Select Tax Developments (Affecting Financial Products)

Transcription

1 Select Tax Developments (Affecting Financial Products) March 27, 2014 Remmelt A. Reigersman 2014 Morrison & Foerster LLP mofo.com

2 Agenda HIRE Act Dividend Equivalents FATCA Update Tax Reform Financial products Bank tax Corporate tax reform Individual tax reform Virtual Currency This is MoFo. 2

3 HIRE Act Dividend Equivalents Background U.S. sourcing rules 30% U.S. withholding tax on U.S.-source dividend equivalent amounts--a dividend equivalent includes: Any substitute dividend made pursuant to a securities-lending or repo transaction Any amount paid pursuant to a specified notional principal contract and that is contingent on, or determined by reference to, the payment of a U.S.-source dividend Any amount that the Treasury determines is substantially similar to the above items This is MoFo. 3

4 HIRE Act Dividend Equivalents Proposed regulations issued December 5, 2013 Expands application to equity-linked instruments ( ELIs ) with respect to payments made on or after January 1, 2016 Example: futures or forward contract, option, debt or other contractual arrangement that references the value of one or more U.S. underlyings Applies to ELIs that have a delta with respect to a U.S. underlying of 0.7 or greater when acquired Delta is the ratio of the change in the fair market value of the ELI to the change fair market value of the underlying asset ELIs with a constant delta are treated as having a delta of one Dividend equivalent (subject to withholding) means payment pursuant to specified ELI that references the payment of a dividend from U.S. underlying Includes dividends that are implicitly taken into account when computing one or more terms of the transaction Exception for certain indices Grandfather: IRS issued a notice indicating an intention to limit the application to ELIs issued on or after 90 days after the date of publication of the final regulations This is MoFo. 4

5 FATCA Update Treasury and IRS release FATCA regulations and coordination rules Revisions and clarifications to FATCA Withholding agents (other than issuer or agent of issuer) required to treat modification of a grandfathered obligation as material only if the withholding agent has actual knowledge (e.g., receives notification that there has been or will be a material modification of a grandfathered obligation) Coordination of FATCA with existing reporting and withholding rules Coordination between chapter 3 and chapter 4 withholding Generally designed to reduce duplicative information reporting and withholding, for example-- Withholding is not required on a payment subject to Chapter 3 withholding where withholding was made on that payment under FATCA Extension of sunset date for portfolio interest paid with respect to certain foreign-targeted registered obligations issued before January 1, 2016 Japan Offerings? This is MoFo. 5

6 FATCA Forms Recent FATCA-Related Forms Issued by the IRS Form/Guide Form 1042 Form 1042-S Form 8966 Form W-8BEN; Instructions to Form W-8BEN Form W-8ECI; Instructions to Form W-8ECI Description Annual Withholding Tax Return for U.S. Source Income of Foreign Persons Foreign Person s U.S. Source Income Subject to Withholding FATCA Report Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States This is MoFo. 6

7 FATCA Forms Forms and instructions still in draft form: Form W-8BEN-E; Instructions to Form W-8BEN-E Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities) Form W-8IMY; Instructions to Form W-8IMY Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting Form W-8EXP; Instructions to Form W-8EXP Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting This is MoFo. 7

8 FATCA IGAs 24 Existing Intergovernmental Agreements (IGAs) (as of 3/24/2014) UK Denmark Mexico Ireland Switzerland Norway Spain Germany Japan France Costa Rica Canada Cayman Islands Jersey Isle of Man Guernsey Netherlands Malta Bermuda Mauritius Italy Hungary Finland Chile This is MoFo. 8

9 Tax Reform? Ways and Means Chairman Camp Discussion Draft Financial Products: Mark-to-Market for Derivatives Bank Tax Corporate Tax Reform Individual Tax Reform This is MoFo. 9

10 Mark-to-Market for Derivatives Basic Rule Mark-to-market any derivative held at the close of a taxable year is treated as sold for its fair market value on the last business day of such year, and gain or loss would be taken into account for such year Basis ongoing adjustments for gain or loss recognized Items of Income, Gain, Loss, and Deduction Treated as ordinary income or loss Exception for certain hedging transactions Effective Dates (if enacted) The provision would be effective for tax years ending after 2014, in the case of property acquired and positions established after 2014, and for tax years ending after 2019, in the case of any other property or position This is MoFo. 10

11 Mark-to-Market for Derivatives Derivative definition would be broad: Any contract (including any option, forward contract, futures contract, short position, swap, or similar contract) the value of which, or any payment or other transfer with respect to which, is (directly or indirectly) determined by reference to one or more of the following: Stock in a corporation Partnership or beneficial ownership interest in a partnership or trust Evidence of indebtedness Actively traded commodity Currency Any rate, price, amount, index, formula, or algorithm Any other item determined by the Treasury Includes contracts with embedded derivative component Does not include stock, straight debt, convertible debt, CPDI or VRDI, integrated debt instrument ADRs treated as stock Treasury to issue regulations treating convertible debt as CPDI This is MoFo. 11

12 S&P 500 Index: March This is MoFo. 12

13 Wash Sales Losses from the disposition of stock or securities would be disallowed if certain parties that are closely related to the taxpayer acquire substantially identical stock or securities within 30 days before or after the disposition Related parties include: Taxpayer s spouse, Dependent (or other taxpayer with respect to whom the taxpayer is a dependent), Any individual, corporation, partnership, trust or estate which controls, or is controlled by, the taxpayer or the taxpayer s spouse or dependent, and Certain individual retirement plans This is MoFo. 13

14 Market Discount Purchasers of debt instruments acquired at a discount on the secondary market would be required to include market discount in income over the term of the debt instrument Any recognized losses resulting from the retirement or resale of the debt instrument would be treated as ordinary loss to the extent of previously accrued market discount Taxable market discount would also be limited to an amount that approximates increases in interest rates since the debt instrument was originally issued Specifically, taxable market discount would be limited to the greater of (a) the original yield on the instrument plus 5%, or (b) the AFR plus 10% This is MoFo. 14

15 Financial Instruments Revenue Effects Estimated Revenue Effects of Various Financial Instrument Tax Reforms (Billions of Dollars) Source: Joint Committee on Taxation Mark-to-Market of Certain Derivatives Current Inclusion of Market Discount $0.1 $0.8 $1.6 $2.2 $2.4 $2.5 $2.3 $2 $1.8 < $50 Million Wash Sales < $50 Million < $50 Million < $50 Million $0.1 $0.1 $0.2 $0.2 $0.1 $0.1 $0.1 < $50 Million < $50 Million < $50 Million < $50 Million < $50 Million < $50 Million < $50 Million This is MoFo. 15

16 Bank Tax Proposed Bank Tax.035% (3.5 bps) quarterly excise tax on total consolidated assets of systematically important financial institutions ( SIFIs ) in excess of $500 billion $500 billion threshold indexed for increases in GDP after 2015 What is a SIFI? Under Dodd-Frank: (1) any bank holding company with at least $50 billion in consolidated assets, OR (2) any non-bank financial institution designated as a SIFI by the Financial Stability Oversight Counsel Examples: JP Morgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Goldman Sachs Group Inc., Morgan Stanley, AIG, General Electric Capital Corp., Prudential Financial Inc. This is MoFo. 16

17 Bank Tax Estimated Revenue Estimated Revenue Effects of Bank Tax (Billions of Dollars) Source: Joint Committee on Taxation $3.1 $7.5 $9.2 $9.8 $10.3 $10.8 $11.3 $11.9 $12.5 This is MoFo. 17

18 Bank Tax Impact Systemically Important Financial Institution Tax Analysts Revenue Estimates of Camp Discussion Draft s Excise Tax on Systemically Important Financial Institutions in 2015 Assets (end of year 2013 or 2012)* Dollars in Billions Estimated Average Total Consolidated Assets in 2015 Dollars in Billions Excess Total Consolidated Assets (that is, the excess over $500 billion) Dollars in Billions Full-Year Excise Tax (quarterly rate of percent) Dollars in Millions Net Burden After Deduction From Corporate Tax With 33 Percent Rate Dollars in Millions JPMorgan Chase & Co. $2,416 $2,515 $2,015 $2,821 $1,890 Bank of America Corp. $2,105 $2,161 $1,661 $2,325 $1,558 Citigroup Inc. $1,880 $1,972 $1,472 $2,061 $1,381 Wells Fargo & Co. $1,527 $1,578 $1,078 $1,510 $1,011 Goldman Sachs Group Inc. $912 $968 $468 $656 $439 Morgan Stanley $833 $878 $378 $529 $355 American International $541 $576 $76 $106 $71 Group Inc. General Electric Capital Corp. $524 $530 $30 $42 $28 Prudential Financial Inc. $709 $795 $295 $413 $277 MetLife Inc.* $837 $992 $492 $689 $461 Total $11,151 $7,471 Sources: Asset data for the first eight institutions are from Forms FR Y-9C filed with the Federal Reserve Board for the year ending Dec. 31, Assets for Prudential and MetLife in the first column of figures are for end-of-year 2012 as reported in their latest available annual report. See notes at end of article (citation below) for more details. *MetLife has not yet officially been designated as a systemically important financial institution. Source: Martin A. Sullivan, Camp Bank Tax Would Cost JPMorgan $2.5 Billion Annually, Table 1., p. 1151, Tax Notes (March 17, 2014). This is MoFo. 18

19 Business Tax Reform (select topics) Flat tax 25% flat corporate tax rate beginning 2019 Capital contributions taxed Corporations would be taxed on capital contributions to the extent cash and FMV of property contributed exceeds FMV of any stock issued in the exchange Depreciation rules modified to track economic useful life of assets Depreciation calculated on a straight-line basis NOL deductions limited to 90% of corporation s taxable income 20-year amortization period for goodwill and certain other intangibles Mortgage servicing rights amortized over 20 years Like-kind exchange rules repealed Limitation on use of cash method accounting for businesses with average annual gross receipts exceeding $10 million AMT repealed This is MoFo. 19

20 Business Tax Revenue Effects Capital Contributions Estimated Revenue Effects of Various Business Tax Reforms (Billions of Dollars) Source: Joint Committee on Taxation $1.5 $1.3 $1.1 $0.9 $0.7 $0.6 $0.5 $0.5 $0.5 25% Rate ($14.3) ($31.9) ($55.4) ($76.1) ($97.5) ($96.2) ($104.3) ($105.5) ($107.3) Depreciation ($9.0) ($1.0) $26 $45.9 $50.6 $47.2 $42.4 $36.8 $33.1 NOL Provisions $5.7 $8.5 $8.2 $7.6 $7.6 $7.9 $8.0 $8.2 $8.4 Amortization $0.3 $0.8 $1 $1.2 $1.5 $1.8 $2 $2.3 $2.1 Repeal of Like-kind Exchanges Accounting Methods AMT Repeal (Corporate) $0.6 $1.1 $1.7 $2.4 $3.5 $4.8 $6.5 $8.7 $11.7 $0.5 $1.1 $0.3 $0.9 $1.6 $3.1 $4.3 $6.9 $5.0 ($9.0) ($20.1) ($19.7) ($15.5) ($12.1) ($9.9) ($8.3) ($7.8) ($8.0) This is MoFo. 20

21 Individual Tax Reform (select topics) Three tax brackets 10% (up to $71,199), 25% (up to $450,000), 35% 35% bracket applies to Modified Adjusted Gross Income Includes: tax-exempt interest, employer-sponsored health insurance payments, self-employed health insurance deduction, pre-tax contributions to defined contribution retirement plans, medical savings accounts deductions Eliminates preferential tax rates for long-term capital gains and qualified dividend income Deduction equal to 40% of adjusted net capital gain Exclusion of gain on sale of principal residence remains but required holding period increased from 5 to 8 years and phase-out at certain income levels Home mortgage interest deduction: phased-in loan limit of $500,000 Significant limitations on charitable deductions and certain credits AMT repealed This is MoFo. 21

22 Individual Tax Revenue Effects Simplification of Rates Elimination of Preferential Rates for Capital Gains Elimination of Preferential Rates for Dividends Exclusion of Gain from Principal Residence AMT Repeal (Individual) Estimated Revenue Effects of Various Individual Tax Reforms (Billions of Dollars) Source: Joint Committee on Taxation ($43.4) ($62.5) ($61.7) ($64.1) ($62.8) ($64.8) ($60.1) ($64.6) ($59.9) $0.3 $2 $2.4 $2.7 $3 $3.3 $3.7 $4.1 $4.4 $0.7 $2.1 $2.2 $2.2 $2.3 $2.3 $2.3 $2.3 $2.3 $0.6 $1.3 $1.7 $1.8 $1.9 $2 $2.1 $2.2 $2.3 ($12) ($147.9) ($135.8) ($147.4) ($157.2) ($166.7) ($177.2) ($188.6) ($198.9) This is MoFo. 22

23 Virtual Currency IRS has issued preliminary guidance requesting comments and describing general tax principles applicable to convertible virtual currencies, such as Bitcoin Background: Virtual currency is a digital representation of value that may be used to pay for goods or services, or held for investment; however, virtual currency has no legal tender status in any jurisdiction Convertible virtual currency is any virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency For example, Bitcoin may be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, etc., as well as other virtual currencies This is MoFo. 23

24 Virtual Currency Federal tax considerations: Virtual currency is treated as property, other than currency FMV of virtual currency received as payment for goods or services must be included in gross income and is measured in U.S. dollars, as of the date the virtual currency was received If the virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, then taxpayers may use the exchange rate, in a reasonable manner that is consistently applied Gains/losses may be recognized upon an exchange of virtual currency for other property Character of the gains/losses depends on whether the virtual currency is a capital asset in the hands of the taxpayer Mining may give rise to gross income, in cases where the taxpayer receives virtual currency as compensation for these activities Virtual currency may constitute wages and be subject to employment taxes in appropriate circumstances Certain information reporting and backup withholding obligations may apply This is MoFo. 24

25 Circular 230 To ensure compliance with requirements imposed by the IRS, Morrison & Foerster LLP informs you that, if any advice concerning one or more U.S. Federal tax issues is contained in this communication (including any attachments), such advice is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. This is MoFo. 25