Prevention of Over-Withholding & US Tax Avoidance

SIFMA provides comments to the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) on the prevention of over-withholding and U.S. tax avoidance with respect to certain substitute dividends, IRS Notice 2010-46.  Under the proposed framework, there is a primary and a secondary approach to address the problem. The primary approach, a qualified securities lender (“QSL”) program (somewhat similar to the qualified intermediary (“QI”) program that currently exists), would allow qualifying foreign financial institutions to receive substitute dividend payments free of withholding tax, provided that they agree to withhold and report on the payments they make to people who have lent securities to them and to report and pay tax on those payments they receive for their own account.  SIFMA supports the development of a workable system that will eliminate over-withholding on cascading dividend equivalent payments. SIFMA shares its views on the implementation of the proposed framework and indicates others areas where it believes additional guidance is needed.