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Section 871(m)Calculation,storage, data ducationLinking a dividendpayment on anunderlying asset to aderivative contractDelta ate datafeeds for 1042,1042S reportingWithholdingGovernanceDrivers for successful complianceOperations impact:ModerateCopyright 2017 Deloitte Development LLC. All rights reserved.Significant Updatingcontracts anddisclosuresTaxreporting Desks offering equity linked instruments will need toformalize issuance delta calculation and ingestion given it’sprimacy in the determination of trade eligibility Delta information will need to be ingested, stored, andcommunicated to determine 871(m) withholding andinformation reporting Dividend equivalent information will need to be to calculatedusing issuance deltaCustodyClientreportingCommunicationEquities andfixed incomePrime brokerage Update clientstatements toreflect 871(m)withholding Calculate 871(m)withholdingSimple vs.complexsegmentation andlinkage tounderlyingequitiesOnboarding Calculate dividendequivalent Orient clients on871(m)withholdingServices Greater attention toBusinessAcceptance Combine issuancedelta with client andproduct staticFund services(Actg. & Admin.)CollateralmanagementAsset mgmt. Lower impact dueto improved taxform collection(FATCA)The impact is defined by the role played by the parties in a transactionExe.871(m) impacts the tax operations lifecycleInvestmentmanagementWealthmanagement Additional information flows will need to be incorporated forChapter 3 reporting 871(m) withholding information will be required by fundaccounting to ensure accuracy of NAV and performancereporting In addition to recording 871(m) withholding on clientrecords, delta and 871(m) withholding amounts may needto be stored, in anticipation of client and/or regulatoryrequests Although rare, holding convertible debt as collateral maytrigger 871(m) withholding, requiring a review of thecollateral currently held, and a policy review acceptableforms of collateral Investment strategies that include derivatives will requirereview to account for the 871(m) impact A lack of clarity in the rules on processing responsibilitiesmakes contract negotiations challenging While generally considered a fixed income product,structured notes linked to US equities will be subject to871(m) withholdingSection 871(m)1
Section 871(m)Organizations are actively planningfor the transformationSome aspects of the requirementare operationally complex Classifying for simple and complex contracts will require securitymaster analysis and updates Linking ELIs to underlying reference asset is not a consistentpractice and will require standardizationProducts Issuance delta will require counterparties to create new feeds tosend/receive and store this information, and pass it downstream fordividend equivalent and withholding determinationDelta Transaction details will need to be enriched with issuance deltainformation and reproduced for combined trades testing New capability will have to be built to calculate dividend equivalentamounts prior to withholdingWithholding Multiple withholding applications may need to be modified for871(m) withholding, impacting the IT organization that is alreadystretched for resources and constrained for time The regulations are fully effective for contracts entered into on orafter January 1, 2017; the statutory rules continue to apply tocontracts entered into prior to 2017.Effectivedate Identified transactions will need to be enriched with issuance deltainformationCopyright 2017 Deloitte Development LLC. All rights reserved. Inventory impacted businesses and articulate their role in the871(m) lifecycle Establish governance structure for senior management to steer871(m) program, and, manage the program, and mitigate risks Mobilize cross-functional teams consisting of tax technical, taxoperations, and technology resourcesMobilizationandgovernance Provide targeted messaging to key stakeholders on 871(m)requirements, including an executive understanding on effort level Identify front office groups responsible for client outreach toeducate them on 871(m) and leverage them to devise broaderclient outreach strategy Scope homegrown and vendor systems and their roles in the 871(m) lifecycle Connect with system owners (including vendors) to orient them on 871(m) anddevelop consensus on prioritization of build for 2016 Document system and data flows to determine new data and technologycapabilities that need to be built Accelerate the development cycle, beginning with requirements, due to theshortened compliance horizonCommunicationand educationTech and opstransformation Inventory all client and vendors to determine size and scope ofcontracts to be amended Engage legal to outline changes required, depending on nature ofcontracting relationship Begin identifying relationship owners to serve as a single source ofcontact with key providersContractamendmentsSection 871(m)2
Tax withholding and reporting engine871(m) SolutionProposed solutionCopyright 2017 Deloitte Development LLC. All rights reserved.Solution aggregates data, calculates dividend equivalent and withholding(6)The complexity of IRC Section 871(m) andrecently issued regulations thereundercreates a difficult business and technologychallenge. However, Deloitte believes it ispossible to customize and leverage an existingDeloitte Financial Technology Group platformthat has long served financial institutions inconfiguring data-driven rules and performingwaterfall calculations to address many of thecalculations required under 871(m)Using determinations and data inputs providedby the Client, the solution can be designed toinclude the following capabilities: Ability to interface with multiple sourcesystems such as data warehouse, tradingplatforms and remittance systems Extendable tables and import mappingallowing for future customization as dataneeds change Column and row transformation allowing forstandardization and consolidation of largevolumes of data into a central repository Highly auditable and customizable rule setswith ability to create logic and loopcalculations based on user inputs: Customer status and withholding ratedeterminations Product tests under multiple exceptionscenarios Tracking in-scope transactions andcorporate action events Dividend equivalent & withholdingcalculations Combination tradesInput: Customer domicile/status, corporateaction/dividend data, trade data, market dataTrading system(s)Process rulebuilder(4)Security assetmaster(s)ETL(1)Identifies & tracks potential871(m) transactionsCalculateswithholdingMaintains View builder/calculations(3),(5)Tax system(s)Reporting(5)Calculates dividendequivalent amountWithholdingsystem(s)(1), (2)GeneralledgerOracleCapabilityWhat does it mean?(1) Configurablearchitecture Conforms to your architecture to reduce developmenteffortCan be used for multiple purposes(2) Database applicationdesigned for highvolumes Retains data for support and reporting purposesProvides data for reporting & analytics(3) Configurablecalculations Conforms to your data to reduce development effortCan be used for multiple purposesReduces maintenance and allows for regulatory changes(4) Configurableprocesses Extends calculations and provides complex related andreusable processesProvides auditable resultsReduces maintenance and allows for regulatory changesCan be used for multiple purposes (5) Configurable viewsand reporting Allows clients to extend the reporting without systemmodifications(6) Controls, audit trails,and promotionmanagement Disciplined process to appropriately manage flexibilityControlled process to test and promote changes withversion controlSection 871(m)3
Deloitte’s Financial Technology Group qualificationsThe Financial Technology Group’s suite ofsoftware products are utilized by many ofthe market’s largest and most complexbanks, asset managers, administrators,issuers, and trustees Over 250 installations of Financial Technologyapplications on 5 different continents Extensive experience assisting with theintegration of our private equity waterfall andsecuritization solutions into clients’infrastructure Integrated solutions that address current andfuture needs and circumstances. Knowledgeable industry-experiencedprofessionals provide consulting,implementation assistance, and on-goingadvisory services.ContactsTaxCraig GibianPrincipalDeloitte Tax LLPcgibian@deloitte.com 1 202 220 2637Eric FoxPrincipalDeloitte Tax LLPefox@deloitte.com 1 203 905 2618Tom ButeraPrincipalDeloitte Tax LLPtbutera@deloitte.com 1 212 436 3231Jon WattsManaging DirectorDeloitte & Touche LLPjonwatts@deloitte.com 1 212 436 6561Devanjn DesouzaSenior ManagerDeloitte & Touche LLPdevdsouza@deloitte.com 1 212 436 4483AdvisoryGarrett O’BrienPrincipalDeloitte & Touche LLPgobrien@deloitte.com 1 212 436 5250Technology SolutionCopyright 2017 Deloitte Development LLC. All rights reserved.Mark SchererPrincipalDeloitte & Touche LLPmscherer@deloitte.com 1 212 436 2842James UllrichSenior ManagerDeloitte & Touche LLPjullrich@deloitte.com 1 212 436 6382Eric PeelPartnerDeloitte Tax LLPepeel@deloitte.com 1 212 436 4714Mike SteeleSenior ManagerDeloitte Tax LLPmisteele@deloitte.com 1 704 887 1696Section 871(m)4
About DeloitteDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of itsmember firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. In the United States, Deloitte refers to one or more of theUS member firms of DTTL, their related entities that operate using the “Deloitte” name in the United States and their respective affiliates. Certain services may not be available to attest clients underthe rules and regulations of public accounting. Please see www.deloitte.com/about to learn more about our global network of member firms.Copyright 2017 Deloitte Development LLC. All rights reserved.36 USC 220506
Eric Fox Principal Deloitte Tax LLP efox@deloitte.com 1 203 905 2618 Tom Butera Principal Deloitte Tax LLP tbutera@deloitte.com 1 212 436 3231 Advisory Garrett O'Brien Principal Deloitte & Touche LLP gobrien@deloitte.com 1 212 436 5250 Jon Watts Managing Director Deloitte & Touche LLP jonwatts@deloitte.com 1 212 436 6561 Devanjn Desouza .
