SECTION 3. PROPOSED

REGULATIONS TO BE ISSUED

Pursuant to the Secretary’s rulemaking authority under section 863(a), the forthcoming proposed regulations would provide that the source of borrow fees (as defined in this section) paid with respect to a securities lending transaction or a sale-repurchase transaction (also as defined in this section) is determined based on the residence of the recipient, subject to the following definitions and rules applicable solely for this purpose.

A securities lending transaction and a sale-repurchase transaction have the meanings provided under §§1.861-2(a)(7) (transactions with respect to debt securities) and 1.861-3(a)(6) (transactions with respect to equity securities).

A borrow fee (including negative rebate) is a fee that is (1) paid pursuant to a securities lending transaction or sale-repurchase transaction that is (i) documented on an industry-standard master agreement and confirmation (or electronic equivalent thereof) with standard market terms and (ii) entered into in the ordinary course of the taxpayer’s and counterparty’s trades or businesses or pursuant to their normal investment activities or objectives, and (2) paid in substance to compensate the lender of the securities (including a cash borrower in a sale-repurchase transaction) for making its securities available to the borrower of the securities (including a cash lender in a sale-repurchase transaction).

The residence of the recipient is determined in the same manner as under section 988(a)(3)(B).