DTCC has launched a new service to provide its subsidiary, the Depository Trust Company (DTC), with IRS Form 1042-S tax withholding information on distributions.
The service, known as the 1042-S Classification Announcement, will lower the amount of tax withheld on distributions for non-US investors, prior to the payable date.
DTCC collaborated with BlackRock and Citi Securities Services on the launch of the service and to establish a formal process for providing interest-related dividends on bond exchange-traded funds (ETFs) at the time of distribution.
Citi Securities Services is leveraging the new service to reduce the amount of taxes withheld on payments to its clients.
While interest-related dividends are not subject to a withholding tax, due to information not being available at the time of distribution to non-US investors, ETF distributions are treated as dividends and subject to a 30 per cent tax on payments.
At year end, when firms receive data on interest-related dividends, tax refunds are processed to investors that were over-withheld throughout the year.
By providing interest-related dividend information on the 1042-S Announcement at the time of distribution, brokers and custodians will now have access to the required information and will no longer have to withhold 30 per cent tax on payments, says DTCC.
The corporation estimates that hundreds of millions of dollars are over-withheld on distributions at inception, tying up funding and liquidity, only to be refunded later in the year.
The service has been launched following the U.S. Securities and Exchange Commission’s approval.
Longer term, DTCC has said the 1042-S service may be used for additional pooled investments and types of distributions that may have multiple components for 1042-S tax withholding purposes.
Ian DeSacia, executive director, global tax services at DTCC, says: “This is a major step toward further automating tax processing and increasing efficiency. Being able to source interest-related dividends directly from an issuer and provide it in an automated ISO 20022 format, leveraging fixed data formats and a standardised set of rules, will enable greater automation in the tax withholding process, creating new efficiencies, lowering upfront tax burdens and reducing risks.”
Shawn Ormont, vice president of tax product at Citi Securities Services, comments: “The 1042-S Announcement will increase straight-through processing on tax withholding and reduce risk, delivering tremendous value to the industry.”
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