117DCC

Copyright © 2011 Tax Analysts
Tax Notes Today

OCTOBER 07, 2011, FRIDAY

DEPARTMENT: News, Commentary, and Analysis; News Stories   

CITE: 2011 TNT 195-6

LENGTH: 571 words

HEADLINE: #6 2011 TNT 195-6 PRACTITIONERS DISCUSS QUESTIONS RAISED BY EXTRATERRITORIAL REACH OF DODD-FRANK. (Section 1256 -- Futures Marked to Market) (Release Date: OCTOBER 06, 2011) (Doc 2011-21203)

CODE: Section 1256 -- Futures Marked to Market

ABSTRACT: The extraterritorial reach of the Dodd-Frank Act raises numerous questions regarding its application to situations involving the foreign operations of U.S. banks and foreign banks dealing with U.S. counterparties, said practitioners on an October 6 webcast sponsored by KPMG LLP.

AUTHOR: Sapirie, Marie
Tax Analysts

TEXT:
 
Release Date: OCTOBER 06, 2011
 
Published by Tax Analysts(R)
 
Although recent Treasury guidance has clarified other aspects of the Dodd-Frank Act, its extraterritorial reach raises numerous questions regarding its application to situations involving the foreign operations of U.S. banks and foreign banks dealing with U.S. counterparties, practitioners said on an October 6 webcast sponsored by KPMG LLP.
 
Derivatives traders would like to avoid what they view as onerous regulatory requirements in Dodd-Frank by moving their books of positions to locations outside the United States, but it is unclear whether that type of transfer will be sufficient to accomplish that objective, said John Bush of KPMG.
 
Regarding foreign banks with U.S. branches, Bush said there is an open question whether the requirements in Dodd-Frank would apply if a bank transferred its U.S. dollar derivative trades from a New York branch to its London headquarters. In that hypothetical situation, Bush said, the bank's transfer pricing policies would assign to the United States 40 percent of the profits or losses on U.S. dollar trades booked in London. Assuming that some of those trades are with foreign counterparties, "one could argue that [the trades] have nothing to do with the United States," because they are non-U.S. trades involving a foreign counterparty that are booked outside the United States, he said.
 
However, Bush said the transfer pricing policy that moves 40 percent of the trading profits back to the United States could create a wrinkle in that argument, because the answer to whether the transfer pricing policy would pull those trades under Dodd-Frank is unclear. "We are awaiting clarification about the extraterritorial implications of Dodd-Frank. It's quite an interesting question," he said.
 
Bush identified other situations that also raise questions about the scope of Dodd-Frank. For example, if a U.S. bank has a foreign broker-dealer and the U.S. parent guarantees the trades of the broker-dealer, "does that [guarantee] have the same effect as the transfer pricing policy of dragging trades back into Dodd-Frank by pulling the risk into the U.S.?" he asked.
 
Section 1256 Guidance
 
Proposed regulations under section 1256 were released on September 15. They addressed the treatment of credit default swaps, which was one of the big areas of uncertainty before Dodd-Frank, said Viva Hammer of KPMG. (For prior coverage, see Doc 2011-19697 or 2011 TNT 180-1.)
 
Although the proposed regs do not define what a credit default swap (CDS) is, they do explain that a CDS is treated as a notional principal contract, which Hammer said is a significant development. The definition of a CDS will be hard for the IRS to develop, but "most people will know it when they smell it," because CDSs are common, she added.
 
Hammer also said that generally, the coordination between the regulatory framework of Dodd-Frank and the tax treatment of derivatives in the proposed regulations "is a really good thing."
 
Although the proposed regulations made important clarifications, comments on the proposed regs under section 1256 are needed, Hammer said.