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Section 871(m) Withholding and Reporting

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Solution introduction

US Section 871(m) regulations extend the US withholding tax object to specific income from derivatives referencing US equities

This is irrespective of whether the derivatives concerned were issued by US or non-US persons. Under their QI Agreement, banks are required to withhold US withholding taxes on the US investment income of their clients and to report it to the US tax authorities. Derivative income that falls under Section 871(m) is also generally affected. Accordingly, this derivative income must be identified, charged, submitted and reported.

Confinale supports Avaloq banks in implementing Section 871(m) regulations with a three-part solution package that can be adapted to the individual needs of each bank. The solution packages include in particular:

  • Connection to SIX VDF 871(m) data feed and creation of the necessary master data
  • Automated mechanism for charging the withholding tax based on dividend equivalents (retrospective from 1.1.2017)
  • Blockings for specific 871(m) products
  • Additional information on customer notifications
  • Including 871(m) transactions for the 1042-S reporting

Control and safety
Section 871(m) transactions do not have to be manually identified and monitored. Affected transactions are automatically detected and evaluated. Even complex products can be identified by means of a look-through approach.

Affected transactions are settled with the correct deltas, tax values and the correct DBA rate of the customer. Thereby, both the client custody withholding as well as the issuer withholding are taken into consideration.

871(m)-income can be directly included in the bank's 1042-S reporting. The merge with the 1042-S reporting takes place completely in Avaloq. No other systems are involved.

Calculations, debits and settlements are fully automated. Where desired, manual intervention points can be added at any time.

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