Base Erosion and Anti-Abuse Tax Rules for Qualified Derivative Payments on Securities Lending Transactions

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[REG-107895-24]</DEPDOC> <RIN>RIN 1545-BR20</RIN> <SUBJECT>Base Erosion and Anti-Abuse Tax Rules for Qualified Derivative Payments on Securities Lending Transactions</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations regarding the base erosion and anti-abuse tax imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties. The proposed regulations relate to how qualified derivative payments with respect to securities lending transactions are determined and reported. The proposed regulations would affect corporations with substantial gross receipts that make payments to foreign related parties. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by April 14, 2025. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at <E T="03">https://www.regulations.gov</E> (indicate IRS and REG-107895-24) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-107895-24), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the proposed regulations, Sheila Ramaswamy at (202) 317-6938; concerning submissions of comments, requests for a public hearing, and access to a public hearing, Publications and Regulations Section at (202) 317-6901 (not toll-free numbers) or by email to <E T="03">publichearings@irs.gov</E> (preferred). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains proposed additions and amendments to 26 CFR part 1 (Income Tax Regulations) under sections 59A and 6038A of the Internal Revenue Code (Code). The proposed additions and amendments are issued pursuant to the express delegations of authority to the Secretary of the Treasury (or her delegate) provided under sections 59A(i) and 6038A(b)(2). The proposed regulations are also issued under the express delegation of authority under section 7805(a) of the Code. <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. Statutory Framework</HD> The base erosion and anti-abuse tax (“BEAT”) of section 59A imposes on each applicable taxpayer a tax equal to the base erosion minimum tax amount for the taxable year. For taxable years after 2018 and before 2026, the base erosion minimum tax amount for the taxable year is the excess of ten percent of the modified taxable income of the applicable taxpayer minus the applicable taxpayer's regular tax liability under section 26(b) reduced (but not below zero) by certain credits. <E T="03">See</E> section 59A(b)(1) and (2). To be an applicable taxpayer, generally the taxpayer must meet the following three requirements: (1) the taxpayer must be a corporation which is not a regulated investment company, a real estate investment trust, or an S corporation; (2) the taxpayer must have average annual gross receipts for the three-taxable-year period ending with the preceding taxable year that are at least $500 million; and (3) the taxpayer generally must have a base erosion percentage for the taxable year of at least three percent (or two percent for banks and registered securities dealers). <E T="03">See</E> section 59A(e). The applicable taxpayer determines its modified taxable income by computing its taxable income without regard to any base erosion tax benefit with respect to any base erosion payment or the base erosion percentage of any net operating loss deduction allowed under section 172 for the taxable year. <E T="03">See</E> section 59A(c)(1). Generally, a base erosion payment is any deductible amount paid or accrued by an applicable taxpayer to a foreign person as defined in section 6038A(c)(3) that is a related party of the applicable taxpayer. <E T="03">See</E> section 59A(d)(1) and (f). The base erosion tax benefit is the deduction allowed under Chapter 1 for the taxable year for the base erosion payment. <E T="03">See</E> section 59A(c)(2). Qualified derivative payments (“QDPs”) are not treated as base erosion payments if they are properly reported to the IRS. <E T="03">See</E> section 59A(h)(1) and (h)(2)(B). <HD SOURCE="HD2">II. Guidance Addressing the BEAT</HD> On December 6, 2019, the Treasury Department and the IRS published final regulations (TD 9885) under sections 59A, 383, 1502, 6038A, and 6655 (the “2019 final regulations”) in the <E T="04">Federal Register</E> (84 FR 66968). On October 9, 2020, the Treasury Department and the IRS also published final regulations (TD 9910) under sections 59A and 6031 in the <E T="04">Federal Register</E> (85 FR 64346). In a series of notices, the Treasury Department and the IRS announced the intention to defer the applicability date of § 1.6038A-2(b)(7)(ix) (regarding the reporting requirements for QDPs) until taxable years beginning on or after January 1, 2027. <E T="03">See, e.g.,</E> Notice 2024-43, 2024-25 IRB 1737. <HD SOURCE="HD1">Explanation of Provisions</HD> These proposed regulations provide guidance under section 59A that would modify the rules set forth in the final regulations relating to how to determine QDPs in connection with securities lending transactions. Part A of this Explanation of Provisions summarizes the QDP exception. Part B of this Explanation of Provisions explains the reporting requirements for QDPs, particularly with respect to securities lending and borrowing transactions. Part C of this Explanation of Provisions describes the proposed amendment to the reporting requirements for QDPs. <HD SOURCE="HD2">A. Overview of Qualified Derivative Payments</HD> Section 59A and the final regulations thereunder provide a number of exceptions to base erosion payments. One exception relevant to these proposed regulations is in section 59A(h), which provides that QDPs are not base erosion payments. Section 59A(h)(2)(A) defines a QDP as any payment made by a taxpayer pursuant to a derivative with respect to which the taxpayer— (i) Recognizes gain or loss as if such derivative were sold for its fair market value on the last business day of the taxable year (and additional times as required under a statute or the taxpayer's method of accounting), (ii) Treats any gain or loss recognized as ordinary, and (iii) Treats the character of all items of income, deduction, gain, or loss with respect to a payment pursuant to the derivative as ordinary. Section 59A(h)(2)(B) provides that a payment is not a QDP unless the taxpayer satisfies certain reporting requirements. Section 1.59A-6(b)(2)(i) provides that a payment is not a QDP unless the taxpayer reports the information required by § 1.6038A-2(b)(7)(ix), which includes: (a) the aggregate amount of QDPs for the taxable year and (b) a representation that all payments satisfy the requirements of § 1.59A-6(b)(2). The aggregate amount of QDPs is reported on the Form 8991, <E T="03">Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts.</E> Under § 1.59A-6(b)(2)(ii), if a taxpayer fails to satisfy the reporting requirement with respect to a payment, that payment is ineligible for the QDP exception to base erosion payment status, unless another exception applies. However, until § 1.59A-6(b)(2)(i) is applicable, § 1.59A-6(b)(2)(ii) will not apply to a taxpayer who reports the aggregate amount of QDPs in good faith. § 1.59A-6(b)(2)(iv). Section 1.6038A-2(b)(7)(ix) initially applied to taxable years beginning on or after June <E T="03">7,</E> 2021, as a result of which § 1.59A-6(b)(2)(i) did not apply until taxable years beginning on or after June 7, 2021. § 1.6038A-2(g). Therefore, for taxable years beginning before June 7, 2021, taxpayers could satisfy the reporting requirements for QDPs by reporting the aggregate amount of QDPs in good faith. §§ 1.59A-6(b)(2)(iv) and 1.6038A-2(g). As described in more detail below, the Treasury Department and the IRS have announced the intention to defer the applicability date of § 1.6038A-2(b)(7)(ix) to taxable years beginning on or after January 1, 2027. <E T="03">See, e.g.,</E> Notice 2024-43, 2024-25 IRB 1737. This means that § 1.59A-6(b)(2)(i) will not apply until taxable years beginning on or after January 1, 2027. Once § 1.6038A-2(b)(7)(ix) becomes applicable, the reporting requirements for QDPs will no longer be satisfied by reporting the aggregate amount of QDPs in good faith. Instead, taxpayers must correctly report the aggregate amount of QDPs on Form 8991 to satisfy the reporting requirements and only those payments for which the reporting requirements have been satisfied will qualify for the QDP exception. The Treasury Department and the IRS are considering requiring taxpayers to report additional information on the Form 8991 or a schedule thereto to assist the IRS in verifying that taxpayers have accurately reported the payments that qualify for the QDP exception. Before modifications are made to the information required to reported on Form 8991 or a schedule thereto, the IRS expects to make a draft available with the proposed changes so that ta ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 52k characters. 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