This is part of a series of posts analyzing proposed changes to the U.S. international tax system. For the rest of the series, please click here.

Prevent the Avoidance of Dividend Withholding Taxes
Current Law
Foreign investors who hold stock in U.S. domestic corporations are generally subject to 30% withholding tax on dividends. Equity swaps, where a set of future cash flows are agreed to be exchanged between two parties at a future date, are generally treated as foreign-source payments that are not subject to U.S. withholding tax.
Furthermore, under IRS Notice 97-66, the problem of ‘cascading withholding tax’ is limited.
Proposed Change
Any income earned by foreign persons with respect to equity swaps referencing U.S. equities would be treated as U.S. source to the extent the income is attributable to dividends paid by a domestic corporation. Furthermore, the Treasury plans to revoke Notice 97-66, and replace it with “guidance”
ATRF Analysis
This proposal will allow the IRS to withhold tax, not just for actual income, but also on theoretical future non-realized income. It is a basic principle of sound tax policy that income should only be taxed when it is accumulated. If enacted, this will tax you for income you only might earn.
What’s next – taxing you for the job you might get?
10-year Revenue Estimate:
U.S. Department of Treasury: $1.4 billion
Joint Committee on Taxation: $1.2 billion