Rev Proc 2017-15, 2017-3 IRB
Revenue Procedure 2017-15; Qualified intermediary withholding agreement.
In a Revenue Procedure, IRS has set out the final qualified intermediary withholding agreement (QI agreement) that foreign persons may enter with IRS under Reg. § 1.1441-1(e)(5) to simplify their obligations as withholding agents under chapters 3 and 4 and as payors under chapter 61 and Code Sec. 3406 for amounts paid to their account holders. The QI agreement also allows certain foreign persons to enter into an agreement with IRS to act as qualified derivatives dealers (QDDs). In addition, IRS has announced that, because updated withholding foreign partnership (WP) and withholding foreign trust (WT) agreements will not be published before Dec. 31, 2016, WPs and WTs with agreements currently in effect may continue to treat those agreements as in effect until updated agreements are issued in January of 2017.
Background on FATCA, etc. In general, nonresident aliens and foreign corporations are subject to a U.S. withholding tax on certain items of income that they receive from U.S. sources that are not effectively connected with a U.S. trade or business. Such “fixed, determinable, annual, and periodic income” (FDAP) includes interest, dividends, royalties, compensation, and certain gains. The U.S. withholding tax is generally collected at the source by the withholding agent. Such agent is generally the last person in the U.S. who handles the item before it is remitted to the foreign taxpayer or the taxpayer’s foreign agent.
Under chapter 3 of Subtitle A to the Code, “Withholding of Tax on Nonresident Aliens and Foreign Corporations,” a withholding agent must withhold 30% of any payment that is subject to withholding and made to a foreign payee, unless it can reliably associate the payment with valid tax documentation. (See Code Sec. 1441 to Code Sec. 1446.)
Chapter 4 of the Code (Code Sec. 1471 through Code Sec. 1474, the “Foreign Account Tax Compliance Act” or FATCA) requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless the FFI has entered into a “FFI agreement” with IRS to, among other things, report certain information with respect to U.S. accounts. (The withholding rules are essentially a mechanism to enforce new reporting requirements.) Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities (NFFEs).
In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative intergovernmental agreement (IGA) models that facilitate FATCA implementation.
Background on the QI regime. The QI system was designed to simplify U.S. tax withholding and reporting obligations for payments of income made to an account holder through one or more foreign intermediaries. A QI is an eligible entity that enters into a QI agreement with IRS to assume certain responsibilities related to compliance with the U.S. tax withholding and reporting regime.
Rev Proc 2000-12, 2000-1 CB 387, contained the original application procedures for becoming a QI and reproduces the text of the IRS’s model QI Agreement. To incorporate the FATCA requirements and reflect various other guidance, IRS subsequently issued Rev Proc 2014-39, 2014-29 IRB 150, which: provided a revised QI agreement (the 2014 QI agreement); set out new procedures for a person to enter into a withholding agreement with IRS to be treated as a QI within the meaning of Reg. § 1.1441-1(e)(5) and certify to IRS on behalf of a foreign payee that a lower rate of withholding applies; and provided application procedures for becoming a QI and renewing a QI agreement. (See Weekly Alert ¶ 36 07/03/2014 for more details.)
In July of 2016, IRS issued Notice 2016-42, 2016-29 IRB, in which it provided a proposed QI withholding agreement to replace the QI agreement issued back in 2014 that was currently in effect but would expire at the end of the year (see Weekly Alert ¶ 6 07/07/2016).
Similar to the QI agreement, the WP and WT agreements are intended to simplify withholding and reporting obligations for payments to partners of a WP and beneficiaries or owners of a WT. The agreements are tailored to fit the unique situations of foreign partnerships and trusts in much the same way that the QI agreement is designed to meet the needs of FFIs.
In Rev Proc 2014-47, 2014-35 IRB 393, IRS established guidance for entering into WP and WT agreements with IRS under Reg. § 1.1441-5(c)(2)(ii) and Reg. § 1.1441-5(e)(5)(v) . It also highlighted changes to the existing WP and WT agreements that were included in Rev Proc 2003-64, 2003-2 CB 306, as modified by Rev Proc 2004-21, 2004-1 CB 702 and Rev Proc 2005-77, 2005-2 CB 1176, and provided the text to the most current version of the WP agreement and WT agreement.
New guidance. In Rev Proc 2017-15, IRS has set out the final QI withholding agreement that foreign persons may enter with IRS under Reg. § 1.1441-1(e)(5) to simplify their obligations as a withholding agent under chapters 3 and 4 and as a payor under chapter 61 and Code Sec. 3406 for amounts paid to their account holders.
The QI agreement also allows certain foreign persons to enter into an agreement with IRS to act as qualified derivatives dealers (QDDs).
The text of the final QI agreement is in Rev Proc 2017-15, Sec. 6.
WP and WT agreements. Rev Proc 2017-15 also announces that because updated WP and WT agreements will not be published before Dec. 31, 2016, WPs and WTs with agreements currently in effect may continue to treat those agreements as in effect until updated agreements are issued in January of 2017.
Effective Date. The final QI agreement is effective on or after Jan. 1, 2017.
The effective date of the QI agreement for a new QI 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 Jan. 1, 2017, a prospective QI that applies for QI status on or before March 31 of a calendar year and is 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 and is 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 and is approved, it will have a QI agreement with 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 for its renewed QI agreement to have an effective date of Jan. 1, 2017.
References: For withholdable payments to FFIs and other foreign entities, see FTC 2d/FIN ¶ O-13070 et seq.;United States Tax Reporter ¶ 14,714 et seq..