Michael Yaghmour, of E&Y, has published an article titled “OID and the Foreign Holder: Is it Really This Hard,” in Tax Notes Today.

The article begins as follows:

It has been more than 30 years since the statutory framework governing the tax accounting for original issue discount was enacted in its current form, to the text of the note and more than 20 years since the regulatory regime governing OID instruments was largely finalized to the text of the note Despite this passage of time, the treatment of an OID instrument in the hands of a foreign holder (either directly or through a passthrough entity) is uncertain and often confusing.

This confusion affects holders as well as issuers, and it touches on a multitude of tax issues. From the foreign holder’s perspective, the primary tax issues involve the timing of the accrual of the OID income and the timing of any tax on the OID to the text of the note The U.S. tax liability on interest income of a foreign holder involves both substantive and withholding tax rules. Although the substantive tax rules are the final determination of whether tax is owed, because of difficulties in collecting the substantive tax imposed on foreign entities, the U.S. tax regime incorporates a withholding tax that serves to ensure that the substantive tax is collected to the text of the note

From the issuer’s perspective, the critical concern is the timing of the OID expense deduction to the text of the note This issue arises when the foreign holder is related to the issuer, and, as will be discussed, this issue is linked to the withholding issue mentioned above. This report will explore all these issues, with the hope of clearing up some of the confusion while highlighting areas that need future guidance.

See full article (subscription required) at Tax Analysts. 

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.