IRS Proposes New Qualified Intermediary Agreement

The IRS released Notice 2016-42, outlining the proposed new Qualified Intermediary (QI) agreement under FATCA rules, in July 2016. The draft agreement highlights significant updates to recent revenue procedures, including a revision to the QI compliance review and certification procedures, the authorization of primary withholding responsibilities of the QI, and the establishment of Qualified Derivatives Dealer (QDD) rules.

The QI agreement permits a foreign intermediary to enter into agreement with the IRS to simplify its obligations as a withholding agent and as a payor.

The new qualified intermediary review and certification procedure
The proposed agreement provides more guidance on the review and certification compliance program. It permits the responsible officer of the QI to rely on reasonable procedures when certifying internal controls. It also permits the responsible officer to rely on the review provided by an external party when performing a periodic certification. The responsible officer must maintain documentation of the process relied upon to make the certification.

The withholding responsibilities of the QI
Under the draft agreement, qualified intermediaries such as banks will be allowed to withhold on security dealer payments received. The QI will be allowed to provide a Form W-8IMY without having to distinguish if it is acting as a principal or an intermediary. In addition, QIs will be permitted to claim treaty benefits, as long as they can provide a detailed explanation of which limitations of benefits clause is relied on within the particular treaty. The QI will be responsible for ensuring that the claims are reasonable.

The qualified derivatives dealer (QDD) rules
The qualified derivatives dealer regulation was first introduced in 2015 to ease cascading gross basis tax and withholding tax on derivatives transactions. The proposed QI agreement will require eligible entities, such as banks and regulated broker dealers that would like to obtain QDD status, to also have QI status by the later of January 1, 2017, or the date it acquires the QDD status. An advantage of the QDD status is that it allows the financial institution to not apply tax withholding on derivative transactions with underlying equities until the final stage, after which the total tax owed is then calculated and withheld.

Important time frames
The finalized agreement will be effective beginning January 1, 2017. The IRS is asking for comments by August 31, 2016.

Conclusion
This new agreement presents additional complexities in what many consider an already burdensome FATCA reporting requirement. Clients may contact their Marcum tax professional for help with navigating through the new FATCA provisions, and advice on the best practices for claiming a treaty benefit where applicable.