What Are the Tax Consequences of the Securities?
You should review carefully the section entitled "Material U.S.
Federal Income Tax Consequences" in the accompanying product
supplement no. UBS-1a-I. In determining our reporting
responsibilities we intend to treat (i) the Securities for U.S.
federal income tax purposes as prepaid forward contracts with
associated contingent coupons and (ii) any Contingent Coupons as
ordinary income, as described in the section entitled "Material U.S.
Federal Income Tax Consequences Tax Consequences to U.S. Holders
Notes Treated as Prepaid Forward Contracts with Associated Contingent
Coupons" in the accompanying product supplement no. UBS-1a-I. Based
on the advice of Davis Polk & Wardwell LLP, our special tax counsel,
we believe that this is a reasonable treatment, but that there are
other reasonable treatments that the IRS or a court may adopt.
Sale, Exchange or Redemption of a Security. Assuming the treatment described above is respected, upon a sale or
exchange of the Securities (including redemption upon an automatic
call or at maturity), you should recognize capital gain or loss equal
to the difference between the amount realized on the sale or exchange
and your tax basis in the Securities, which should equal the amount
you paid to acquire the Securities (assuming Contingent Coupons are
properly treated as ordinary income, consistent with the position
referred to above). This gain or loss should be short-term capital
gain or loss unless you hold the Securities for more than one year,
in which case the gain or loss should be long-term capital gain or
loss, whether or not you are an initial purchaser of the Securities
at the issue price. The deductibility of capital losses is subject to
limitations. If you sell your Securities between the time your right
to a Contingent Coupon is fixed and the time it is paid, it is likely
that you will be treated as receiving ordinary income equal to the
Contingent Coupon. Although uncertain, it is possible that proceeds
received from the sale or exchange of your Securities prior to an
Observation Date but that can be attributed to an expected Contingent
Coupon payment could be treated as ordinary income. You should
consult your tax adviser regarding this issue.
As described above, there are other reasonable treatments that the
IRS or a court may adopt, in which case the timing and character of
any income or loss on the Securities could be materially affected. In
addition, in 2007 Treasury and the IRS released a notice requesting
comments on the U.S. federal income tax treatment of "prepaid forward
contracts" and similar instruments. The notice focuses in particular
on whether to require investors in these instruments to accrue income
over the term of their investment. It also asks for comments on a
number of related topics, including the character of income or loss
with respect to these instruments and the relevance of factors such
as the nature of the underlying property to which the instruments are
linked. While the notice requests comments on appropriate transition
rules and effective dates, any Treasury regulations or other guidance
promulgated after consideration of these issues could materially
affect the tax consequences of an investment in the Securities,
possibly with retroactive effect. You should consult your tax adviser
regarding the U.S. federal income tax consequences of an investment
in the Securities, including possible alternative treatments and the
issues presented by this notice.
Non-U.S. Holders Tax Considerations. The U.S. federal income tax treatment of Contingent Coupons is
uncertain, and although we believe it is reasonable to take a
position that Contingent Coupons are not subject to U.S. withholding
tax (at least if an applicable Form W-8 is provided), a withholding
agent may nonetheless withhold on these payments (generally at a rate
of 30%, subject to the possible reduction of that rate under an
applicable income tax treaty), unless income from your Securities is
effectively connected with your conduct of a trade or business in the
United States (and, if an applicable treaty so requires, attributable
to a permanent establishment in the United States). If you are not a
United States person, you are urged to consult your tax adviser
regarding the U.S. federal income tax consequences of an investment
in the Securities in light of your particular circumstances.
FATCA. Withholding under legislation commonly referred to as "FATCA" could
apply to payments on the Securities, and (if they are
recharacterized, in whole or in part, as debt instruments) could also
apply to the payment of gross proceeds of a sale of a Security
occurring after December 31, 2016 (including an automatic call or
redemption at maturity). You should consult your tax adviser
regarding the potential application of FATCA to the Securities.
In the event of any withholding on the Securities, we will not be
required to pay any additional amounts with respect to amounts
so withheld.