Proposed Regulations Regarding Section 892 Tax Treatment

Summary

SIFMA ¹ provided comments to the IRS in response to the recently proposed tax regulations under section 892 regarding the taxation of investments in the United States by foreign governments (the "Proposed Regulations").

Excerpt

SIFMA appreciates the goal of Treasury and the IRS to provide clear rules for determining whether acquiring debt, including at original issuance, is treated as investment and not as commercial activity for purposes of section 892. With that goal in mind, SIFMA believes it is important for Treasury and the IRS to take a few steps to modify the Proposed Regulations.

First, while SIFMA appreciates the public statements made by members of Treasury and the IRS to the effect that the Proposed Regulations will preserve established market practices and will not when finalized be implemented retroactively to impact existing investments, those assertions are not official pronouncements providing express assurance on which investors can rely. Accordingly, formal guidance from Treasury and the IRS is needed, providing that any final regulations under section 892 will not impact existing investments, and allowing for a reasonable prospective grandfathering period so as to not require hasty renegotiation of the terms of investments which are close to final. Such guidance could be issued on its own without other changes to the Proposed Regulations so as to provide certainty to investors and ensure that there is no chilling of investment activity into the United States as quickly as possible. SIFMA is ready and willing to support Treasury and the IRS in formulating such guidance.

Second, SIFMA believes that the presumption in Prop. Reg. §1.892-4(c)(1)(ii)(A) that any debt acquisition is considered commercial activity should be reversed. Debt acquisitions should be presumed to be investments and not be considered commercial activity unless and until they meet certain principles-based standards, which future regulations should outline. This construct should also be coupled with further examples of existing common market practices (including debt modification scenarios) that represent routine investment activity. The reversal of the presumption and the development of such examples-both efforts that SIFMA would be glad to help with-will alleviate trepidation and provide certainty to investors who may hesitate to continue investment in the U.S. without more definitive guidance, while allowing Treasury and the IRS to elucidate the qualitative aspects which rise to the level of commercial activity.