Structured Products Washington Taxation of financial products

Transcription

1 2013 Morrison & Foerster LLP mofo.com Structured Products Washington Taxation of financial products December 10, 2013 Remmelt A. Reigersman NY

2 Agenda Structured Notes FATCA HIRE Act Tax Reform Q&A This is MoFo. 2

3 Current U.S. Tax Rates Marginal Rates For Unmarried Individuals with Taxable Income For Married Individuals Filing Jointly with Taxable Income Over $400,000 Over $450, % Maximum Dividend and Capital Gain Rates For Unmarried Individuals with Taxable Income For Married Individuals Filing Jointly with Taxable Income Up to $400,000 Up to $450,000 15% Over $400,000 Over $450,000 20% Medicare Tax on Net Investment Income For Unmarried Individuals with Modified Adjusted Gross Income For Married Individuals Filing Jointly with Modified Adjusted Gross Income Over $200,000 Over $250, % Maximum Combined Tax Rates on Interest and Dividends Interest 39.60% % = 43.40% Dividends 20% % = 23.80% This is MoFo. 3 3

4 Structured Notes Categorization Principal Protected? Yes No Type 1 Note Bears a Periodic Coupon? (Debt) No Yes Type 2 Note Type 3 Note (Open Transaction) (Alternative Characterizations) This is MoFo. 4

5 Categorization Special Considerations Foreign currencies; Rev. Rul Expectations vs. legal entitlements Type 1 Notes Fixed rate debt, variable rate debt, contingent payment debt OID Type 2 Notes Open transaction Notice Type 3 Notes Unit consisting of components (debt/deposit plus a derivative) Single instrument This is MoFo. 5

6 Notice Requested Comments Government Considering Tax Policy Issues: In connection with certain financial transactions frequently referred to as prepaid forward contracts (or in certain circumstances as exchange traded notes) Considering Whether Parties Should Be Required to Accrue Income/Expense During Term This is MoFo. 6

7 Withholding Tax U.S. imposes a 30% withholding tax on payments of U.S. source FDAP income (interest, dividends, etc.) to foreign investors Portfolio interest exception Capital gains of foreign investors generally exempt Type 1 Notes No withholding because the interest payment qualifies for the portfolio interest exemption Type 2 Notes No withholding because no FDAP, only capital gain Type 3 Notes Withholding? This is MoFo. 7

8 FATCA Background The U.S. government became increasingly concerned about U.S. taxpayers hiding assets offshore and not reporting income. UBS Investigation In 2008, the U.S. government s attempt to force UBS to identify names of U.S. clients with offshore accounts became public. John Doe Summonses (seeking in excess of 4,000 names) Federal District Court in Southern District of Florida UBS has been forced to provide the U.S. government with the names of thousands of U.S. clients with offshore accounts. Thousands of others have come forward under the IRS s voluntary disclosure program UBS settlement ($780 million; disclose 5,000 U.S. account holders) Other banks have also been under investigation or subject to enforcement action (e.g., Wegelin & Co.) This is MoFo. 8

9 Basic FATCA Requirements New Withholding Tax on Payments to non-u.s. persons/entities that do not comply with FATCA Withholding is phased in over several years, beginning in Any U.S.-source payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income ( FDAP ); for example bond interest or stock dividends 2017 Gross proceeds from sale of property that is of a type that can produce U.S.-source dividends or interest, for example gross proceeds on the sale of stocks or bonds 2017 Foreign passthru payments as yet to be defined The withholding rate is generally 30% This is MoFo. 9

10 Basic FATCA Requirements Non-U.S. persons/entities may prevent FATCA withholding by complying with FATCA as follows Foreign Financial Institutions or FFIs Will need to enter into agreements with the U.S. Treasury obligating them to perform certain information reporting and withholding functions Alternatively, FFIs in jurisdictions that have an intergovernmental agreement ( IGA ) with the US can comply with the applicable IGA Non-Financial Foreign Entities or NFFEs Companies operating a nonfinancial business will need to certify whether or not they have U.S. owners Individuals Individuals may need to provide documentation to the payor to establish U.S./non-U.S. status. Individuals must waive their rights under foreign privacy and banking secrecy laws that would otherwise prevent information reporting to the IRS This is MoFo. 10

11 Grandfathered Obligations Grandfathered Obligations: All obligations: July 1, 2014 Obligations giving rise to Withholdable Payments solely because they are subject to dividend equivalent treatment: Obligations giving rise to foreign passthru payments: Obligation must be executed before: Later of: (i) July 1, 2014, or (ii) 6 months after Section 871(m) dividend equivalent treatment applies to such instrument Later of: (i) July 1, 2014, or (ii) 6 months after the regulations defining foreign passthru payments are finalized This is MoFo. 11

12 FATCA Website This is MoFo. 12

13 HIRE Act Dividend Equivalents 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. 13

14 HIRE Act Dividend Equivalents Proposed regulations issued December 5, 2013 Expands application to equity-linked instruments ( ELIs ), including structured notes Applies to ELIs: acquired after March 5, 2014 that have a delta with respect to a U.S. corporation 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 Payment of a dividend equivalent includes dividends that are implicitly taken into account when computing one or more terms of the transaction Exception for certain indices This is MoFo. 14

15 Tax Reform? House Ways & Means Committee Discussion Draft Mark-to-Market for Derivatives This is MoFo

16 Mark-to-Market for Derivatives Chairman Dave Camp (R-MI) of the House Ways & Means Committee proposed a mark-to-market system for the taxation of derivatives on January 24, Press Release: The lack of consistent and comprehensive tax policy has also contributed to some corporate scandals and the recent financial crisis that devastated our economy and threatened our standing in the global community. Updating these tax rules to reflect modern developments in financial products will make the code simpler, fairer and more transparent for taxpayers; and it will also help to minimize the potential for abuse that has occurred in the past. This is MoFo

17 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 recognized in such year Basis ongoing adjustments for gain or loss recognized Items of Income, Gain, Loss, and Deduction Treated as ordinary income or loss Treated as attributable to a trade or business for purposes of Section 172(d)(4), which limits the non-trade or business deductions of non-corporate taxpayers to non-trade or business income This is MoFo

18 Mark-to-Market for Derivatives Derivative definition would be broad: Any evidence of an interest in (or any derivative financial instrument with respect to) stock, partnership interest, beneficial ownership interest in a trust, debt, real property (with certain exceptions), actively traded commodity, currency, and notional principal contract Includes any derivative financial instrument with respect to any of the above. Derivative Financial Instrument: any option, forward contract, futures contract, short position, swap, or similar financial instrument Includes any embedded derivative component in a debt instrument Embedded Derivative Component: any term of a debt instrument that affects its cash flow or the value of other payments required by the instrument in a way similar to a derivative Does not include stock, straight debt, CPDI or VRDI As written would include compensatory options and options on partnership interests This is MoFo

19 Mark-to-Market for Derivatives Special Provisions Mixed Straddles mark-to-market regime applies to all non-derivative positions that are part of a tax straddle with a derivative Terminations / Transfers mark-to-market regime applies to any termination or transfer of the rights or obligations with respect to a derivative during the taxable year, whether by exercise, settlement, etc. Fair Market Value If not readily ascertainable, look to method used in report or statement (i) to shareholders, partners or other persons provided in the applicable Treasury Regulations, or (ii) for credit purposes Fair market value of an embedded derivative component in a instrument is (i) the fair market value of the instrument with the component over (ii) the fair market value of the instrument without the component This is MoFo

20 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