US Treasury and IRS issue proposed BEAT regulations
19 December 2018 Washington
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The US Treasury Department and the Internal Revenue Service (IRS) have issued proposed regulations for the Base Erosion and Anti-Abuse Tax (BEAT).
BEAT was introduced as part of the Tax Cuts and Jobs Act of 2017 with the intended purpose of preventing US corporations from unduly reducing their taxable base through payments related to foreign parties.
As part of the ‘important clarifications’ section of the proposed regulations, it stated that the term derivative does not include any sale-repurchase transaction, securities lending transaction or substantially similar transaction.
It explained that while the exclusion from derivative treatment of the loan component of a sale-repurchase transaction may be sensible, it is difficult to understand why securities lending transactions were excluded from derivative treatment.
The changes suggested that, in particular, a securities lending transaction is a derivative in any commonplace understanding of the term; and the rationale for excluding qualified depository participants (QDP) from treatment, as base erosion payments should apply with equal force to payments and other items with respect to securities lending transactions.
In addition, it should consider whether, in the case of a securities borrower, the derivative transaction might be treated as a short sale rather than a securities lending transaction.
Elsewhere, in the context of a financial institution, it highlighted the importance of considering the practical consequences of excluding securities lending transactions from treatment as derivatives.
The proposed regulation considers whether substitute payments and securities lending fees paid to a related foreign person are base erosion payments. The changes also consider whether mark-to-market losses from securities lending transaction with a foreign-related party may be treated as base erosion payments.
Another consequence on the exclusion of securities lending is determining whether securities posted by a foreign-related party as collateral for an obligation have been loaned to the taxpayer may take on new-found importance.
Finally, the proposed regulation stated that the US Government has specifically requested comments regarding whether it is appropriate to exclude sale-repurchase and securities lending transactions from the definition of a derivative, including whether certain of such transactions lack a ‘significant financing component’.
BEAT was introduced as part of the Tax Cuts and Jobs Act of 2017 with the intended purpose of preventing US corporations from unduly reducing their taxable base through payments related to foreign parties.
As part of the ‘important clarifications’ section of the proposed regulations, it stated that the term derivative does not include any sale-repurchase transaction, securities lending transaction or substantially similar transaction.
It explained that while the exclusion from derivative treatment of the loan component of a sale-repurchase transaction may be sensible, it is difficult to understand why securities lending transactions were excluded from derivative treatment.
The changes suggested that, in particular, a securities lending transaction is a derivative in any commonplace understanding of the term; and the rationale for excluding qualified depository participants (QDP) from treatment, as base erosion payments should apply with equal force to payments and other items with respect to securities lending transactions.
In addition, it should consider whether, in the case of a securities borrower, the derivative transaction might be treated as a short sale rather than a securities lending transaction.
Elsewhere, in the context of a financial institution, it highlighted the importance of considering the practical consequences of excluding securities lending transactions from treatment as derivatives.
The proposed regulation considers whether substitute payments and securities lending fees paid to a related foreign person are base erosion payments. The changes also consider whether mark-to-market losses from securities lending transaction with a foreign-related party may be treated as base erosion payments.
Another consequence on the exclusion of securities lending is determining whether securities posted by a foreign-related party as collateral for an obligation have been loaned to the taxpayer may take on new-found importance.
Finally, the proposed regulation stated that the US Government has specifically requested comments regarding whether it is appropriate to exclude sale-repurchase and securities lending transactions from the definition of a derivative, including whether certain of such transactions lack a ‘significant financing component’.
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