United States: Notice 2021-36 delays reporting requirements for qualified derivative payments

In brief

When Congress enacted the base erosion anti-abuse tax (BEAT) provisions of Code Section 59A as part of the Tax Cuts and Jobs Act of 2017 (TCJA), Congress included an exception for certain “qualified derivative payments,” which are not treated as base erosion payments for BEAT purposes.


Contents

Section 59A(h) defines a “qualified derivative payment” as a payment that a taxpayer makes pursuant to a financial derivative (other than payments consisting of interest, royalties, or service payments), if the taxpayer (i) recognizes gain or loss on a mark-to-market basis at the end of each year, (ii) treats the gain or loss as ordinary, and (iii) treats any other income or deduction associated with a payment pursuant to the derivative as ordinary. To qualify for this exception, the taxpayer must include, as part of its reporting under Code Section 6038A(b)(2), information as necessary to identify the qualified derivative payments, as well as any other information prescribed by the Treasury Secretary. Broadly speaking, section 6038A requires information reporting for base erosion payments and other information in connection with the BEAT on Form 8991. (Although the statute incorrectly references Code Section 6038B(b)(2), regulations described below correct this error.)

Treasury issued proposed regulations under the BEAT in December 2018, and final regulations under in December 2019. Prop. Reg. § 1.6038A-2(b)(7)(ix) laid out the specific information that taxpayers would be required to provide regarding qualified derivative payments. The proposed regulations provided a delayed effective date, so that the reporting requirements for qualified derivative payments would apply to taxable years beginning one year after the final regulations were published. Under a transition rule, a taxpayer could comply with the reporting requirements by simply reporting the aggregate amount of qualified derivative payments on Form 8991. The final regulations further extended the transition period, so that taxpayer must fully comply with the reporting requirements only for taxable years beginning on or after 7 June 2021. In granting this extension, Treasury acknowledged that taxpayers may need to develop new systems to track information relating to qualified derivative payments, which may not have been separately tracked previously. See T.D. 9885 (6 December 2019).

In October 2020, Treasury issued additional final regulations under the BEAT. In the preamble to these regulations, Treasury noted that it had received a taxpayer comment regarding the interaction of the exception for qualified derivative payments, the netting rule in Treas. Reg. § 1.59A-2(e)(3)(iv) dealing with certain mark-to-market transactions, and the reporting requirements for qualified derivative payments. Treasury indicated that it was considering the issue and whether future guidance might be appropriate. See T.D. 9910 (9 October 2020). Treasury has now announced a further extension of the transition period. In Notice 2012-36, which was released on 10 June 2021, Treasury announces that it is still considering the question and will delay the effective date of the full reporting requirements until tax years beginning on or after 1 January 2023. In the meantime, the simplified reporting requirements should be a welcome relief for taxpayers concerned about compliance burdens once the full reporting regime takes effect.  

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