Base Erosion and Anti-Abuse Tax Rules for Qualified Derivative Payments on Securities Lending Transactions, 3085-3092 [2025-00186]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 90, Number 8 (Tuesday, January 14, 2025)]
[Proposed Rules]
[Pages 3085-3092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-00186]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-107895-24]
RIN 1545-BR20


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

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: 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.

DATES: Written or electronic comments and requests for a public hearing 
must be received by April 14, 2025.

ADDRESSES: Commenters are strongly encouraged to submit public comments 
electronically via the Federal eRulemaking Portal at https://www.regulations.gov (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eRulemaking Portal, comments cannot be edited or withdrawn.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.

FOR FURTHER INFORMATION CONTACT: 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 [email protected] (preferred).

SUPPLEMENTARY INFORMATION:

Authority

    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.

Background

I. Statutory Framework

    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. See 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). See 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. See 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)

[[Page 3086]]

that is a related party of the applicable taxpayer. See 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. See section 59A(c)(2). Qualified derivative payments 
(``QDPs'') are not treated as base erosion payments if they are 
properly reported to the IRS. See section 59A(h)(1) and (h)(2)(B).

II. Guidance Addressing the BEAT

    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 Federal Register (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 Federal Register (85 FR 64346). In a series of notices, the 
Treasury Department and the IRS announced the intention to defer the 
applicability date of Sec.  1.6038A-2(b)(7)(ix) (regarding the 
reporting requirements for QDPs) until taxable years beginning on or 
after January 1, 2027. See, e.g., Notice 2024-43, 2024-25 IRB 1737.

Explanation of Provisions

    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.

A. Overview of Qualified Derivative Payments

    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 Sec.  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 Sec.  
1.59A-6(b)(2). The aggregate amount of QDPs is reported on the Form 
8991, Tax on Base Erosion Payments of Taxpayers with Substantial Gross 
Receipts. Under Sec.  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 Sec.  1.59A-6(b)(2)(i) is 
applicable, Sec.  1.59A-6(b)(2)(ii) will not apply to a taxpayer who 
reports the aggregate amount of QDPs in good faith. Sec.  1.59A-
6(b)(2)(iv). Section 1.6038A-2(b)(7)(ix) initially applied to taxable 
years beginning on or after June 7, 2021, as a result of which Sec.  
1.59A-6(b)(2)(i) did not apply until taxable years beginning on or 
after June 7, 2021. Sec.  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. Sec. Sec.  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 Sec.  1.6038A-
2(b)(7)(ix) to taxable years beginning on or after January 1, 2027. 
See, e.g., Notice 2024-43, 2024-25 IRB 1737. This means that Sec.  
1.59A-6(b)(2)(i) will not apply until taxable years beginning on or 
after January 1, 2027.
    Once Sec.  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 taxpayers may submit 
comments.
    The aggregate amount of QDPs is defined under Sec.  1.59A-
6(b)(2)(iii) and (b)(3) to incorporate Sec.  1.59A-2(e)(3)(vi) (the 
``BEAT Netting Rule''). The BEAT Netting Rule provides that for any 
position with respect to which the taxpayer applies a mark-to-market 
method of accounting, the taxpayer must determine its gain or loss with 
respect to that position for any taxable year by combining all items of 
income, gain, loss, or deduction arising with respect to the position 
during the taxable year, such as from a payment, accrual, or mark. The 
BEAT Netting Rule was adopted to ensure that only a single deduction is 
claimed with respect to each transaction that is marked to market and 
to prevent distortions in deductions from being included in the 
denominator of the base erosion percentage, including as a result of 
the use of an accounting method that values a position more frequently 
than annually. See Preamble to the 2019 final regulations, 84 FR 66971. 
For example, when a taxpayer is a party to an interest rate swap with a 
foreign related party, the BEAT Netting Rule ensures that the periodic 
payments made by the taxpayer to the foreign related party give rise to 
only a single deduction in a taxable year regardless of whether the 
taxpayer marks to market the swap more frequently than annually.

B. Reporting and Determining QDPs

    A comment recommended modifying the 2019 final regulation to 
provide that mark-to-market gains and losses with respect to the 
securities leg of a cross-border securities lending or borrowing 
transaction with a related party (an ``intercompany securities lending 
transaction'') are not subject to the QDP reporting requirements. The 
Treasury Department and the IRS agree that mark-to-market gains and 
losses with respect to intercompany securities lending transactions 
should not be subject to the QDP reporting requirements; however, the 
Treasury Department and the IRS do not agree with the rationale 
suggested by the comment. Part B.1 of this Explanation of Provisions 
describes intercompany securities lending transactions and the QDP 
rules applicable to those transactions as provided by the 2019 final 
regulations. Part B.2 of this Explanation of Provisions summarizes the 
comment requesting changes to the QDP reporting requirements with 
respect to mark-to-

[[Page 3087]]

market gains and losses on intercompany securities lending 
transactions. Part B.3 of this Explanation of Provisions describes the 
proposed modifications to the QDP reporting requirements and explains 
why the Treasury Department and the IRS disagree with the rationale 
generally offered in the comment.
1. Application of QDP Reporting to Securities Lending or Borrowing 
Transactions
    After the publication of the 2019 final regulations, comments 
requested clarification as to how the QDP reporting requirements apply 
to mark-to-market gains and losses with respect to the securities leg 
of an intercompany securities lending transaction. The Treasury 
Department and the IRS subsequently issued three notices announcing the 
intent to defer the applicability date of the reporting rules of Sec.  
1.6038A-2(b)(7)(ix) while the Treasury Department and the IRS studied 
whether further guidance was appropriate regarding the interaction of 
the QDP exception, the BEAT Netting Rule, and the QDP reporting 
requirements with respect to intercompany securities lending 
transactions. See Notice 2021-36, 2021-26 IRB 1227; Notice 2022-30, 
2022-28 IRB 70. The most recent notice, Notice 2024-43, announced the 
intent to defer the applicability date to taxable years beginning on or 
after January 1, 2027. Notice 2024-43, 2024-25 IRB 1737.
    In a typical intercompany securities borrowing transaction, a 
taxpayer may borrow securities, such as stock, from a foreign related 
party. The terms of the securities loan agreement will require the 
taxpayer to return identical securities to the foreign related party 
and to pay amounts equivalent to all interest, dividends, and other 
distributions that the foreign related party would be entitled to 
receive during the term of the lending transaction if it had not loaned 
the securities (substitute payments). The securities borrower may also 
be required to pay a separately stated borrow fee. Additionally, under 
normal market terms in the United States, the securities borrower will 
provide cash collateral and receive interest (the cash amount of which 
may be reduced by an embedded borrow fee) on that collateral. A 
taxpayer may also lend securities to a foreign related party under 
similar terms. For ease of discussion, both such transactions generally 
are referred to in this Explanation of Provisions as a securities 
lending transaction. Under a taxpayer's method of accounting, 
intercompany securities lending transactions may be marked to market on 
the last business day of its taxable year.
    Section 1.59A-6(d) defines a derivative, for purposes of the QDP 
rules, as any contract the value of which, or any payment or transfer 
with respect to which, is determined by reference to, among other 
items, any share of stock of a corporation or any evidence of 
indebtedness. Special rules apply to securities lending transactions, 
pursuant to which a derivative does not include the cash collateral 
component of the transaction. Sec.  1.59A-6(d)(2)(iii)(B). Accordingly, 
only the securities leg of a securities lending transaction--that is, 
the part of the contract providing for the borrowing and return of the 
securities, without regard to any obligation to provide cash 
collateral--may be treated as a derivative for purposes of the QDP 
rules.
    Like other derivatives, the amount of any QDP arising from a 
securities lending transaction is excluded from the numerator and the 
denominator of the base erosion percentage. Section 59A(h)(1); Sec.  
1.59A-6(b)(3)(i). The aggregate amount of QDPs is determined as 
provided by the BEAT Netting Rule. Sec.  1.59A-6(b)(2)(iii). For 
intercompany securities lending transactions, however, the cash 
collateral component of a securities lending transaction, and the 
payment of interest thereon, are not taken into account for purposes of 
the BEAT Netting Rule. Sec.  1.59A-6(b)(3)(ii) and (d)(2)(iii)(B).
2. Comments Requesting Modifications to the QDP Reporting Requirements
    A comment on the QDP reporting requirements of the regulations 
discussed the treatment of gains and losses on the securities leg of 
intercompany securities lending transactions. When the taxpayer is the 
securities borrower, the securities leg can result in deductions with 
respect to substitute payments or other payments made to the securities 
lender and, if the taxpayer marks to market the securities lending 
transaction, deductions for mark-to-market losses on the obligation to 
return the borrowed securities if the value of the borrowed securities 
increases. A transaction in which a U.S. taxpayer lends securities to a 
foreign related party also can give rise to a deduction for mark-to-
market losses on the right to the return of the loaned securities if 
the value of the loaned securities decreases.
    The comment agreed that substitute payments should be reported 
under the QDP reporting requirements but asserted that mark-to-market 
gains and losses on intercompany securities lending transactions should 
not be required to be reported. The comment noted that the language in 
the preamble to the 2019 final regulations stated that ``a mark-to-
market loss arising from a deemed sale or disposition of a third-party 
security held by a taxpayer is not within the general definition of a 
base erosion payment because the loss is not attributable to any 
payment made to a foreign related party. Rather, the mark-to-market 
loss is attributable to a decline in the market value of the 
security.'' See Preamble to the 2019 final regulations, 84 FR 66972 
(noting ``that the BEAT Netting Rule will apply primarily for purposes 
of determining the amount of deductions that are taken into account in 
the denominator of the base erosion percentage''). The comment viewed 
this statement as applicable not only to mark-to-market losses on 
third-party securities held by the taxpayer but also to mark-to-market 
losses on intercompany securities lending transactions. The comment 
asserted that that treatment would be correct as a legal matter, 
arguing that mark-to-market losses on derivatives with a related party 
are not payments to a related party. The comment supported this 
conclusion on the basis of legislative history to section 475 stating 
that mark-to-market gains or losses on a security that is a contract 
with a related party are treated as arising from a sale to an unrelated 
party.
    The comment stated that mark-to-market losses should not be 
captured by the QDP reporting requirement because these losses should 
not be considered base erosion payments, and the QDP exception is 
predicated on an amount being a base erosion payment. The comment noted 
that including mark-to-market gains and losses on intercompany 
securities lending transactions in the amount of QDPs reported on Form 
8991 could result in a QDP number that is either over- or under-
inclusive of what the comment considered to be the correct aggregate 
QDP amount, depending upon the facts. For example, a taxpayer that has 
a mark-to-market gain for the year on an intercompany securities 
borrowing that exceeds the amount of substitute payments it makes would 
report no QDPs on the transaction by operation of the BEAT Netting Rule 
even though, in the view of the comment, the actual amount of QDPs 
should equal the amount of the substitute payments. The comment 
requested that the regulations under section 59A be revised to provide 
that mark-to-market gains and losses for the securities leg of an 
intercompany

[[Page 3088]]

securities transaction are not payments to foreign related parties and 
should not be included in QDP reporting.
    The same stakeholder also submitted a comment requesting that the 
applicability date of the reporting rules of Sec.  1.6038A-2(b)(7)(ix) 
be deferred for another two years because financial institutions (a) do 
not have systems that maintain records of intercompany securities 
transactions from which mark-to-market gains or losses can be 
determined, including whether a particular securities lending 
transaction is cross-border; and (b) need certainty regarding the QDP 
reporting rules before building compliance systems. The stakeholder 
also commented that, while it believes mark-to-market amounts on other 
derivatives also are not base erosion payments, it is appropriate to 
apply the BEAT Netting Rule to the reporting of QDPs relating to those 
derivatives for practical reasons, including that taxpayers have the 
necessary information on their books and records to apply the BEAT 
Netting Rule to the QDP determination.
3. Changes to the Rule for Determining QDPs
    While the Treasury Department and the IRS agree with the 
recommendation suggested by the comment, the Treasury Department and 
the IRS do not agree with the commenter's more general assertion that 
mark-to-market payments on derivatives with a foreign related party are 
not, or should not be, treated as base erosion payments. Payments on 
derivatives made to a foreign related party are base erosion payments, 
unless they qualify as QDPs. Sections 59A(d)(1) and 59A(h). They must 
be taken into account for BEAT purposes either when paid or when 
otherwise taken into account for U.S. Federal income tax purposes. If 
the commenter's position were correct, payments on derivatives to a 
foreign related party would be required to be taken into account for 
BEAT purposes when paid or accrued, which would deviate from when such 
payments are taken into account for other Federal income tax purposes 
for taxpayers that mark those payments to market.
    For derivatives, the effect of the BEAT Netting Rule generally is 
to aggregate all items of income, gain, loss, or deduction to ensure 
that a single deduction is claimed with respect to each transaction 
that is marked to market. Because a derivative must be marked-to-market 
for tax purposes in order for a payment on the derivative to qualify as 
a QDP, it is appropriate to determine the aggregate amount of QDPs by 
reference to the BEAT Netting Rule. Section 59A(h)(2)(A)(i).
    The QDP exception eliminates most mark-to-market gain or loss from 
derivative transactions from being characterized as base erosion 
payments. In those situations for which the QDP exception does not 
apply, mark-to-market losses on derivative contracts with foreign 
related parties generally are properly treated as base erosion 
payments. However, the Treasury Department and the IRS agree that it is 
appropriate to propose a special rule for mark-to-market losses (and 
gains) on intercompany securities lending transactions. Securities 
lending transactions have different characteristics from other 
derivative transactions such that it is appropriate to provide for a 
different treatment under the QDP rules. Unlike other derivative 
contracts such as forward contracts, options or notional principal 
contracts, securities lending transactions require the lender to 
transfer the securities to the borrower at the inception of the 
transaction and the borrower is required to return those securities (or 
identical securities) to the lender when the securities lending 
transaction is terminated. While other derivative transactions may 
provide either for physical delivery of a security or for cash 
settlement, those transactions typically function as a risk-shifting 
mechanism, whereas securities lending transactions are generally 
entered into to temporarily acquire or lend the securities. 
Additionally, a loss recognized on the sale or transfer of property, 
including securities, that results in a deduction is generally not a 
base erosion payment. Sec.  1.59A-3(b)(2)(ix). As stated in the 
preamble to the 2019 final regulations, a mark-to-market loss from a 
deemed disposition of a third-party security is not a base erosion 
payment because the loss is not attributable to any payment made to a 
foreign related party; that loss is instead attributable to a decline 
in the market value of the security. 84 FR 66968, 66972. If the 
taxpayer sold the stock or debt to a foreign related party, loss on 
sale of the stock or debt generally would not be a deduction that would 
cause the payment to be treated as a base erosion payment under Sec.  
1.59A-3(b)(2)(ix).
    If a taxpayer borrows securities from a foreign related party, and 
the security rises in value during the term of the intercompany 
securities lending transaction, the taxpayer has an economic loss on 
its contractual obligation to return the securities. In some cases (for 
example, if the intercompany securities lending transaction is part of 
a short sale transaction), the taxpayer also might have a tax loss when 
it returns the security to the foreign related party. Similarly, if a 
taxpayer lends securities to a foreign related party and the security 
falls in value, the taxpayer would have an economic loss on its 
contractual right to the return of the security. If the taxpayer sold 
the returned security, the taxpayer would recognize that loss for tax 
purposes. Marking to market the securities lending transaction in these 
circumstances accelerates the recognition of the tax loss attributable 
to the transaction.
    For example, assume that a taxpayer that applies mark-to-market 
accounting for U.S. Federal income tax purposes borrows stock from a 
foreign related party pursuant to an intercompany securities lending 
transaction on September 1, when the value of the stock is $100x. The 
taxpayer sells the stock for $100x on September 1. The intercompany 
securities lending transaction is outstanding on December 31, when the 
value of the stock is $106x, and a $1x dividend is paid on the stock by 
the issuer after September 1 and prior to December 31. The taxpayer 
will make a $1x substitute dividend payment to the foreign related 
party. Under the BEAT Netting Rule, the taxpayer will have a $7x loss 
on this transaction ($7x) = (($100x-$106x)-$1x). The substitute 
dividend payment is a $1x base erosion payment on a stand-alone basis 
that is eligible for the QDP exception assuming all the requirements of 
section 59A and the regulations are met. The $6x mark-to-market loss on 
the securities leg of intercompany securities lending transaction is a 
loss on a derivative that requires the delivery of the stock at the 
termination of the transaction, and arises because the increase in 
value of the stock makes it more expensive for the taxpayer to satisfy 
its obligation to deliver the stock to the foreign related party. If, 
hypothetically, the intercompany securities lending transaction were 
not marked to market, and the taxpayer realized a $6x loss on the 
delivery of the stock to the foreign related party at the termination 
of the transaction, that $6x loss would not be a base erosion payment.
    Alternatively, if the value of the stock were $94x on December 31, 
the taxpayer would have a gain of $5x on the transaction $5x = (($100x-
$94x)-$1x)) under the BEAT Netting Rule. The taxpayer would have a $6x 
mark-to-market gain on the securities leg of the intercompany 
securities lending transaction, which would arise because the decrease 
in value of the stock makes it less expensive for the taxpayer to 
satisfy its obligation to deliver the stock

[[Page 3089]]

to the foreign related party. If, hypothetically, the intercompany 
securities lending transactions were not marked to market, and the 
taxpayer realized a $6x gain on the delivery of the stock to the 
foreign related party at the termination of the transaction, that $6x 
gain would not be a base erosion payment. The substitute dividend 
payment is a $1x base erosion payment that is eligible for the QDP 
exception assuming all the requirements of section 59A and the 
regulations are met.
    Accordingly, the Treasury Department and the IRS are of the view 
that the BEAT regulations should be revised to provide that mark-to-
market gains and losses on the securities leg of a securities lending 
transactions with a foreign related party are not treated as a QDP. 
Consequently, only substitute payments and other payments made to a 
foreign related party under an intercompany securities lending 
transaction that are not payments of cash collateral or interest 
thereon would be QDPs.
    The proposed regulations would provide that mark-to-market gains 
and losses on the securities leg of an intercompany securities lending 
transaction are not treated as QDPs and therefore are not netted with 
QDPs nor required to be included in QDP reporting. Proposed Sec.  
1.59A-6(b)(3)(iii)(A). Mark-to-market gains and losses on other 
derivative transactions (including other derivative transactions that 
provide for physical delivery) must be included in QDP reporting. The 
proposed regulations would not alter the rule that substitute payments 
and other payments to foreign related parties must be reported under 
Sec. Sec.  1.59A-6(b)(2)(i) and 1.6038A-2(b)(7)(ix). Those amounts must 
be taken into account on a consistent basis when determining the amount 
of the taxpayer's base erosion payment, for example on a cash, accrual 
or mark-to-market basis, in a manner that does not omit or duplicate 
any payment. Proposed Sec.  1.59A-3(b)(2)(iv)(B). Furthermore, the 
proposed rule achieves the compliance objectives of the QDP reporting 
requirement without imposing additional burden on taxpayers to create 
new systems to track mark-to-market gains and loss with respect to 
intercompany securities lending transactions.
    Proposed Sec.  1.59A-3(b)(2)(iv) would provide a conforming 
amendment to the definition of a base erosion payment in the context of 
the securities leg of a securities lending transaction to provide that 
the BEAT Netting Rule under Sec.  1.59A-2(e)(3)(vi) does not apply to 
net QDPs with mark-to-market gains and losses on securities lending 
transactions. Consequently, only amounts paid to a foreign related 
party under a securities lending transaction that do not qualify as a 
QDP will be taken into account for purposes of the numerator of the 
base erosion perentage, such as in the case where a taxpayer lends 
securities and pays or accrues interest to a foreign related party with 
respect to the cash leg of a securities lending transaction. The BEAT 
Netting Rule continues to apply to determine the deductions 
attributable to securities lending transactions for purposes of the 
denominator of the base erosion percentage. Sec.  1.59A-2(e)(3)(vi).
C. Rule for Determining the Recipient of a Substitute Payment
    Comments suggested that it may be challenging for a financial 
institution to determine whether it has borrowed a security from a 
foreign related party or an unrelated third-party customer. According 
to the comments, when a U.S. broker-dealer enters into securities 
lending transactions with third-party customers, the broker-dealer may 
borrow the securities required to execute the trade from a pool of 
available securities owned by other customers, some of which are U.S. 
customers, and some of which are foreign customers who have accounts 
with a foreign affiliate of the U.S. broker-dealer. If the borrowed 
security is owned by a foreign customer, the comments indicated that 
the U.S. broker-dealer may be treated as having entered into a 
securities borrowing transaction with its foreign affiliate who has the 
relationship with the foreign customer, who in turn borrowed the 
security from its foreign customer. However, the U.S. broker-dealer may 
not determine from which specific customer it has borrowed a security 
or whether it has entered into an intercompany securities borrowing 
transaction with its foreign affiliate. The U.S. broker-dealer may 
determine its counterparty only when a substitute dividend is required 
to be paid (for example, on the dividend record date), and only for 
purposes of determining the recipient of the substitute payment for 
U.S. Federal income or withholding tax purposes.
    To address this concern, the proposed regulations would provide 
that a taxpayer may report the amount actually paid to foreign related 
parties for QDP reporting purposes if the taxpayer can associate the 
substitute payment on securities borrowed and other payments made 
pursuant to a securities loan (such as borrow fees) with a specific 
recipient. The ``lottery'' method of Sec.  1.6045-2(f)(2)(ii) is not 
applicable for this purpose. In response to the challenges that may 
exist in determining whether the recipient of a substitute payment and 
other payments is a foreign related party of the taxpayer, proposed 
Sec.  1.59A-6(b)(3)(iv) would provide an alternative rule that treats 
the substitute payments that a taxpayer pays with respect to borrowed 
securities as having been paid first to foreign related parties (but 
not in excess of the amount of the payments received by the foreign 
related parties).

Proposed Applicability Date

    Proposed Sec. Sec.  1.59A-3(b)(2)(iv) (application of BEAT netting 
rule to securities lending transactions) and 1.59A-6(b)(3)(iii) and 
(iv) (QDP rules relating to securities lending transactions) would 
apply to taxable years beginning on or after the date that final 
regulations are filed with the Federal Register. Proposed Sec.  
1.6038A-2(b)(7)(ix) (rules relating to QDP reporting) would apply to 
payments made in taxable years beginning on or after January 1, 2027.

Special Analysis

I. Regulatory Planning and Review--Economic Analysis

    Pursuant to the Memorandum of Agreement, Review of Treasury 
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory 
actions issued by the IRS are not subject to the requirements of 
section 6 of Executive Order 12866, as amended. Therefore, a regulatory 
impact assessment is not required.

II. Paperwork Reduction Act

    These proposed regulations do not impose any additional information 
collection requirements in the form of reporting, recordkeeping 
requirements, or third-party disclosure statements. However, a taxpayer 
will continue to be required to report on Form 8991, Tax on Base 
Erosion Payments of Taxpayers with Substantial Gross Receipts, the 
aggregate amount of QDPs.
    For purposes of the Paperwork Reduction Act, the reporting burden 
associated with the collections of information with respect to section 
59A will be reflected in the Paperwork Reduction Act Submission 
associated with Form 8991 (OMB control number 1545-0123). The overall 
burden estimates associated with the OMB control number 1545-0123 is an 
aggregate number related to the entire package of forms associated with 
the applicable OMB control number and will include, but not isolate, 
the estimated burden of the tax forms that

[[Page 3090]]

will be created or revised as a result of these proposed regulations. 
These numbers are therefore not specific to any burden imposed by these 
proposed regulations. The burdens have been reported for other income 
tax regulations that rely on the same information collections and the 
Treasury Department and the IRS urge readers to recognize that these 
numbers are duplicates and to guard against overcounting the burdens 
imposed by tax provisions before Tax Cuts and Jobs Act, Public Law 115-
97 (2017) (the ``Act''). No burden estimates specific to the forms 
affected by the proposed regulations are currently available. For the 
OMB control number discussed in this paragraph, the Treasury Department 
and the IRS estimate PRA burdens on a taxpayer-type-basis rather than a 
provision-specific basis. Those estimates capture both changes made by 
the Act and those that arise out of discretionary authority exercised 
in the proposed regulations (when final) and other regulations that 
affect the compliance burden for that form.
    The Treasury Department and the IRS request comments on all aspects 
of information collection burdens related to the proposed regulations, 
including estimates for how much time it would take to comply with the 
paperwork burdens described above for each relevant form and ways for 
the IRS to minimize paperwork burden. In addition, when available, 
drafts of IRS forms are posted at https://www.irs.govdraft-tax-forms, 
and comments may be submitted at https://www.irs.gov/forms-pubs/comment-on-tax-forms-and-publications. Final IRS forms are available at 
https://www.irs.gov/forms-instructions. Forms will not be finalized 
until after they have been approved by OMB under the PRA.

III. Regulatory Flexibility Act

    Generally, the proposed regulations affect only aggregate groups of 
corporations with average annual gross receipts of at least $500 
million and that make payments to foreign related parties. Generally, 
only large businesses have both substantial gross receipts and make 
payments to foreign related parties. In accordance with the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.) the Secretary hereby certifies 
that these proposed regulations will not have a significant economic 
impact on a substantial number of small entities.

IV. Section 7805(f)

    Pursuant to section 7805(f) of the Code, these proposed regulations 
will be submitted to the Chief Counsel for Advocacy of the Small 
Business Administration for comment on their impact on small business.

V. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that agencies assess anticipated costs and benefits and take certain 
other actions before issuing a final rule that includes any Federal 
mandate that may result in expenditures in any one year by a State, 
local, or Tribal government, in the aggregate, or by the private 
sector, of $100 million in 1995 dollars, updated annually for 
inflation. The proposed regulations do not include any Federal mandate 
that may result in expenditures by State, local, or Tribal governments, 
or by the private sector in excess of that threshold.

VI. Executive Order 13132: Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial, direct compliance costs on State and local 
governments, and is not required by statute, or preempts State law, 
unless the agency meets the consultation and funding requirements of 
section 6 of the Executive order. The proposed regulations do not have 
federalism implications and do not impose substantial direct compliance 
costs on State and local governments or preempt State law within the 
meaning of the Executive order.

Comments and Request for Public Hearing

    Before these proposed amendments to the final regulations are 
adopted as final regulations, consideration will be given to comments 
that are submitted timely to the IRS as prescribed in this preamble 
under the ADDRESSES heading. Any comments submitted will be made 
available at https://www.regulations.gov or upon request. A public 
hearing will be scheduled if requested in writing by any person who 
timely submits written comments. Requests for a public hearing are also 
encouraged to be made electronically. If a public hearing is scheduled, 
notice of the date and time for the public hearing will be published in 
the Federal Register.

Drafting Information

    The principal authors of the proposed regulations are D. Peter 
Merkel and Sheila Ramaswamy of the Office of Associate Chief Counsel 
(International). However, other personnel from the Treasury Department 
and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, the Treasury Department and IRS propose to amend 26 
CFR part 1 as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
* * * * *
0
Par. 2. Section 1.59A-2 is amended by removing the language ``Sec.  
1.59A-3(b)(2)(iii)'' from the last sentence of paragraph (e)(3)(vi) and 
adding the language ``Sec.  1.59A-3(b)(2)(iv)'' in its place.
0
Par. 3. Section 1.59A-3 is amended by revising paragraph (b)(2)(iv) to 
read as follows:


Sec.  1.59A-3  Base erosion payments and base erosion tax benefits.

* * * * *
    (b) * * *
    (2) * * *
    (iv) Amounts paid or accrued with respect to mark-to-market 
position--(A) In general. For any transaction with respect to which the 
taxpayer applies the mark-to-market method of accounting for U.S. 
Federal income tax purposes, the rules set forth in Sec.  1.59A-
2(e)(3)(vi) apply to determine the amount of the base erosion payment.
    (B) Application of BEAT netting rule to securities lending 
transactions. Notwithstanding paragraph (b)(2)(iv)(A) of this section, 
mark-to-market gains and losses from a securities lending transaction 
described in Sec. Sec.  1.861-2(a)(7) and 1.861-3(a)(6) are not taken 
into account when applying Sec.  1.59A-2(e)(3)(vi) for purposes of 
determining the amount of a taxpayer's base erosion payment. When 
determining the amount of the taxpayer's base erosion payment, 
substitute payments and other amounts that relate to the securities 
lending transaction must be taken into account on a consistent basis 
that does not result in the duplication or omission of these amounts. 
For purposes of the immediately preceding sentence, the term ``other 
amounts that relate to the securities lending transaction'' does not 
include delivery of the securities to, or receipt of securities from, 
the lender. This paragraph (b)(2)(iv)(B) applies to a taxpayer that is 
either the borrower or lender with respect to the securities lending 
transaction.
* * * * *

[[Page 3091]]

0
Par. 4. Section 1.59A-6 is amended by adding paragraphs (b)(3)(iii) and 
(iv) to read as follows:


Sec.  1.59A-6  Qualified derivative payment.

* * * * *
    (b) * * *
    (3) * * *
    (iii) Special rule for mark-to-market gains and losses on the 
securities leg of a securities lending transaction--(A) In general. The 
amount of any qualified derivative payment with respect to the 
securities leg component of a securities lending transaction as defined 
in Sec. Sec.  1.861-2(a)(7) and 1.861-3(a)(6) that is excluded from the 
denominator of the base erosion percentage is determined under Sec.  
1.59A-3(b)(2)(iv)(B). Gains and losses on a security leg of a 
securities lending transaction are not included in determining the 
amount of the qualified derivative payment with respect to that 
security. The gain or loss with respect to the security leg for 
purposes of determining the amount of the qualified derivative payment 
is determined by combining only other items of income, gain, loss, or 
deduction during the taxable year, such as substitute payments and 
borrow fees, that arise from a payment or accrual to a foreign related 
party.
    (B) The following examples illustrate the application of this 
paragraph (b)(3)(iii).
    (1) Example 1: Securities loan--(i) Facts. Foreign Parent (FP) is a 
foreign corporation that owns all of the stock of domestic corporation 
(DC). FP is a foreign related party of DC under Sec.  1.59A-1(b)(12). 
DC is a registered securities dealer. On September 1 of year 1, DC 
enters into a securities lending transaction with FP in which it 
borrows stock from FP. DC provides cash collateral for the loan and 
receives interest on that collateral from FP. On September 1, year 1, 
the stock has a value of $100x. On November 1, year 1, a dividend of 
$1x is paid by the issuer on the stock. DC pays a substitute dividend 
of $1x to FP on November 1, year 1 under the terms of the security 
loan. There are no other payments made or received in year 1. On 
December 31, year 1, the stock has a value of $106x. DC is required to 
mark-to-market the securities leg of securities lending transaction for 
U.S. Federal income tax purposes. DC is a calendar year taxpayer.
    (ii) Analysis. DC has a deduction of $1x as a result of the 
substitute dividend it pays to FP. Assuming that the securities lending 
transaction otherwise meets the requirements of this section (including 
reporting the information required by Sec.  1.6038A-2(b)(7)(ix)), the 
amount of DC's qualified derivative payment with respect to the 
securities lending transaction is $1x. Payments with respect to the 
cash collateral are not treated as part of the securities lending 
transaction. See paragraph (d)(2)(iii)(B) of this section. With respect 
to the securities leg of the securities lending transaction, DC has a 
mark-to-market loss of ($6x). Under paragraph (b)(3)(iii)(A) of this 
section, the amount of this mark-to-market loss is not included when 
determining the amount of the qualified derivative payment. Under Sec.  
1.59A-3(b)(2)(iv)(B), DC's ($6x) mark-to-market loss on the securities 
leg of the securities lending transaction also is not taken into 
account in determining the base erosion tax benefit amount for purposes 
of the numerator of the base erosion percentage. The ($6x) loss is 
taken into account in the denominator of the base erosion percentage, 
while the $1x substitute dividend payment is not taken into account for 
that purpose because it is a qualified derivative payment. See Sec.  
1.59A-2(e)(3)(vi) and (e)(3)(ii)(C).
    (2) Example 2: Securities loan. The facts are the same as in 
paragraph (b)(3)(iii)(B)(1) of this section (Example 1) except that on 
December 31, year 1, the stock has a value of $94x. With respect to the 
securities leg of the securities lending transaction, DC has a mark-to-
market gain of $6x. Under paragraph (b)(3)(iii)(A) of this section, the 
amount of this mark-to-market gain is not included when determining the 
amount of the qualified derivative payment. DC has a deduction of $1x 
as a result of the substitute dividend payment it makes to FP. Assuming 
that the securities lending transaction otherwise meets the 
requirements of this section (including reporting the information 
required by Sec.  1.6038A-2(b)(7)(ix)), the amount of DC's qualified 
derivative payment with respect to the securities lending transaction 
is $1x. Neither the $6x gain nor the $1x substitute dividend payment, 
which is a qualified derivative payment, are taken into account in the 
denominator of the base erosion percentage.
    (iv) Rule for determining the amount of substitute payments and 
other payments paid to foreign related parties with respect to a 
securities lending transaction--(A) In general. When a taxpayer makes a 
substitute payment or other payment with respect to a securities 
lending transaction, the taxpayer must determine whether the substitute 
payment or other payment paid with respect to the securities lending 
transaction is paid to a foreign related party. The amount of 
substitute payments or other payments paid by the taxpayer to a foreign 
related party is determined under paragraph (b)(3)(iv)(B) or (C) of 
this section.
    (B) Specific identification method. The taxpayer may determine the 
amount of substitute payments or other payments that it has paid to a 
foreign related party by using the amount actually paid by the taxpayer 
to the foreign related party if the taxpayer can specifically identify 
each recipient of the substitute payment or other payment.
    (C) Alternative method. If the taxpayer has paid substitute 
payments or other payments but cannot determine the recipients of those 
payments, the taxpayer must use the methodology provided in this 
paragraph (b)(3)(iv)(C) to determine whether the recipient is a foreign 
related party.
    (1) Step 1: Determining the total amount of substitute payments and 
other payments received by foreign related parties. The taxpayer must 
determine the total amount of substitute payments and other payments 
described in paragraph (b)(3)(iii) of this section received by all 
foreign related parties of the taxpayer during the taxable year.
    (2) Step 2: Determining the total amount of substitute payments and 
other payments paid by taxpayer. The taxpayer must determine the total 
amount of substitute payments and other payments described in paragraph 
(b)(3)(iii) of this section paid by the taxpayer during the taxable 
year.
    (3) Step 3: Determining the amount of substitute payments and other 
payments paid by taxpayer to foreign related parties. The amount of 
substitute payments and other payments described in paragraph 
(b)(3)(iii) of this section paid by the taxpayer is treated as being 
paid first to foreign related parties of the taxpayer up to the total 
amount of substitute payments and other payments received by foreign 
related parties. Any amount of substitute payments and other payments 
paid by the taxpayer that exceeds the amount of substitute payments and 
other payments received by foreign related parties is treated as paid 
to unrelated parties for purposes of this paragraph (b)(3)(iv)(C)(3).
* * * * *
0
Par. 5. Section 1.59A-10 is amended by revising paragraph (a) and 
adding paragraph (c) to read as follows:


Sec.  1.59A-10  Applicability date.

    (a) General applicability date. Sections 1.59A-1 through 1.59A-9, 
other than the provisions described in the first sentence of paragraph 
(b) of this section or in paragraph (c) of this section, apply to 
taxable years ending on or after December 17, 2018. However,

[[Page 3092]]

taxpayers may apply these regulations in their entirety for taxable 
years beginning after December 31, 2017, and ending before December 17, 
2018. In lieu of applying the regulations referred to in the first 
sentence of this paragraph (a), taxpayers may apply the provisions 
matching Sec. Sec.  1.59A-1 through 1.59A-9 from the Internal Revenue 
Bulletin (IRB) 2019-02 (https://www.irs.gov/irb/2019-02_IRB) in their 
entirety for all taxable years beginning after December 31, 2017, and 
ending on or before December 6, 2019.
* * * * *
    (c) Additional applicability dates. Sections 1.59A-3(b)(2)(iv) and 
1.59A-6(b)(3) (iii) through (iv) apply to taxable years beginning on or 
after January 10, 2025.
0
Par. 6. Section 1.6038A-2 is amended by revising the third sentence of 
paragraph (g) to read as follows:


Sec.  1.6038A-2  Requirement of return.

* * * * *
    (g) * * * Paragraph (b)(7)(ix) of this section applies to payments 
made in taxable years beginning on or after January 1, 2027. * * *

Douglas W. O'Donnell,
Deputy Commissioner.
[FR Doc. 2025-00186 Filed 1-10-25; 4:15 pm]
BILLING CODE 4830-01-P