The Proposed Regulations provide guidance for taxpayers with qualified derivative payments (QDPs) resulting from securities lending transactions to foreign related parties.
The Bottom Line
The Section 59A base erosion and anti-abuse tax (BEAT) imposes a tax of 10 percent on a taxpayer’s modified taxable income, less the taxpayer’s regular tax liability. A taxpayers modified taxable income is calculated without regard to deductible payments made to a foreign related person (base erosion payments). Under Section 59A(h)(1), QDPs are not treated as base erosion payments if properly reported to the IRS.
QDPs are defined in Section 59A(h)(2)(A) as any derivative payment for which the taxpayer recognizes gain or loss as if the derivative were sold at fair market value on the last business day of the taxable year, and any gain or loss and all items of income and deduction related to the derivative are characterized as ordinary income or loss.
The Proposed Regulations provide specific guidance on the following:
- A special rule regarding treatment as a QDP for mark-to-market gains and losses on intercompany securities lending transactions.
- A rule to prevent the BEAT netting rule of Treas. Reg. 1.59A-2(e) from applying to QDPs with mark-to-market gains and losses on securities lending transactions.
- An alternative rule to deal with substitute payments of a taxpayer regarding borrowed securities if challenges arise when determining whether the recipient of the payment is a foreign related party.
The IRS has requested comments on the Proposed Regulations by April 14, 2025.