The net delta exposure calculation only includes long positions and short positions that the qualified derivatives dealer holds in its equity derivatives dealer capacity (as described in paragraph (q)(2) of this section). Any long positions or short positions that are treated as effectively connected with the qualified derivatives dealer’s conduct of a trade or business in the United States for U.S. federal income tax purposes are excluded from the net delta exposure computation. The net delta exposure to an underlying security is determined at the end of the day on the date provided in § 1.871–15(j)(2) for the applicable dividend.
The omission of manufacturing is significant especially in light of other directives from the legislative history. The Treasury Department and the IRS have interpreted this language to mean that Congress did not intend to include extended processing or manufacturing activities beyond getting an extracted mineral or natural resource to market in a form in which those products are generally sold. At the end of the day on the date provided in paragraph (j)(2) of this section for the dividend, FB is a long party on a delta one contract (the total return swap) and a short party on a delta one contract (the forward contract with Customer).
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The final regulations retain separate definitions for processing and refining of natural gas, crude oil, ores and other minerals, and timber. As a practical matter, the minerals and natural resources subject to depletion under section 611 are different, and there is no uniform way to address them. The processing of timber necessarily differs from the processing of natural gas. The absence of specific rules for each type of natural resource would result in vague guidelines lacking clear distinctions between qualifying and non-qualifying activities. Furthermore, a more general approach would lead to an unwarranted expansion of the scope of qualifying income beyond that intended by Congress, since a general definition would need to encompass the activities of the resource with the broadest definition of processing and refining. These final regulations do not list LNG and LPG as natural resources since they are not a mineral or natural resource under the definition provided by Congress.
- In reaching this conclusion, the Treasury Department and the IRS agree with the comment that indicated that the QDD rules provide a more administrable method of determining that withholding properly occurred.
- After consideration of the comments received on this issue, however, the Treasury Department and the IRS are persuaded that the MACRS class lives are not comprehensive nor sufficiently detailed for every industry.
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- In-the-money option contract entered into by a foreign equity derivatives dealer.
- Other types of hedges, however, may be included under other provisions of section 7704.
However, as announced in the 2017 QI Agreement, in order to allow taxpayers time to implement the net delta approach, these regulations continue to provide that dividends on physical shares and deemed dividends received by a QDD in its QDD capacity in 2017 will not be subject to tax under section 881(a)(1) or subject to withholding under chapters 3 and 4. A QDD will be subject to withholding on dividends (including deemed dividends) received on or after January 1, 2018. Qualifying income includes income and gains from performing blending activities or services with respect to products under paragraph (c)(4), (5), or (6) of this section, so long as the products being blended are component parts of the same mineral or natural resource.
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The Treasury Department and the IRS recognize, however, that the wording of the manufacturing limitation in the proposed regulations was vague and could cause confusion. Therefore, the general definitions of processing and refining in the final regulations no longer contain the specific language that made up the manufacturing limitation. Instead, the specific definitions for the processing and refining of natural gas and crude oil capture congressional intent by including only those activities that are generally performed at field facilities and petroleum refineries, or those that produce products typically found at field facilities and refineries.
Accordingly, these final regulations do not include a MACRS consistency requirement. Notwithstanding the lack of a MACRS consistency requirement, MACRS or NAICS codes nevertheless may provide useful insight when determining whether an activity generates qualifying income as provided in these final regulations. Generally, newly redesignated § 1.1441–2(e)(7) (formerly § 1.1441–2(e)(8)) provides that a withholding agent must withhold on a dividend equivalent on the later of the date on which the amount of the dividend equivalent is determined and the date that a payment occurs. A payment generally occurs when money or other property is paid to or by the long party, or the long party sells, exchanges, transfers, or otherwise disposes of a section 871(m) transaction. Notwithstanding this general rule applicable to withholding agents, the QI Notice announced that a QDD must withhold with respect to a dividend equivalent payment on the dividend payment date for the applicable dividend on the underlying security as determined in § 1.1441–2(e)(4). Section 1.871–15T(q)(1) of the 2015 temporary regulations provided that a QDD generally would not be liable for tax under section 871 or 881 on a dividend or dividend equivalent payment that the QDD receives in its capacity as a QDD, provided that the QDD complies with its obligations under the qualified intermediary agreement.
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They argued that revoking a PLR sets a bad precedent that will cause taxpayers and investors not to rely on PLRs. They also argued that the revocation of a PLR would hurt them economically and would harm investors. Finally, some commenters requested that the final regulations clarify that a technical termination of a partnership under section 708(b)(1)(B) does not end the Transition Period. One commenter recommended that the restriction that services conducted offsite must be offered exclusively to those engaged in performing section 7704(d)(1)(E) activities should be removed, since activities such as clean-up and disposal happen offsite and may be performed for service recipients other than those engaged in section 7704(d)(1)(E) activities. These final regulations modify this provision to provide that services may be conducted offsite if the services are offered to those engaged in one or more section 7704(d)(1)(E) activities. If the services are monitoring services, those services must be offered exclusively to those engaged in one or more section 7704(d)(1)(E) activities.
The current regulations provide that § 1.871–15(d)(2) and (e) apply to any payment made on or after January 1, 2017, with respect to any transaction issued on or after January 1, 2017. Several comments requested that implementation of these provisions be delayed until at least January 1, 2018. One comment requested that implementation be delayed until at least one year after the date guidance resolving all issues raised by the comment is issued.
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Rather, it was added in conference and therefore must mean that the two terms are not synonymous. While some commenters admitted that it is not uncommon in the industry to use the words processing and refining interchangeably to refer to the same activities, they maintained that Congress intended to include a broader range of activities than either word alone would allow. The proposed regulations combined the activities of processing and refining together in one definition that included both a general definition followed by specific rules for different categories of natural resources (natural gas, petroleum, ores and minerals, and timber). The vast majority of the comments received on the proposed regulations concerned the definition of processing or refining, addressing issues related to both the general definition and specific rules. Section III.D.1 of this Summary of Comments and Explanation of Revisions addresses the comments related to the general definition.
The 2015 final regulations adopted this approach in response to taxpayer comments. Similarly, these temporary regulations also provide a rule for determining the responsible party when potential section 871(m) transactions are traded on an exchange and cleared by a clearing organization. When more than one broker or dealer acts as an agent or intermediary between the short party and a foreign investor on an exchange-traded irs i 9 2017 contract, the broker or dealer that has an ongoing customer relationship with the foreign investor is the responsible party. The Treasury Department and the IRS requested comments regarding the substantial equivalence test. In particular, comments were requested on whether two testing points were adequate to ensure that the test would capture appropriate transactions and on the administrability of the test.
As a result, § 1.1441–2(e)(7) is revised to provide that a payment of a dividend equivalent occurs when a section 871(m) transaction is transferred to an account not maintained by the withholding agent or upon a termination of the account relationship. Comments requested that a QDD be permitted to elect to calculate its section 871(m) amount either by using (1) the method described in the QI Notice or (2) its net delta exposure to an underlying security. According to comments, the net delta exposure is a calculation, measured in shares of stock, that aggregates all the shares of an underlying security and all equity derivative transactions referring to the same underlying security that the QDD has entered into in a dealer capacity (whether customer transactions or hedging transactions). Comments explained that net delta accurately measures a QDD’s residual exposure to an underlying security. Comments noted that financial institutions use net delta exposure for business and non-tax regulatory purposes.