Equity Swaps and the Withholding Tax : 'Potential for Tax Avoidance'

New Section 871(m)(3)(B) provides that effective March 2012 all equity swap contract payments that reference U.S. source dividends will be subject to withholding tax, unless the U.S. tax authorities determine that the equity swap contract is of a type that does not have the “potential for tax avoidance.” Unfortunately, the tax authorities have no direct guidance for interpreting the statute. This article introduces indirect guidance that suggests guiding principles, and furthermore proposes that, under the circumstances, an interpretation grounded in those principles, and extended as new investigations warrant, is the most supportable