Letters

Treatment of Negative Rate Payments for U.S. Tax Information Reporting and Withholding Purposes

Summary

SIFMA provided comments to the to the Treasury Department regarding negative rate payments (“negative interest”) and presents recommendations for guidance on the tax treatment of such payments.

PDF

Submitted To

Treasury

Submitted By

SIFMA

Date

9

July

2020

Excerpt

July 9, 2020

Mr. Chip Harter
Deputy Assistant Secretary, International Tax Affairs
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Ms. Erika Nijenhuis
Senior Counsel, Office of Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Mr. Brett York
Deputy Tax Legislative Counsel, Office of Tax Legislative Counsel
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Re: Treatment of Negative Rate Payments for U.S. Tax Information Reporting and Withholding Purposes

Dear Mr. Harter and Ms. Nijenhuis and Mr. York:

The Securities Industry and Financial Markets Association (“SIFMA”)1 would like the opportunity to raise the issue of negative rate payments—colloquially known as “negative interest”—and present our recommendations for guidance on the tax treatment of such payments.

As you are aware, in mid-2014, central banks in Europe and Japan began making negative rate payments, a trend that has sustained for several years and does not appear to be reversing. The practice has raised questions on its tax treatment since the inception of the idea. We discussed the reasoning and trend toward negative interest in the December 2014 SIFMA letter3, and in the current market environment some analysts have considered whether the U.S. Federal Reserve would drop rates below zero as well.

This letter focuses on cross-border transactions.

SIFMA members increasingly engage in cross-border transactions that involve negative rate payments or charges, but the U.S. tax rules do not currently provide specific guidance on either the characterization or sourcing of these payments. Final Regulations issued in January 2014 amended Treasury Regulation section 1.171-2 to provide rules applicable to premiums paid on bonds, and these regulations appear to encompass bonds with negative yield that may be attributable to negative interest rates, but there are no other direct tax precedents.4 Withholding agents need guidance from the government to ensure correct and consistent treatment across the industry. Below are a few scenarios highlighting situations in which negative rate payments might arise:

  • Cash Deposits: In this scenario, a U.S. financial institution has a deposit account with a non- U.S. bank. Typically, the non-U.S. bank would pay interest on the amount deposited. In a negative rate environment, the U.S. financial institution would make a negative rate payment to the non-U.S. bank with respect to the funds held in the deposit account.
  • Margin Loan: A non-U.S. client borrows cash from a U.S. broker to purchase U.S. securities. Typically, the non-U.S. client would pay interest to the U.S. broker on the borrowed funds and the securities are used as collateral. In a negative rate environment, the U.S. broker would pay the non-U.S. client an amount based on the negative rate.
  • Derivatives: Cash collateral is pledged by a U.S. financial institution to a non-U.S. counterparty. Usually, the non-U.S. counterparty would pay interest on the cash collateral. In a negative rate environment, the U.S. financial institution would make a negative rate payment to the non-U.S. counterparty with respect to the funds held as collateral.
  • Sale-and-repurchase transactions (“repos”): A non-U.S. client that owns U.S. Treasury securities (repo seller) sells them to a U.S. counterparty (repo buyer) for cash. The repo buyer agrees to resell the securities at a later date to the repo seller at the original price plus an amount determined by reference to an interest rate. The incremental amount is termed “Price Differential.” When positive, the Price Differential is generally treated as interest when paid by the repo seller. In low interest rate environments, the Price Differential may be negative and there would be a negative rate payment. Additionally, if
    the repo buyer fails to deliver the repoed securities to the repo seller at repurchase, the U.S.

1 SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly 1 million employees, we advocate for legislation, regulation and business policy, affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA).
2 Despite the colloquial use of the term “negative interest,” it may not be appropriate to characterize a negative rate payment as payment for the use or forbearance of money. Accordingly, use of the term is not indicative of character or source for U.S. Federal tax purposes.
3 Please refer to the enclosed SIFMA letter, dated December 19, 2014.