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Abstract: 

U.S. tax authorities and U.S. financial institutions continue to struggle with the new withholding tax treatment of total return equity swaps. These innovative financial contracts do not readily fit into U.S. federal income tax “cubbyholes” and so present challenges to applying and enforcing U.S. withholding tax policy. The Hiring Incentives to Restore Employment Act of 2010 amended the tax code by eliminating the previous disparity in the withholding tax treatment between equity swaps and equity securities—but arguably this change has created as many tax difficulties as it resolved. This article discusses the evolution and current withholding tax treatment of total return equity swaps, and the response from U.S. financial institutions to the changing playing field.

Keywords: withholding tax, total return equity swap, IRC Section 871(m), HIRE Act, dividend equivalent

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