Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934,
DTC has filed a proposed rule change to implement a new tax service called “DALI” (an acronym for data link for intermediaries). DALI is a communications hub to be used by U.S. payors such as banks, broker-dealers and foreign customers to exchange data in order to determine the proper withholding amount and to report U.S. withholding tax on payments such as dividends and interest made to a foreign payee.
In its filing with the Commission, DTC included statements concerning the purpose of and basis for the
The proposed rule change consists of the addition of DALI to DTC's tax services. DALI is a communications hub that will allow financial institutions (typically, a U.S. paying institution and its foreign customer payee) to exchange the data necessary to determine correct withholding and reporting of U.S. tax on payments such as dividends and interest to a foreign payee. DALI will also provide a storage facility for payment allocation information necessary for tax reporting. At a later stage, DALI will be expanded to also serve as a document repository for payee tax documentation and a storage facility for payment allocation information necessary for tax reporting at a beneficial owner level.
Changes in U.S. tax regulations concerning U.S. withholding tax and reporting on payments of U.s. source income made to foreign payees will become effective on January 1, 2001.
DTC was asked to provide the DALI service by several of its participants (referred to here as the “Consortium”) that sought a common solution to enable them to comply with the new withholding tax regulations. The Consortium also consulted with Price WaterhouseCoopers (“PWC”) concerning the feasibility of developing a centralized and standardized software system that could be shared among the Consortium. At the request of the Consortium and industry groups, DTC agreed to act as a project manager for the development of the DALI software system and to operate and maintain the completed system as a DTC service. DTC and the Consortium retained PWC to develop the core DALI software. The Consortium agreed to pay PWC's software development costs and DTC's out-of-pocket product development costs such as hardware and operating software. The Consortium expects to recoup these costs over time from the proceeds of excess user service fees.
DALI is a communications hub that withholding agents and foreign payees can use to transmit and receive the information necessary for tax withholding and reporting under the new tax regulations. DALI will be available to participants and non-participant customers for use with respect to withholding on varying types of payments and not restricted to position in securities held at DTC. DALI may be accessed by File Transfer Protocol and through the Internet at DTC's website.
In its simplest form, a typical message flow through DALI would proceed as follows:
(1) A U.S. financial institution notifies its foreign customer of a forthcoming payment and requests payment allocation information on the payment.
(2) The foreign intermediary responds with allocation information based upon the characteristics of the beneficial owners of the payment; and
(3) The U.S. financial institution confirms allocation instructions.
DALI will later be used to also validate, track, and retain required payee tax documentation such as IRS Forms W–8 and W–9 and to aggregate information for recordkeeping and tax reporting.
DTC believes that the proposed rule change is consistent with the requirements of Section 17A(b)(3) of the Act
DTC does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
Representatives of several of DTC's participants that comprise DTC's Foreign Taxes Legal Working Group requested at a meeting held on January 24, 2000, that DTC provide a service to facilitate compliance with the new U.S. tax withholding regulations effective January 1, 2001. This request was made in writing by memorandum to DTC dated February 1, 2000, from the group of financial institutions then comprising the DALI Consortium (Morgan Stanley, Dean Witter, Goldman Sachs, Merrill Lynch, Prudential Securities, Salomon Smith Barney/Citibank, Pershing/DLJ, Chase Manhattan Bank, Brown Brothers Harriman, and Bear Stearns). Except as set forth above, DTC has not solicited nor received written comments on the proposed rule change.
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(iii) of the Act
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, DC. Copies of such filing will also be available for inspection and copying at DTC's principal office. All submissions should refer to File No. SR–DTC–00–19 and should be submitted by December 28, 2000.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.