After launching a successful production pilot program for tax clients in December 2016, DTCC has implemented the full-service offering of its 305(c) Announcement Service. The service helps clients meet their tax withholding and reporting obligations by providing information-only announcements on deemed distributions under section 305(c) of the Internal Revenue Code.
By leveraging its unique position within the industry, DTCC is able to source tax information directly from issuers and provide this information in a standardized fielded format using the same medium that handles corporate action events. The announcements are made available to clients in Corporate Actions Web (CA Web) and provided to clients via ISO 20022 messaging allowing for operational efficiency by enabling smooth, automated data integration directly into clients’ systems.
“Collaboration with the industry was vital in finding a way to implement a solution within the ever-evolving tax landscape,” said Dan Thieke, DTCC Managing Director, General Manager, Settlement and Asset Services. “We’re pleased DTCC has been able to play a centralized role in bringing greater efficiencies to the 305(c) Announcement process for issuers and the industry overall.”
Issuer Outreach during Pilot Phase
The pilot phase included individualized outreach from the Global Tax Services team to ensure clients were aware of the new capabilities and functions of the tax event announcement service.
During the pilot phase, the Global Tax Services team performed an extensive outreach to issuers of convertible securities. Prior to the outreach, most issuers were not aware of their obligations to publish IRS Form 8937s for deemed distributions under 305(c). Instead, brokers were forced to rely on vendors or to calculate the amount of 305(c) deemed dividend, which had
the potential to result in holders of convertible securities being treated inconsistently.
What is Section 305(c)?
Section 305(c) states that holders of convertible securities may deem to have received a dividend as a result of an underlying common stock’s cash dividend. Issuers of convertible securities are required to file IRS Form 8937 if a conversion rate adjustment results in a deemed dividend under section 305(c). The 305(c) Announcement Service eliminates the need for firms to source, review and interpret Form 8937.
"The industry has been seeking market standards and better alignment of information flows for 305(c) for some time. The fact that DTCC was able to meet both needs with one solution will help bring much needed efficiencies to the event notification process,” said Dana Pasricha, Vice President at Brown Brothers Harriman.
The full production pilot occurred between December 2016 and September 2017, consisting of 2016 and ongoing 2017 section 305(c) tax events. As issuers were contacted, more than 260 securities were analyzed that had potential 305(c) deemed distributions. This resulted in more than $465 million in section 305(c) deemed distributions to DTCC’s clients from over 270 completed tax events during that span.
"Frankly, we were surprised by the amount uncovered in our analysis for clients,” said Nardeo Ganesh, DTCC Executive Director, Asset Services. “However, we believe that by getting the information directly from the issuer that holders of convertible securities will now have a more consistent and accurate calculation.”
In addition to the 305(c) Announcements Service, the Form 8937s are also available in DTCC’s Legal Notice System (LENS), providing access to the source document and allowing users to search notices by CUSIP, keyword, notice type or document number.
Learn more about 305(c) Announcement Service by visiting dtcc.com/305c.