The Internal Revenue Service and the Treasury Department intend to issue proposed regulations providing a rule for determining the source of borrow fees paid in securities-lending transactions and sale-repurchase transactions. The fees will be sourced based on the recipient's residence.
Neither the Tax Code nor Treasury regulations directly specify how to determine the source of payments referred to as borrow fees or negative rebates to securities lending transactions or sale-repurchase transactions. As a result, the appropriate source rule for those payments is uncertain, the IRS and Treasury said Thursday in
Back in 2012, they issued
A "qualified fails charge" is a payment that a seller of certain securities needs to pay to the buyer for failing to deliver the securities on the agreed-upon settlement date.
The general rules for determining whether items of income come from sources within or outside the U.S. are found in Sections 861 through 865 of the Tax Code. There are specific sourcing rules there for items such as interest, dividends, compensation for personal services, rents and royalties, and income from sales of personal property. Section 863(a) of the Tax Code grants authority to the Treasury Secretary to prescribe regulations allocating or apportioning items of gross income not otherwise specified in those sections of the Tax Code to sources within or outside the U.S.
Securities lending transactions and sale-repurchase transactions are typically entered into under a standardized form of agreement that includes industry-standard legal and commercial terms and definitions, and attached annexes or schedules, which provide other standardized terms that apply to particular kinds of transactions and can include procedures for making elections allowed under the standardized agreement.
