Code Section 165
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 149, 163, 165, 871, 881, 1287, 4701 | *3/18/2010 | The Hiring Incentives to Restore Employment Act | Repeal of certain foreign exceptions to registered bond requirements | **See sec. 1471 |
* Notes on Effective Date
The provision applies to debt obligations issued after the date which is two years after the date of enactment (March 18, 2010).
**Notes on Revenue Estimate
See section 1471, provision: Reporting on certain foreign accounts.
Repeal of certain foreign exceptions to registered bond requirements
Explanation of Provision
- Repeal of the foreign targeted obligation exception to the registration requirement
- Preservation of exception to the registration requirement for excise tax purposes
- Repeal of treatment as portfolio interest
- Dematerialized book-entry systems treated as registered form
- Repeal of exception to requirement that Treasury obligations be in registered form
1. Repeal of the foreign targeted obligation exception to the registration requirement
The provision repeals the foreign targeted obligation exception to the denial of a deduction for interest on bonds not issued in registered form. Thus, under the provision, a deduction for interest is disallowed with respect to any obligation not issued in registered form, unless that obligation (1) is issued by a natural person, (2) matures in one year or less, or (3) is not of a type offered to the public.
Also, the provision repeals the foreign targeted obligation exception to the denial of the tax exemption on interest on State and local bonds not issued in registered form. Therefore, under the provision, interest paid on State and local bonds not issued in registered form will not qualify for tax exemption unless that obligation (1) is not of a type offered to the public, or (2) matures in one year or less.
The Act preserves the ordinary income treatment under present law of any gain realized by the beneficial owner from the sale or other disposition of a registration-required obligation that is not in registered form. Similarly, the Act does not change the present law rule disallowing deductions for losses realized by a beneficial owner of a registration-required obligation that is not in a registered form.
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2. Preservation of exception to the registration requirement for excise tax purposes
Under the provision, the foreign targeted obligation exception is available with respect to the excise tax applicable to issuers of registration- required obligations that are not in registered form. Thus, the excise tax applies with respect to any obligation that is not in registered form unless the obligation (1) is issued by a natural person, (2) matures in one year or less, (3) is not of a type offered to the public, or (4) is a foreign targeted obligation.
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3. Repeal of treatment as portfolio interest
The provision repeals the treatment as portfolio interest of interest paid on bonds that are not issued in registered form but meet the foreign targeting requirements of section 163(f)(2)(B). Under the provision, interest qualifies as portfolio interest only if it is paid on an obligation that is issued in registered form and either (1) the beneficial owner has provided the withholding agent with a statement certifying that the beneficial owner is not a United States person (on IRS Form W–8), or (2) the Secretary has determined that such statement is not required in order to carry out the purposes of the subsection. It is anticipated that the Secretary may exercise its authority under this rule to waive the requirement of collecting Forms W–8 in circumstances in which the Secretary has determined there is a low risk of tax evasion and there are adequate documentation standards within the country of tax residency of the beneficial owner of the obligations in question or in the country where the book-entry system exists. Generally, however, as a result of the provision, interest paid to a foreign person on an obligation that is not issued in registered form is subject to U.S. withholding tax at a 30-percent rate, unless the withholding agent can establish that the beneficial owner of the amount is eligible for an exemption from withholding other than the portfolio interest exemption or for a reduced rate of withholding under an income tax treaty.
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4. Dematerialized book-entry systems treated as registered form
The provision provides that a debt obligation held through a dematerialized book entry system, or other book entry system specified by the Secretary, is treated, for purposes of section 163(f), as held through a book entry system for the purpose of treating the obligation as in registered form.553 A debt obligation that is formally in bearer form is treated, for the purposes of section 163(f), as held in a book-entry system as long as the debt obligation may be transferred only through a dematerialized book entry system or other book entry system specified by the Secretary.
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5. Repeal of exception to requirement that Treasury obligations be in registered form
The provision includes a conforming change to title 31 of the United States Code that repeals the foreign targeted exception to the definition of a registration-required obligation. Thus, a foreign targeted obligation of the Treasury must be in registered form.
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553- By reason of cross references, this rule will also apply to sections 165(j), 312(m), 871(h), 881(c), 1287 and 4701.
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