Isda frowns on IRS proposal

The International Swaps and Derivatives Association (Isda) has criticised proposed changes by the IRS to the accounting regulations for notional principal contacts (NPCs).

The IRS sent Isda four alternative accounting methods governing the timing of income and inclusions and deductions on NPCs that provide for contingent non-periodic payments. In its response to IRS notice 2001-44, Isda argues that three of the four proposed methods are sufficiently flawed on tax grounds to make their implementation highly undesirable. The fourth proposal, the full allocation method, is grudgingly preferred as the best of the four, but the report adds: “it would be less preferable than current practice”.

Isda is putting its weight behind the retention of the current standard. Presently, taxpayers usually defer income inclusions and deductions attributable to contingent payments under NPCs until the contingency has been resolved. The four IRS alternatives change the timing of these inclusions and deductions in different ways, but Isda argues each method results in a tax disincentive for users of NPCs.

“All the IRS proposed methods would lead to a tax disadvantage of synthetic holders of assets through derivatives, and would therefore be a disincentive to the use of NPCs,’ says an Isda spokesman. “So we have responded to the IRS stressing that the present accounting method is preferable.”

A full discussion of Isda’s objections to the IRS’s proposed changes to NPC regulations can be found at www.isda.org.