IRS 871(m) Tax Compliance Data
Comply with IRS Section 871(m) and fulfill withholding and reporting obligations.
Guidance issued by the IRS on 2 December 2016 officially confirmed the phasing-in of 871(m) dividend equivalent taxation regulations, which were finalized in September of 2015. This notice follows the unofficial announcement in late October, and stipulates that in calendar year 2017 enforcement will focus on delta-one and a subset of combined transactions as defined in the rule. The guidance also specifies certain Exchange Traded Notes (ETNs) to be out of scope until 2020.
As the financial services industry continues to prepare for compliance by adapting systems, processes and data procurement, SIX Financial Information is also adjusting its data services to accommodate the relaxed enforcement environment in 2017. In addition to determining 871(m) eligibility and providing classification for instruments confirmed by both the regulation and this notice, SIX Financial Information will support financial institutions in this transition phase by providing tax applicability status for identified 871(m)-relevant instruments. A new “out of scope” tax applicability will also be introduced for identifying those ETNs with a delayed effective date as listed in section III.D of the guidance notice. This will be extended in future to accommodate further ETN lists published by the IRS “through guidelines or in a private letter ruling”.
While this notice amounts to an official, partial relaxation in regulatory enforcement, in practice it gives financial firms slight cause for relaxing their compliance efforts, given that the fundamental requirement still remains for firms to identify, withhold and report on a subset of in-scope instruments.
The IRS has indicated that it will take into account the extent to which good faith efforts have been made to comply with the section 871(m) regulations when it comes to enforcing the rules. However, the simplified standard only applies to withholding agents, and does not apply to taxpayers that are long parties to potential section 871(m) transactions. For the foreign investors targeted by the regulation, the partial postponement of the application date is therefore likely to offer scant comfort.
Even for withholding agents, a relaxation in enforcement criteria still comes with strict conditions attached. With regard to good faith efforts, withholding agents must still comply with reporting and withholding on delta-one transactions and QDD provisions in 2017. Leeway will only be granted as long as they are building and updating documentation and withholding systems, and working to determine whether transactions are combined transactions. The good faith period specified is narrow, and the specter of penalties remains if no such effort can be evidenced.
The IRS has indicated that a good faith compliance effort should necessarily include “enhancing and developing data sources for determining whether transactions are section 871(m) transactions”. Provisioning 871(m) data from a reputable data source may be one means of escaping undue attention from the regulator. Data services that deliver issuer-provided 871(m) data may be viewed particularly positively, as establishing such connections could be considered a proactive effort to identify 871(m)-relevant securities.
Thanks to its flexible offering, SIX is able to adapt the regulatory rule set for 871(m) to accommodate the phase-in period requirements and deliver data to support clients with their reporting and withholding obligations under the current regulatory environment and as the regulation evolves. According to the December 2 guidance, further amendments are expected, such as allowing additional ETNs that meet the criteria of continuous distribution to be subject to the delayed effective date and perhaps taking industry comments into account to influence the rule in the future. SIX Financial Information is therefore closely monitoring developments to help financial firms navigate the regulatory uncertainty around 871(m) as the situation evolves.
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SIX Financial Information is a leading global provider of data and value-added services for the wealth and asset management industry. Aggregated directly and in real-time from 1500 worldwide sources - covering all the major trading venues - SIX’s database includes reference and market data, corporate actions, regulatory data and pricing information for over 18 million instruments. With offices in 23 countries, SIX combines the advantages of local expertise with global reach to offer financial specialists comprehensive data services for asset servicing and administration, middle office, and investment and portfolio management.
SIX operates Switzerland’s financial market infrastructure and offers on a global scale comprehensive services in the areas of securities trading, clearing and settlement, as well as financial information and payment transactions. The company is owned by its users (approximately 140 banks of various size and orientation) and, with its workforce of more than 4‚000 employees and presence in 25 countries, generated an operating income of 1.8 billion Swiss francs and a Group net profit of CHF 247.2 million in 2014.