The 871(m) Tax Event Announcement helps firms meet their obligations for tax withholding and reporting under 871(m) of the Internal Revenue Code by providing timely notification of dividend equivalent amounts.
Section 871(m) imposes a 30 percent withholding tax on dividend equivalent payments that are made or deemed to be made to non-U.S. persons with respect to certain derivatives that reference equity (“Equity Derivatives”) of a U.S. issuer. Under the Section 871(m) Regulations, an Equity Derivative held by a non-U.S. person can potentially give rise to a dividend equivalent subject to withholding tax. A complex set of rules must be followed in order for the withholding agent to determine if the withholding tax in fact applies, and, if so, the amount of the dividend equivalent subject to withholding tax.
The 871(m) Announcement simplifies compliance with these rules by sourcing dividend equivalent amounts directly from issuers and providing the information in the same manner as other corporate action information which allows these events to flow seamlessly into client’s tax processing engines.