The United States imposes a 30 percent withholding tax on dividends paid to nonresident aliens. However, this tax is rarely paid by portfolio investors because they can swap into U.S. securities, receiving payments to match both capital gain and dividends. Treasury has ruled that swap payments have an origin in the taxpayer’s residence so there is no withholding obligation on payments that match dividends. The proposal would impose withholding tax on dividend equivalents on the ground that there is no policy justification for a distinction between dividends, substitute dividends under securities lending transaction (which are treated as dividends and are subject to withholding), and dividend equivalents paid under swaps. The proposal is made as a part of the Shelf Project, a collaboration of tax professionals to develop and perfect proposals to strengthen the tax base. Shelf Project proposals are intended to raise revenue without raising rates — the best systems have the lowest feasible tax rates because the taxes are unavoidable. Shelf projects defend the tax base and improve the rationality and efficiency of the tax system. Given the current calls for tax stimulus, some shelf projects may stay on the shelf for awhile. A longer description of the Shelf Project can be found at ‘‘The Shelf Project: Revenue-Raising Projects That Defend the Tax Base,’’ Tax Notes, Dec. 10, 2007, p. 1077, Doc 2007-22632, 2007 TNT 238-37. Shelf Project proposals follow the format of a congressional tax committee report in explaining current law, what is wrong with it, and how to fix it.
Avi-Yonah, Reuven S. "Enforcing Dividend Withholding on Derivatives." Tax Notes 121, no. 6 (2008): 747-51.
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