MFA Submits Comments to IRS on Proposed 871(m) Rules

On March 5, MFA submitted comments to the IRS regarding the proposed 871(m) rules, which would apply withholding taxes on non-U.S. investors that receive dividend equivalent payments from U.S. sources.  In the letter, MFA encouraged the IRS and Treasury to amend the proposed rules to, among other things: (1) set a delta threshold of .90, which would better capture instruments that have substantially similar economic exposure as directly owning the relevant underlying U.S. security while avoiding the adoption of an overly broad scope that could adversely affect capital markets; (2) remove the requirement that taxpayers combine multiple transactions for purposes of determining whether a transaction is subject to withholding, given the uncertainty about how to apply an “in connection standard” or, to the extent the IRS does not remove that requirement, to permit taxpayers to combine all transactions entered into in connection with each other, whether long or short; (3) exclude convertible securities from the rule, given their importance as a financing mechanism for many U.S. companies and the low risk of these instruments being used for tax abuse or, to the extent they are not excluded entirely, to limit the impact on convertible securities by measuring the delta only at issuance; (4) broaden the qualified index definition to include indices widely used for investment and hedging purposes and which do not present a significant risk of tax abuse; and (5) eliminate provisions in the proposed rule that would have the effect of imposing withholding taxes on phantom dividend equivalent payments that are never actually received by the investor.