IRS Proposes Changes to Qualified Intermediary Agreement

IRS Proposes Changes to Qualified Intermediary Agreement

The IRS has issued guidance (Notice 2016-42) for entering into a qualified intermediary withholding agreement under <a href="http://services.taxanalysts.com/taxbase/ta15.nsf/SecSearch/1-1441-1?OpenDocument#1.1441-1(e)(5)" class="frllink">reg. section 1.1441-1(e)(5)</a>, proposing changes to the QI agreement published in Rev. Proc. 2014-39 that expires on December 31, 2016. The proposed changes to the QI agreement -- subject to any changes included in a revenue procedure containing the final QI agreement that will be issued later this year -- will apply to QI agreements that are in effect after December 31, 2016. Comments on the proposed QI agreement are due by August 31. Notice 2016-42 proposes changes to the QI agreement that will allow a QI that is an eligible entity to act as a qualified derivatives dealer (QDD) and provides the requirements and obligations that will apply to a QDD. When a QDD provides a valid withholding certificate to a withholding agent, the withholding agent won't be required to withhold on some payments made to the QDD when it's acting as a principal and not an intermediary. Under the proposed QI agreement, a QI may only act as a QDD for payments regarding potential <a href="/lr/resolve//cpr5#cpr5-0000176" class="frllink">section 871(m)</a> transactions or underlying securities that it receives and payments regarding potential section 871(m) transactions that it makes as a principal, whether or not the payments are received or made in its dealer capacity. Notice 2016-42 also addresses a QDD's tax liability as described in the proposed QI agreement and provides that the QDD regime will replace the qualified securities lender (QSL) regime described in Notice 2010-46. All securities lending and sale-repurchase transactions the QI enters into that are section 871(m) transactions will be deemed to be entered into by the QI as a principal and therefore within the QDD regime. Until the QDD regime is implemented, the QSL rules will continue to apply for substitute dividend payments made under a securities lending or a sale-repurchase transaction. Treasury and the IRS intend to modify the section 871(m) regulations to coordinate with provisions of the QI agreement relevant to the requirements of QDDs and withholding agents making payments to QDDs. Notice 2016-42 also proposes changes to the QI agreement to provide more detailed procedures on how QIs satisfy their compliance review obligations. Under the proposed QI agreement, a QI's responsible officer must still make a periodic certification of internal controls. The responsible officer may rely on -- in addition to the results of the periodic review -- any other processes or reviews that the responsible officer has determined are necessary to make the certification. The QI must report some factual information regarding its documentation, withholding, reporting, and other obligations under the QI agreement. A QI acting as a QDD must report specified information regarding the determination of its QDD tax liability. In response to comments requesting a safe harbor method for determining a sample of accounts for the periodic review, a stratified statistical sampling methodology is included in an appendix to the proposed QI agreement. The proposed QI agreement has been clarified to prevent unintended inferences that the periodic review must satisfy the standards of a financial audit or other attestation engagement of a CPA. The proposed QI agreement removes limited foreign financial institution as a category of entity eligible to enter into the QI agreement and makes other changes in response to comments, including changes regarding payments of substitute interest on debt securities. 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. Other changes have been made in the proposed QI agreement that either correct minor errors, further clarify the current rule, conform to changes made in the withholding foreign partnership and trust agreements, or make conforming changes consistent with changes addressed in other guidance or other IRS correspondence. Notice 2016-42 generally describes corresponding changes that will be made to the withholding foreign partnership and trust agreements published in Rev. Proc. 2014-47. Notice 2016-42 also provides the application procedures for becoming a QI and renewing a QI agreement, as well as the text of the proposed QI agreement.

Rev. Proc. 2014-39 <a href="/lr/resolve//fhly"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2014 TNT 125-10: IRS Revenue Procedures"/></a>. Notice 2010-46 <a href="/lr/resolve//w48l"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2010 TNT 98-12: Internal Revenue Bulletin"/></a>. Rev. Proc. 2014-47 <a href="/lr/resolve//fk1k"> <img src="//s3.amazonaws.com/binary.taxnotes.com/image/etl/doclink.gif" border="0" alt="2014 TNT 154-15: IRS Revenue Procedures"/></a>.

Proposed Qualified Intermediary Agreement

The IRS has issued guidance for entering into a qualified intermediary withholding agreement under reg. section 1.1441-1(e)(5), proposing changes to the QI agreement published in Rev. Proc. 2014-39 that expires on December 31, 2016.

The IRS has issued guidance (Notice 2016-42) for entering into a qualified intermediary withholding agreement under reg. section 1.1441-1(e)(5), proposing changes to the QI agreement published in Rev. Proc. 2014-39 that expires on December 31, 2016. The proposed changes to the QI agreement -- subject to any changes included in a revenue procedure containing the final QI agreement that will be issued later this year -- will apply to QI agreements that are in effect after December 31, 2016. Comments on the proposed QI agreement are due by August 31. Notice 2016-42 proposes changes to the QI agreement that will allow a QI that is an eligible entity to act as a qualified derivatives dealer (QDD) and provides the requirements and obligations that will apply to a QDD. When a QDD provides a valid withholding certificate to a withholding agent, the withholding agent won't be required to withhold on some payments made to the QDD when it's acting as a principal and not an intermediary. Under the proposed QI agreement, a QI may only act as a QDD for payments regarding potential section 871(m) transactions or underlying securities that it receives and payments regarding potential section 871(m) transactions that it makes as a principal, whether or not the payments are received or made in its dealer capacity. Notice 2016-42 also addresses a QDD's tax liability as described in the proposed QI agreement and provides that the QDD regime will replace the qualified securities lender (QSL) regime described in Notice 2010-46. All securities lending and sale-repurchase transactions the QI enters into that are section 871(m) transactions will be deemed to be entered into by the QI as a principal and therefore within the QDD regime. Until the QDD regime is implemented, the QSL rules will continue to apply for substitute dividend payments made under a securities lending or a sale-repurchase transaction. Treasury and the IRS intend to modify the section 871(m) regulations to coordinate with provisions of the QI agreement relevant to the requirements of QDDs and withholding agents making payments to QDDs. Notice 2016-42 also proposes changes to the QI agreement to provide more detailed procedures on how QIs satisfy their compliance review obligations. Under the proposed QI agreement, a QI's responsible officer must still make a periodic certification of internal controls. The responsible officer may rely on -- in addition to the results of the periodic review -- any other processes or reviews that the responsible officer has determined are necessary to make the certification. The QI must report some factual information regarding its documentation, withholding, reporting, and other obligations under the QI agreement. A QI acting as a QDD must report specified information regarding the determination of its QDD tax liability. In response to comments requesting a safe harbor method for determining a sample of accounts for the periodic review, a stratified statistical sampling methodology is included in an appendix to the proposed QI agreement. The proposed QI agreement has been clarified to prevent unintended inferences that the periodic review must satisfy the standards of a financial audit or other attestation engagement of a CPA. The proposed QI agreement removes limited foreign financial institution as a category of entity eligible to enter into the QI agreement and makes other changes in response to comments, including changes regarding payments of substitute interest on debt securities. 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. Other changes have been made in the proposed QI agreement that either correct minor errors, further clarify the current rule, conform to changes made in the withholding foreign partnership and trust agreements, or make conforming changes consistent with changes addressed in other guidance or other IRS correspondence. Notice 2016-42 generally describes corresponding changes that will be made to the withholding foreign partnership and trust agreements published in Rev. Proc. 2014-47. Notice 2016-42 also provides the application procedures for becoming a QI and renewing a QI agreement, as well as the text of the proposed QI agreement.

Section 1441 -- Nonresident Alien Withholding

Section 3406 -- Backup Withholding

Section 1471 -- Foreign Financial Institution Withholding

Section 1472 -- Foreign Entity Withholding

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IRS Proposes Changes to Qualified Intermediary Agreement