Document Type
Article
Publication Date
9-2024
Abstract
In their excellent Tax Notes article on the application of withholding taxes on derivatives, Lorenz F. Haselberger and Michael B. Shulman write that:
A taxpayer entering into a derivative may derive income of a kind that is different from the kind of income that would have been realized had the taxpayer instead acquired the underlying asset, resulting in different U.S. withholding tax treatment.
For example, when a foreign taxpayer enters into a swap referencing an equity security or interest rate, amounts it receives that correspond to dividends or interest generally are characterized as periodic payments on a financial contract rather than as dividends or interest for federal income tax purposes. This characterization can result in different withholding treatment because swap payments generally are sourced to the jurisdiction of the recipient, whereas dividends and interest generally are sourced to the jurisdiction of the payer. . . .
In some cases, Congress has enacted legislation to conform the withholding tax treatment of income from the underlying asset and the treatment of the corresponding income from a derivative referencing the underlying asset. For example, under section 871(m), enacted in 2010, the withholding treatment of dividend equivalent amounts payable or imputed with respect to certain U.S. equity derivatives generally conforms to the withholding treatment of dividends paid on the underlying physical equity security. In the absence of a provision like section 871(m), however, there is no overriding principle that would require withholding tax on derivative income simply because withholding would apply to income from the underlying asset. [Emphasis added.]
My question is, why is there no such overriding principle?
Recommended Citation
Avi-Yonah, Reuven S. "Sourcing Derivatives: Time to Reverse the Rule?" Tax Notes International 115 (2024): 1547.