In general, the QI agreement allows foreign persons to enter into an agreement with the Internal Revenue Service (IRS) to simplify their obligations as a withholding agent under FATCA chapters 3 and 4 and as a payer under chapter 61 and section 3406 for amounts paid to their account holders.
The QI agreement currently in effect, as provided in Rev. Proc. 2014-39, 2014-29 I.R.B. 150 (the 2014 QI agreement), expires on December 31, 2016. The proposed changes to the QI agreement described in this Notice, subject to any modifications included in a revenue procedure containing the final QI agreement (to be issued later in 2016), will apply to QI agreements that are in effect on or after January 1, 2017.
Qualified Derivatives Dealers and Section 871(m)
On September 18, 2015, final and temporary regulations under section 871(m) and sections 1441, 1461, and 1473 (collectively, the 871(m) regulations) were published in T.D. 9734 addressing the treatment of dividend equivalents from U.S. sources. Section 871(m) treats “dividend equivalent” payments as U.S. source dividends for purposes of chapters 3 and 4 and sections 871(a), 881, and 4948(a). As a result, dividend equivalent payments are amounts subject to withholding (as defined in §1.1441-2(a)) for purposes of sections 1441 through 1443 and withholdable payments (as defined in §1.1473-1(a)) for purposes of sections 1471 and 1472. Accordingly, a withholding agent generally is required to deduct and withhold a tax equal to 30 percent on any dividend equivalent payment unless an exception from, or lower rate of, withholding applies.
Periodic Review and Certifications of Compliance
In general, the 2014 QI agreement replaced the previous external audit requirement with an internal compliance and review program. As part of this compliance program, the responsible officer is required to make periodic compliance certifications and provide certain factual information to the IRS. Under the proposed QI agreement, a QI’s responsible officer will still be required to make a periodic certification of internal controls.
FATCA requirements
As part of the QI agreement, a QI that is an FFI is required to comply with the FATCA requirements applicable to its chapter 4 status as a participating FFI, registered deemed-compliant FFI, or registered deemed-compliant Model 1 IGA FFI, and a QI that is a non-financial foreign entity (NFFE) acting on behalf of its shareholders is required to comply with the requirements of a direct reporting NFFE. In addition the proposed QI agreement clarifies that the QI’s responsible officer can rely on other personnel with oversight or responsibility for the QI’s FATCA requirements as a participating FFI, registered deemed-compliant FFI, or registered deemed-compliant Model 1 IGA FFI (as defined in section 2.28 of the proposed QI agreement) or its requirements as a direct reporting NFFE or sponsoring entity, as applicable, in making its certifications relating to its FATCA obligations.
Substitute Interest
The proposed QI agreement allows a QI to assume primary chapters 3 and 4 withholding responsibility and primary Form 1099 reporting and backup withholding responsibility for payments of interest and substitute interest it receives in connection with a sale-repurchase or similar agreement, a securities lending transaction, or collateral that it holds in connection with its activities as a securities dealer. This will allow a QI to provide a Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting, to a withholding agent certifying that the QI is a QI assuming primary withholding responsibility without requiring the QI to distinguish between these payments of interest and substitute interest the QI receives as a principal and those that it receives as an intermediary. QIs that assume primary withholding responsibility for payments of interest and substitute interest as described in this paragraph will be required to assume primary withholding responsibility for all such payments.
Limitation on Benefits for Treaty Claims
In order to enhance and make more robust claims for a reduced rate of chapter 3 withholding under an income tax treaty, Treasury and the IRS intend to modify the chapter 3 regulations to require withholding agents to collect certain information and certifications regarding a beneficial owner’s claim for treaty benefits. Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), was revised in April 2016 to include check boxes for a beneficial owner to provide information regarding the limitation on benefits provision of an applicable treaty that it satisfies, and Form 1042-S was revised in 2016 to include a line for a withholding agent to report the corresponding limitation on benefits provision code.
The proposed QI agreement modifies the requirements for a QI using documentary evidence to document an entity account holder claiming a reduced rate of withholding under an income tax treaty to require the collection of information regarding limitation on benefits on the treaty statement provided by the account holder. A QI opening an account or obtaining documentation for an entity account holder on or after January 1, 2017, will be required to collect this limitation on benefits information. For QIs with pre-existing entity accounts (as described in section 5.10(A) of the proposed QI agreement) that were documented with documentary evidence, there will be a two-year transition period provided for the collection of the appropriate limitation on benefits information (unless there is a change in circumstances that requires the QI to obtain corrected information). For QIs that documented entity accounts with Forms W-8, those forms may be relied up on until their normal expiration period (unless there is a change in circumstances that requires QI to obtain corrected information). Under the proposed QI agreement, a withholding agent will be subject to an actual knowledge standard with respect to the limitation on benefits claims. The chapter 3 regulations also will be similarly amended to apply an actual knowledge standard for limitation on benefits claims.
Validation of Treaty Claims
In addition to the standard of knowledge for limitation on benefits claims discussed in section 2.06 of this Notice, the proposed QI agreement provides that a QI will be considered to have reason to know that a claim for treaty benefits is unreliable or incorrect if the account holder claims benefits under a treaty that does not exist or is not in force and thus is not included on the list maintained here.
Effective date
The effective date of the proposed QI agreement for an applicant will depend on when the QI submits its application and whether the QI has received any reportable payments prior to when it submits its application. Beginning on January 1, 2017, a prospective QI that applies for QI status prior to March 31 of a calendar year, if approved, will have a QI agreement with an effective date of January 1 of that year. If a prospective QI applies for QI status after March 31 of a calendar year and has not received a reportable payment prior to the date it applies for QI status, if approved, it will have a QI agreement with an effective date of January 1 of that year. If a prospective QI applies for QI status after March 31 and has received a reportable payment prior to the date it applies, if approved, its QI agreement will have an effective date of the first of the month in which its QI application is approved and the prospective QI is issued a QI-EIN. A QI that seeks to renew its QI agreement must renew prior to March 31, 2017, and the renewed QI agreement shall have an effective date of January 1, 2017.
Term of the QI Agreement
The proposed QI agreement would expire, unless otherwise terminated, at the end of the third full calendar year the agreement is in effect.
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