IRS 871(m) Regulations
In September 2015, the U.S. Internal Revenue Service issued final and temporary regulations pursuant to Section 871(m) of the Internal Revenue Code that prescribe rules for withholding on certain notional principal contracts, derivatives and other “equity-linked instruments” with payments that reference dividends on U.S. equity securities when such payments are paid to a non-U.S. person. The IRS 871(m) regulations generally apply to transactions that take place from January 2017 onwards.
FIA has been working with members to assess the impact of these regulations on their futures and swaps activities. FIA’s work included meeting with the IRS to explain the 871(m) regulations’ potential impact on futures and swaps trading. On Nov. 21, 2016, FIA submitted a letter to the Department of Treasury and IRS seeking a postponement of the 871(m) implementation date from Jan. 1, 2017, to Jan. 1, 2018, for exchange-traded futures and options on futures. The letter also requested clarity on certain challenges members face in developing procedures and systems necessary to comply with the regulations. On 2 December 2016, the IRS released a notice postponing the implementation date for non-delta-one products to 2018 and stating that it will consider the extent to which a taxpayer or withholding agent has made a good faith effort to comply with the regulations in enforcing the regulations for any delta one transaction.
FIA continues to monitor implementation of the 871(m) regulations and consider seeking appropriate guidance and relief for members.
Additionally, to help members with 871(m) compliance, FIA has reached out to global exchanges and clearinghouses to ascertain whether their listed and cleared products are within the scope of the 871(m) regulations and, if so, whether and how they plan to assist firms in meeting their applicable withholding obligations. FIA also has contacted vendors to determine if they will be offering operational tools and solutions for firms to comply with the 871(m) regulations. The responses FIA received are set forth at the links below and will be periodically updated as more information is received.