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Section 871(m): The new qualified derivatives dealer regime Impact assessment and implementation approach
Tara FerrisPrincipal, Financial ServicesErnst & Young LLP+1 212 360 [email protected]
Lauren LovelacePrincipal, Financial ServicesErnst & Young LLP+1 212 773 [email protected]
Vishnu ThampiSenior Manager, Financial ServicesErnst & Young LLP+1 212 773 5911 [email protected]
EY | Assurance | Tax | Transactions | Advisory
About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.
© 2016 Ernst & Young LLP.All Rights Reserved.
1610-2084562
ED None
This material has been prepared for general informational purposesonly and is not intended to be relied upon as accounting, tax or otherprofessional advice. Please refer to your advisors for specific advice.
ey.com
Justin O’BrienPrincipal, Financial ServicesErnst & Young LLP+1 212 773 [email protected]
Fredric CibelliPrincipal, Financial ServicesErnst & Young LLP+1 212 773 [email protected]
Paul FrascoSenior Manager, Financial ServicesErnst & Young LLP+1 212 773 9037 [email protected]
Our Ernst & Young LLP QDD leadership team
Illustration of QDD tax liability
Our approach to QDD
• Update onboarding procedures
• Validate revised Forms W-8IMY
• Implement appropriate withholding and reporting functionality
Implement QDD-specific functionality • Tax liability calculation
• Withholding logic and frequency
• Year-end reporting requirements
• Update documentation standard to collect Forms W-8 or W-9 or comply with KYC attachment
III
Entity identification• Identify which entities enter into equity derivatives or
security hedges that have a Section 871(m) implication to determine if such entities should apply to be QDDs
I
QDD application• Complete QDD application (Form 14345) for all
selected legal entities
II
Overview• The proposed qualified intermediary (QI) agreement
includes the new qualified derivatives dealer (QDD) regime to deal with US equity derivatives transactions covered by Section 871(m) and substitute payments in securities lending transactions.
• Firms need to consider the requirements of acting as QDD and facing off against a QDD.
• Current qualified securities lenders (QSLs) and dealers of US equity derivatives will need to become QDDs under the QI agreement to be exempt from withholding on certain dividend and dividend equivalent payments (including substitute dividends).
• QDDs will need to establish procedures and processes to fulfill their requirements starting 1 January 2017, the effective date of Section 871(m).
Form W-8IMY — key facts • Section 871(m) imposes a 30% withholding tax (or lower
treaty rate on dividends) on dividend equivalent amounts (DEAs) from derivatives that reference US equities that pay dividends.
• Becoming a QDD prevents multiple levels of withholding on the same stream of dividends. If a QDD provides a valid Form W-8IMY to a withholding agent, the withholding agent will not be required to withhold on certain payments when the QDD is acting as a principal in a transaction.
• Generally, new and existing QIs must follow the instructions in Form 14345 to apply for QDD status on or before 31 March 2017 for the agreement to be effective on 1 January 2017.
Key requirements• Assumes primary withholding responsibility under
chapters 3 and 4 and backup withholding under chapter 61 for potential Section 871(m) transactions
• Must collect know your customer (KYC) documentation or Forms W-8/W-9 to document account holders’ US or non-US status
• Is liable for tax on any dividends and dividend equivalents it receives to the extent that it does not make offsetting payments as a short party to another transaction that references the same security (QDD tax liability)
• Reports on Form 1042-S DEA payments and other reportable payments it makes to counterparties (generally on a pooled basis) and reports on Form 1042 the tax it withheld and payments of DEAs as well as its QDD tax liability
• Elects a responsible officer (RO) who oversees QDD’s compliance program and confirms adequate written policies, procedures, processes, controls, training and systems in place to meet the documentation, withholding and reporting requirements of a QDD under the QI agreement
Firms acting as a QDD1.
Firms facing off against a QDD2.
Compliance program• Design and document a consistent and standardized
compliance program that includes:
• Policy and procedures manual that documents QDD requirements, allocates accountability and responsibility for operational tax risks and controls, and provides minimum risk and control standards
• Training modules on operational procedures for responsible officer(s) and other key stakeholders of the compliance program
IV
contract execution
tax documentation for validation
Legend
How EY can help
Our suite of accelerators significantly reduce a firm’s implementation timeline, providing a quicker and more efficient path to compliance.
Acc
eler
ator
s
QDD Business Requirements Document► The QDD Business Requirements Document (BRD) is a comprehensive set of regulatory business requirements that firms
can leverage to implement their QDD capabilities. The BRD facilitates the creation of the functional requirements, and it alsohelps to design and develop the QDD system.
QDD Compliance Manual► The Compliance Manual includes a policy and procedures guidebook that addresses each QDD’s requirements, enumerates
accountability and responsibilities for operational tax risks and controls, and provides minimum risk and control standards.
Product Playbook► EY’s Product Playbook is a comprehensive set of QDD scenarios that details the tax liability calculations and the associated
impacts to withholding and reporting. These scenarios can help firms at various stages in the project life cycle from functional requirements to testing.
payment flow
appropriate IRS form
Illustration of QDD tax liability
Our approach to QDD
• Update onboarding procedures
• Validate revised Forms W-8IMY
• Implement appropriate withholding and reporting functionality
Implement QDD-specific functionality • Tax liability calculation
• Withholding logic and frequency
• Year-end reporting requirements
• Update documentation standard to collect Forms W-8 or W-9 or comply with KYC attachment
III
Entity identification• Identify which entities enter into equity derivatives or
security hedges that have a Section 871(m) implication to determine if such entities should apply to be QDDs
I
QDD application• Complete QDD application (Form 14345) for all
selected legal entities
II
Overview• The proposed qualified intermediary (QI) agreement
includes the new qualified derivatives dealer (QDD) regime to deal with US equity derivatives transactions covered by Section 871(m) and substitute payments in securities lending transactions.
• Firms need to consider the requirements of acting as QDD and facing off against a QDD.
• Current qualified securities lenders (QSLs) and dealers of US equity derivatives will need to become QDDs under the QI agreement to be exempt from withholding on certain dividend and dividend equivalent payments (including substitute dividends).
• QDDs will need to establish procedures and processes to fulfill their requirements starting 1 January 2017, the effective date of Section 871(m).
Form W-8IMY — key facts • Section 871(m) imposes a 30% withholding tax (or lower
treaty rate on dividends) on dividend equivalent amounts (DEAs) from derivatives that reference US equities that pay dividends.
• Becoming a QDD prevents multiple levels of withholding on the same stream of dividends. If a QDD provides a valid Form W-8IMY to a withholding agent, the withholding agent will not be required to withhold on certain payments when the QDD is acting as a principal in a transaction.
• Generally, new and existing QIs must follow the instructions in Form 14345 to apply for QDD status on or before 31 March 2017 for the agreement to be effective on 1 January 2017.
Key requirements• Assumes primary withholding responsibility under
chapters 3 and 4 and backup withholding under chapter 61 for potential Section 871(m) transactions
• Must collect know your customer (KYC) documentation or Forms W-8/W-9 to document account holders’ US or non-US status
• Is liable for tax on any dividends and dividend equivalents it receives to the extent that it does not make offsetting payments as a short party to another transaction that references the same security (QDD tax liability)
• Reports on Form 1042-S DEA payments and other reportable payments it makes to counterparties (generally on a pooled basis) and reports on Form 1042 the tax it withheld and payments of DEAs as well as its QDD tax liability
• Elects a responsible officer (RO) who oversees QDD’s compliance program and confirms adequate written policies, procedures, processes, controls, training and systems in place to meet the documentation, withholding and reporting requirements of a QDD under the QI agreement
Firms acting as a QDD1.
Firms facing off against a QDD2.
Compliance program• Design and document a consistent and standardized
compliance program that includes:
• Policy and procedures manual that documents QDD requirements, allocates accountability and responsibility for operational tax risks and controls, and provides minimum risk and control standards
• Training modules on operational procedures for responsible officer(s) and other key stakeholders of the compliance program
IV
contract execution
tax documentation for validation
Legend
How EY can help
Our suite of accelerators significantly reduce a firm’s implementation timeline, providing a quicker and more efficient path to compliance.
Acc
eler
ator
s
QDD Business Requirements Document► The QDD Business Requirements Document (BRD) is a comprehensive set of regulatory business requirements that firms
can leverage to implement their QDD capabilities. The BRD facilitates the creation of the functional requirements, and it alsohelps to design and develop the QDD system.
QDD Compliance Manual► The Compliance Manual includes a policy and procedures guidebook that addresses each QDD’s requirements, enumerates
accountability and responsibilities for operational tax risks and controls, and provides minimum risk and control standards.
Product Playbook► EY’s Product Playbook is a comprehensive set of QDD scenarios that details the tax liability calculations and the associated
impacts to withholding and reporting. These scenarios can help firms at various stages in the project life cycle from functional requirements to testing.
payment flow
appropriate IRS form
Section 871(m): The new qualified derivatives dealer regime Impact assessment and implementation approach
Tara FerrisPrincipal, Financial ServicesErnst & Young LLP+1 212 360 [email protected]
Lauren LovelacePrincipal, Financial ServicesErnst & Young LLP+1 212 773 [email protected]
Vishnu ThampiSenior Manager, Financial ServicesErnst & Young LLP+1 212 773 5911 [email protected]
EY | Assurance | Tax | Transactions | Advisory
About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.
© 2016 Ernst & Young LLP.All Rights Reserved.
1610-2084562
ED None
This material has been prepared for general informational purposesonly and is not intended to be relied upon as accounting, tax or otherprofessional advice. Please refer to your advisors for specific advice.
ey.com
Justin O’BrienPrincipal, Financial ServicesErnst & Young LLP+1 212 773 [email protected]
Fredric CibelliPrincipal, Financial ServicesErnst & Young LLP+1 212 773 [email protected]
Paul FrascoSenior Manager, Financial ServicesErnst & Young LLP+1 212 773 9037 [email protected]
Our Ernst & Young LLP QDD leadership team
