20 February 2018
Cyrus Daftary

Talking all things tax

Cyrus Daftary - IHS Markit

6Posts 41,297Views 0Comments

Transition relief won’t ease the pain of Section 871m

03 January 2017  |  3750 views  |  0

Banks and buysides thought the holidays came early this year as the IRS issued transition relief guidance for Section 871(m) in the form of Notice 2016-76. There were sounds of rejoice with changes to the threshold for US equity derivatives products.

The notice highlights that the regulations will only apply to delta-one transactions for 2017, those with a threshold of 1.0 or higher. Non-delta one transactions will be deferred to 2018. Despite this reprieve, firms shouldn’t be celebrating. It turns out that products which have variable delta, such as listed options, could in fact reach a delta of one and fall into scope for 2017. Unfortunately, there is still much work to be done to ensure a pre-trade screening tool is in place to identify these trades. Moreover, for delta-one products, the calculation of the Dividend Equivalent Amount (DEA) must still be made and appropriate withholding determined.

Buysides shouldn’t be thinking sugar plums either. Changes to the Qualified Derivatives Dealers (QDD) regime could leave them caught out too. They must ensure that they are either working with a US broker dealer or a foreign broker dealer with QDD status, otherwise they run the risk of having to conduct withholding.

The IRS has also given the industry an early present with its ‘good faith’ efforts.  For phase-in years 2017 and 2018, the IRS will take into account good faith efforts by the taxpayer to comply with requirements applicable to those years for enforcement purposes. But will these efforts be good enough? Having a process or systems in place, even though imperfect, may serve as an argument against penalties in the event of an audit. There should be a trail of efforts taken to comply with Section 871(m) requirements.

You may have already rung in the New Year but there is still some work to be done. Industry participants will have to continue to put systems and processes in place to account for screening and withholding now that the new deadline is here.  

TagsRisk & regulationPost-trade & ops

Comments: (0)

Comment on this story (membership required)

Latest posts from Cyrus

Transition relief won’t ease the pain of Section 871m

03 January 2017  |  3750 views  |  0 comments | recomends Recommends 0 TagsRisk & regulationPost-trade & ops

871m: Making tax a front office issue?

01 September 2016  |  5961 views  |  0 comments | recomends Recommends 0 TagsRisk & regulationSibos

871m: the death knell for US equity derivatives?

20 July 2016  |  12073 views  |  0 comments | recomends Recommends 0 TagsRisk & regulation

FATCA remediation: are you buried in an avalanche?

27 April 2016  |  4429 views  |  0 comments | recomends Recommends 0 TagsRisk & regulation

Cyrus's profile

job title Managing Director, CEO, Markit | CTI Tax Solutions
location Boston
member since 2016
Summary profile See full profile »
Chief Executive Officer of Markit CTI Tax Solutions, a global provider of international tax and regulatory compliance solutions. Extensive experience with the United States withholding and reporting r...

Cyrus's expertise

Member since 2016
6 posts0 comments
What Cyrus reads
Cyrus's blog archive
2017 (1)2016 (5)

Who's commenting on Cyrus's posts