IRS has revised its general frequently asked questions (FAQs) on the Foreign Account Tax Compliance Act (FATCA) on Qualified Intermediaries (QIs), Withholding Foreign Partnerships (WPs), and Withholding Foreign Trusts (WTs) to provide additional guidance on the certification requirement when a QI’s responsible officer has identified an event of default, or a material failure, prior to the QI’s certification date.
Background. The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 to the Code (Code Sec. 1471 through Code Sec. 1474, FATCA). In general, Chapter 4 requires withholding agents to withhold and deduct 30% from certain payments made to a foreign financial institution (FFI) unless the FFI: (i) has entered into an “FFI agreement” with the U.S. to, among other things, report certain information with respect to U.S. accounts (a participating FFI); (ii) is deemed to meet these requirements under Code Sec. 1471(b) (a deemed-compliant FFI); or (iii) is treated as an exempt beneficiary owner under Reg § 1.1471-6. 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 model intergovernmental agreements (IGAs) that facilitate FATCA implementation.
A QI is an eligible person that submits an application and enters into a QI agreement with IRS. IRS has released a QI agreement in Rev Proc 2017-15, 2017-3 IRB 437, Section 6, which is effective on or after Jan. 1, 2017 (2017 QI agreement). Generally, under the QI Agreement, the QI agrees to assume certain documentation and withholding responsibilities in exchange for simplified information reporting for its foreign account holders and the ability not to disclose proprietary account holder information to a withholding agent that may be a competitor. A QI Agreement simplifies the U.S. tax withholding and reporting obligations for payments of income made to an account holder through one or more foreign intermediaries (e.g., an FFI).
Similar to the QI Agreement, Withholding Foreign Partnership (WP) and Withholding Foreign Trust (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.
New FAQs. IRS has added two new FAQs to its online FATCA guidance, under the heading “Provisions for 2017 QI Agreement.”
FAQ #5 provides that, when a QI merges into an entity already operating as a non-QI, for the QI’s QI-designated accounts to remain under the QI, the following steps must be followed:
- The non-QI must apply for QI status at the time of the merger via the QI/WP/WT Application and Accounts Management System, and if the non-QI is approved for QI status effective as of the date of the merger, the original QI will merge into the newly approved QI (successor QI).
- The original QI must notify IRS that it intends to terminate its QI Agreement by delivery of a notice of termination and merger on the QI/WP/WT Application and Accounts Management System, and ensure the other requirements of section 11.05 of the QI Agreement are met.
- The successor QI must provide the certification required by section 11.02(B) of the QI Agreement for the original QI’s compliance period prior to the merger.
- The successor QI must provide to its withholding agent a Form W-8IMY representing its status as a QI with respect to the successor QI’s QI-designated accounts.
FAQ #6 sets out the procedures that must be followed when a QI in one country re-domiciles into another country after merging with a newly-formed entity, and the QI’s accounts remain with a branch in its original country of residency. In this situation, at the conclusion of the QI’s re-domiciliation, the QI must report its new name, and the new address of its registered office on the QI/WP/WT Application and Accounts Management System, but does not have to re-apply for QI status.
The QI’s branch information must be updated to take into account the new branch of the QI that results from the re-domiciliation, and a QI that is an FFI or a sponsoring entity must also update its information on the FATCA Registration System.
The QI does not have to submit the notice of termination or the certification described under section 11.05 or 11.02(B) of the QI Agreement, as the QI’s existing QI Agreement will be treated as remaining in effect notwithstanding the merger and re-domiciliation. However, the QI must provide to its withholding agent a Form W-8IMY revised to reflect changes resulting from the re-domiciliation that are relevant to the form.
References: For reporting under FATCA, see FTC 2d/FIN ¶O-13,330 et seq.; United States Tax Reporter ¶14,714 et seq.