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IHS Markit Launches ‘Different’ Solution For Derivatives Tax Compliance

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Information, analytics and solutions provider IHS Markit has launched Markit / CTI Tax Solutions for Section 871(m), a service that went live with some users on January 1 as the US Internal Revenue Service (IRS) rule governing withholding on foreign investors for dividend equivalent payments for US equity derivatives took effect.

Brown Brothers Harriman (BBH), and other firms that the provider has not named, collaborated on the design of the service and are early adopters. Their participation makes IHS Markit’s 871(m) tax compliance service “different” than what is offered in Bloomberg’s 871(m) Tax Solution, according to Cyrus Daftary, co-head of operational risk and regulatory compliance solutions at IHS Markit.

“A lot of accounting firms are helping people decide and do analysis as to what’s in and out, particularly on a security-by-security transaction,” says Daftary. “Some accounting firms may have advised Bloomberg or Thomson Reuters on how and what they should publish. What Markit is doing is more about helping users operationalize and manage data. [Markit / CTI Tax Solutions for Section 871(m)] helps contain the data and operationalize the end-to-end process, as opposed to focusing on a particular data point.”

Firms that began using IHS Markit’s service completed testing during December to prepare to operate live starting January 1, according to Daftary. Working with BBH and other collaborators, IHS Markit built its solution to include a front-office tool that determines whether a security is covered by the Section 871(m) rule, a back-office tool for withholding calculations, and an issuer distribution tool to publish information about their instruments that is relevant to Section 871(m) compliance.

In addition, IHS Markit is leveraging its other data and services offerings to enhance the Tax Solutions service. For example, DeltaOne index and ETP data will support classifying of instruments as subject to Section 871(m) or not, according to Daftary. DeltaOne is one of several services from CoreOne Technologies, which Markit acquired in August 2015.

A key litmus test for whether a derivative is subject to tax withholding under Section 871(m) is whether its delta measurement is higher than one. Delta in this case means the equivalence of changes in the price of a derivative with changes in the price of the underlying security. A delta higher than one shows that the derivative’s price will change by more than the change in price of the underlying security. Earlier versions of Section 871(m) had set a delta threshold of 0.8.

The IRS has said there are likely to be clarifications of how derivatives are determined to be subject to Section 871(m) withholding in 2018. IHS Markit’s Section 871(m) solution provides pre-trade impact analysis about whether a derivative instrument is subject to the regulation, and calculates the amount subject to withholding and the withholding tax rate.

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