UNITED STATES: DTCC Launches New DTC Service

Thursday August 11 2022

On 10^th August 2022, the Depository Trust & Clearing Corporation (DTCC) announced the launch of a new DTCC service, the 1042-S Classification Announcement following recent U.S. Securities and Exchange Commission (SEC) approval.

The new offering will enable issuers to directly provide DTCC’s subsidiary, the Depository Trust Company (DTC), with IRS Form 1042-S tax withholding information on distributions prior to the payable date, lowering the amount of tax withheld on distributions for non-US investors.

While interest-related dividends are not subject to a withholding tax, due to information not being available at the time of distribution to non-U.S. investors, ETF distributions are treated as dividends and subject to a 30% 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% tax on payments. It is estimated 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 is available to all DTC clients. Longer term, it is envisioned that the 1042-S Announcement could be used for additional pooled investments and types of distributions that may have multiple components for 1042-S tax withholding purposes. DTCC is working with the industry to explore additional ways that the new Announcement service could be used to benefit investors.

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