practice Leader 
  Brad Rode

William F. Roth III
Partner, National Tax Office
  Jerry Seade

Scott Hendon
  Monika Loving

Annie Lee
  Sean Dokko
Senior Manager