Navigating Section 871(m) with CTI Tax Solutions by IHS Markit
IRS Section 871(m) establishes new regulations that bring risks and navigation challenges for financial institutions. Section 871(m) arose out of the IRS’ concern that non-US investors were using equity derivatives and other linked instruments to avoid US withholding tax on dividends from US securities.
The IRS is now re-characterizing some of these payments so they are treated as a US dividend equivalent amount subject to a withholding tax. The good news is that delta will only be calculated when the equity derivative is issued instead of when it is acquired. The not so good news: financial institutions must create new systems and processes to monitor which products fall within scope of the regulations and when required, implement withholding and reporting.
Sorting through it all can easily become a tangled mess, but it’s something IHS Markit is well-equipped to handle for you. With extensive tax experience, CTI Tax Solutions developed a three part system for stress-free compliance and navigation of Section 871(m). Our solutions screen, report and store information so you don’t have to reinvent the wheel.
CTI Tax Solutions screening process determines when an equity derivative is in scope and subject to Section 871(m). Then we calculate the dividend equivalent amount subject to withholding and provide withholding tax rates based on the counterparty tax profile. As part of our offering, CTI Tax Solutions can disseminate the required information to the custodians and depositories so that they can effectively make their own determinations as a withholding agent. We can also provide the relevant data elements for Form 1042-S reporting to the IRS.
And to help you mitigate risks and manage compliance, CTI Tax Solutions also offers centrally stored information for internal controls and audit governance. There’s no need to bear the burden of developing screening instruments and calculating dividend equivalent amounts and withholding taxes. With IHS Markit, you can safely navigate the new tax regulations today and keep your eye on opportunities coming over the horizon.
We recently produced a short animation video illustrating the challenges around Section 871(m). Please check it out on our YouTube or LinkedIn channels.
For more information about easily complying with mandate 871(m), send a request to [email protected]