December 8, 2017
David Kautter
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220
Dana Trier
Deputy Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220
Gentlemen:
The Securities Industry and Financial Markets Association (SIFMA)1 appreciates the opportunity to submit comments on the regulatory project to reduce burdens under section 871(m) of the Internal Revenue Code that is identified on the Department of Treasury’s 2017-2018 Priority Guidance Plan, released October 20, 2017. As we discussed in our October 10th meeting, we believe the final section 871(m) regulations impose significant administrative and operational challenges and that the policy objectives underlying Section 871(m) can be achieved through a simpler regime.
Consistent with our discussion, Section I of this letter focuses primarily on issues that SIFMA members face in implementing the regulations as they are in force today. We are currently working under the delta-one framework established by Internal Revenue Service (“IRS”) Notices 2016-76 and 2017-42, which provide that “good faith” efforts by taxpayers to implement that framework will be respected as well as other simplifying measures, particularly with respect to the combination rule and Qualified Derivatives Dealers (“QDDs”).2 Section II discusses the most important issues that need clarification in order for the delta-one standard to be administered by SIFMA members after 2018 without the benefit of the “good faith” standard. Finally, Section III addresses other important issues with respect to section 871(m) that require additional guidance.
SIFMA continues to believe that the delta 0.8 standard presents overwhelming administrative challenges and would urge the government to provide clear assurance in the form of a notice that this standard is being reconsidered and that additional time will be given for withholding agents to comply with any forthcoming guidance. If the delta 0.8 standard is retained, a host of additional issues will need to be addressed in guidance for there to be any chance of practicable implementation. SIFMA members would need significant lead time from the finalization of the rules to build and place into operation the necessary new withholding and recordkeeping systems. Even if broker-dealers had answers today to all of the interpretive questions raised by the delta 0.8 standard, the looming January 1, 2019 effective date may not afford sufficient lead time.
1 SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $18.5 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org..
2 Notice 2016-76, 2016-51 IRB 834; Notice 2017-42, 2017-34 IRB 212. Notice 2017-42 provides the IRS will take into account the extent to which a withholding agent makes a good faith effort to comply with the Regulations with respect to any delta-one transaction in 2017 and 2018, and any non-delta-one section 871(m) transaction in 2019. The notice provides that a withholding agent is required to combine transactions entered into in 2017 only when the transactions are over-the-counter transactions that are priced, marketed, or sold in connection with each other, extends withholding relief for QDDs acting in their capacity as equity derivatives dealers through 2018 and delayed the requirement for QDDs to compute their net delta exposures until 2019. Finally, the notice provides the IRS will take into account the extent to which a QDD makes a good faith effort to comply with the Regulations during 2018.