IHS Markit, a world leader in critical information, analytics and solutions, today announced the launch of Markit│CTI Tax Solutions for Section 871(m) to address compliance obligations for US equity derivatives. Brown Brothers Harriman and other financial institutions participated in the design phase of the solution and signed on as early adopters.
Section 871(m) issued by the US Internal Revenue Service (IRS) aims to establish up to a 30% tax withholding on foreign investors related to dividend equivalent payments for US equity derivatives. US equity linked instruments, indices, structured notes and convertibles will need to be pre-screened to determine if they are subject to Section 871(m) and may require withholding. Beginning January 1, 2017, all US equity derivative dividends will need to be pre-screened but only those with a delta of one or higher will be subject to withholding. Further clarifications for what will be in scope for 2018 will be assessed by the IRS and announced at a later date.
“Section 871(m) is one of the most complex tax regulations, causing major operational and compliance challenges for firms,” said Cyrus Daftary, Co-Head of Operational Risk and Regulatory Compliance Solutions. “Tax has traditionally been a back office function focused on withholding and reporting but these new requirements will result in new tax implications for the front office. By working with our early adopters, we have created a holistic, centralized solution to streamline the compliance process and ease the regulatory burden.”
IHS Markit’s holistic Section 871(m) solution is part of a suite of data and tax offerings to assist buyside and sellside firms and fund administrators in complying with 871(m) obligations. The solution builds on the expertise and integration of Markit|CTI Tax Solutions, Markit DeltaOne, MarkitSERV, Markit Corporate Actions, Markit Dividend Forecasting and Markit PrimeOne. In addition, the offering leverages the Markit DeltaOne SOLA platform to establish the qualification status of indices and exchange traded products based on official composition, dividend and position data. This information can then be easily consumed via the SOLA database or standard flat file distribution.
In line with the regulatory requirements, the solution also enables firms to conduct a pre-trade impact analysis and determine whether or not a particular derivative instrument would fall in scope. If an instrument is within scope, the solution calculates the amount subject to withholding and the withholding tax rate for a specific counterparty. All of the eligibility data is stored in a centralized repository and can be extracted for Form 1042-S reporting.