In 2015, the IRS issued new final and temporary regulations under Section 871(m) of the US Internal Revenue Code. The regulations provide updated rules for determining whether certain payments under swaps or equity-linked instruments might be treated as US ‘dividend equivalent’ payments and, if paid to a non-US beneficial owner, would be subject to US withholding tax generally applicable to US source dividends. The regulations will generally be effective for payments made on or after January 1st 2017.
Payments under swaps or equity-linked instruments are currently not subject to withholding, so banks and brokers must create systems and processes in order to monitor which products may be subject to the new regulations and also implement withholding and reporting where required.
Markit | CTI Tax Solutions’ for Section 871(m) assists financial institutions in addressing their compliance obligations under the Section 871(m) regulations. Leveraging our tax and compliance expertise, it streamlines customers’ Section 871(m) compliance processes by allowing clients to conduct due diligence with respect to their derivative products and integrates the screening of transactions with withholding and reporting functionality.
Financial institutions that act as an issuer can also choose to share Section 871(m) specific data on their structured notes and distribute these details through a repository that will securely share and permission relevant data to withholding agents. The distribution channel may also be coupled with a Dividend Equivalent Amount (DEA) calculator if needed.