• Home
  • Equities
  • Fixed Income
  • Alternative Investments
  • Multi-Asset
  • Passive
  • Thematic
  • Events
  • Market Intelligence
  • Investment Week
  • Newsletters
  • Follow us
    • RSS
    • Twitter
    • LinkedIn
    • Newsletters
  • Events
    • Upcoming events
      event logo
      Milan Forum 2019 (March)

      InvestmentEurope's 9th annual Milan Forum 2019 will take place on 8th March at the Four Seasons Hotel, Milan.

      • Date: 08 Mar 2019
      • Four Seasons Hotel, Milan
      event logo
      Nordic Summit Stockholm 2019

      InvestmentEurope's Nordic Summit returns to Stockholm for the 5th year in 2019.

      • Date: 12 Mar 2019
      • Grand Hotel, Stockholm
      event logo
      Frabelux Forum 2019

      Now in its 2nd year InvestmentEurope's Frabelux Forum will take place on 20th March at the Ritz Hotel, Paris.

      • Date: 20 Mar 2019
      • The Ritz Hotel, Paris
      event logo
      Women in Investment Awards Italy

      InvestmentEurope's Women in Investment Italy will honour the inspiring achievements of women across all parts of the investment industry in Italy

      • Date: 02 Oct 2019
      • Melia Milano Via Masaccio 19 Milan, Milan
      View all events
      Follow our events

      Sign up to receive email alerts about our events

      Sign up

  • Market Intelligence
  • Investment Week
Investment Europe
Investment Europe

Sponsored by

Sharing Alpha
  • Home
  • Equities
  • Fixed Income
  • Alternative Investments
  • Multi-Asset
  • Passive
  • Thematic

Taxing times: is the market ready for a new tax on US equity derivatives?

  • Jonathan Boyd
  • Jonathan Boyd
  • 21 June 2017
  • Tweet  
  • Facebook  
  • LinkedIn  
  • Google plus  
  • Send to  

From the Big Bang of ‘86 to the dotcom bubble of the early 2000’s, finance, perhaps more than any other industry, is defined by a series of eras. Some eras, have far greater significance than others: who could forget 2007-2008?

But you have to rack your brains to think of another period that has lasted quite as long as the current global battle to stamp out tax evasion. Back in 2010, then president Obama passed a law to ensure all US persons were tax compliant, including those with a tax domicile outside the US. The law, known as the Foreign Account Tax Compliance Act (Fatca), meant all foreign financial institutions had to withhold and report any US-sourced assets held by US individuals. Then, four years later, the Automatic Exchange of Information (AEOI) took the fight against tax evasion global.

Related articles

  • Ignore FATCA at your peril - providers express crackdown fears
  • Key facts about FATCA
  • Taxing time for financial institutions unprepared for new laws, SIX survey shows
  • Interactive Data enhances services to facilitate Fatca compliance

Now, the American government is continuing its crackdown by enforcing a 30% withholding tax for non-US investors on dividend payments under derivatives in which the underlying instruments are US equities. This has left firms scrambling to establish the appropriate monitoring, withholding and reporting processes for financial institutions falling under the jurisdiction of this new regulation, more commonly known as 871(m). In effect from 1 January 2018, it applies to situations where the ratio of change in value of the instrument vs. the value of the underlying security is equal or greater than 0.8.

Financial institutions need to have the right processes and systems in place to carry out appropriate calculations and work out which products are affected by the regulation. For investment firms with heavily weighted 871(m) relevant instruments in their portfolios all this adds up to an intricate operational puzzle to solve.

Compliance with 871(m) demands a vast degree of data coverage, research, record-keeping, monitoring, and calculations. To ease reporting and withholding during the phase-in period, the IRS recently raised the delta criteria for affected derivatives to 1.0. Due to the sheer scale and complexity of the task, the IRS will take into account whether a firm has done its best to comply with the combined transaction rule. In 2018, the ruling will be reverted back to the 0.8 delta criteria.

Nevertheless, how exactly should financial institutions go about complying with this latest tax complexity? Clearly, with so much detail to get on top of, firms will need to provide investors with comprehensive and timely information concerning their investment – in the EU, as of 2018 – and also the tax implications. Even before a transaction is carried out, investment managers must be able to tell their clients during the advisory process which instruments fall in-scope of 871(m). Having this level of insight is also key to ensuring that data is shared widely and in a timely manner, and that reporting and withholding requirements are upheld.

Being compliant with 871(m) is, however, just one piece of the puzzle. After all, investors don’t just want to avoid fines; they’re most interested in maximizing their returns. While it may initially seem like a minor and obscure rule amongst a sea of other tax laws, a deluge of detail on the derivatives affected will enable investment managers to detect potential savings and risks. The net beneficiary of this will be clients receiving a better quality of service. As a case in point, Esma (European Securities and Markets Authority) guidelines for the “assessment of knowledge and competence” from 3 January 2017, force advisers to clearly outline the nature of complex products sold to investors. This includes, crucially, the tax implications related to the product in question.

Advisers and investors can access this tax information from 871(m)-related information provided by the major data providers which should empower them to make investing decisions more easily. The savviest firms will be the ones turning the tax compliance to their advantage.

Perhaps the question shouldn’t be whether financial institutions can navigate the maze of 871(m) compliance, but rather, which institutions are going to come out the other side first. After all, as soon as these firms meet their obligations and comply with the various tax directives, they will also be able to deliver benefits to their investors and ultimately, live to see the next financial era that isn’t consumed by the drive to eliminate tax evasion.

 

Phil Lynch is head of Markets, Products, and Strategy at SIX Financial Information 

  • Tweet  
  • Facebook  
  • LinkedIn  
  • Google plus  
  • Send to  
  • Topics
  • Tax
  • Foreign Account Tax Compliance Act (Fatca)
  • Regulation
  • SIX Swiss Exchange
  • United States of America

More From Opinion

Gold: why zero yield is better than negative yield

  • Commodities
  • 13 February 2019
The size paradox

  • UK
  • 13 February 2019
Review of the European ETF Market - 2018

  • Passive
  • 11 February 2019
The UK will remain a key location post-Brexit

  • Equities
  • 08 February 2019
Will it be a complete apocalypse on 29 March or are there solutions available to alternative asset managers?

  • Alternative Investments
  • 08 February 2019
Back to Top

Most read

Swiss bank CEO steps down
UBS overhauls bonuses for 10,000 staff
Vanguard appoints deputy country head for Italy
Credit Suisse announces changes to board of directors
Swedish Church recycles cremations into foundation fund AUM
  • Contact Us
  • Marketing solutions
  • About Incisive Media
  • Terms and conditions
  • Privacy and Cookie policy
  • RSS
  • Twitter
  • LinkedIn
  • Newsletters

© Open Door Media Publishing Ltd, New London House, 172 Drury Lane, London WC2B 5QR, registered in England and Wales with company registration number 08584522