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KPMG report: Initial analysis of IRS proposed qualified intermediary (QI) agreement

Proposed qualified intermediary (QI) agreement

The IRS on July 1, 2016, released Notice 2016-42 containing a revised proposed qualified intermediary (QI) agreement that, when finalized, will replace the current version set forth in Rev. Proc. 2014-39.


Related content

While the proposed QI agreement (“Proposed Agreement”) provided in Notice 2016-42 [PDF 552 KB] contains several noteworthy modifications, there are two significant areas of change:  

  • New rules relating to qualified derivatives dealers (QDDs) and QIs that make substitute interest payments
  • Additional detail surrounding the compliance review, including the requisite testing results that the QI must submit to the IRS as part of the responsible officer (RO) certification

Overview and printable version

The following report provides an initial analysis and observations about the Proposed Agreement. Highlights and discussion of the primary modifications contained in the Proposed Agreement are set forth below:

  • New QDD regime and rules surrounding payments of substitute interest
  • Additional reporting requirements
  • Detailed guidance for compliance review, including the possibility of a waiver for small QIs
  • New requirements relating to treaty claims
  • Modifications to private arrangement intermediaries (PAIs), joint account, and agency rules
  • Changes to responsible officer (RO) rules
  • Term of agreement and renewal instructions
  • Removal of references to limited FFIs


Read a printable version [PDF 90 KB] of this KPMG report.

New QDD regime and rules for payments of substitute interest

The Proposed Agreement implements the new QDD regime which, once effective, will replace the QSL rules set forth in Notice 2010-46. Under the QDD regime, eligible entities may act as QIs and assume primary withholding and reporting responsibility with respect to certain payments received and made with respect to potential section 871(m) transactions.  By properly representing that it is acting as a QDD on Form W-8IMY with respect to a potential section 871(m) transaction, the QDD will be treated as exempt from withholding on payments received with respect to that transaction and can avoid the duplicative withholding that may otherwise apply when receiving and making substitute dividend payments. Entities eligible to become QDDs generally include:

  1.  Regulated dealers in securities
  2. Regulated banks that issue potential section 871(m) transactions to customers and receive dividends or dividend equivalent payments pursuant to potential section 871(m) transactions to hedge those transactions issued to customers
  3. Entities that are wholly owned by regulated banks and that issue potential section 871(m) transactions to customers and receive dividends or dividend equivalent payments pursuant to potential section 871(m) transactions to hedge those transactions issued to customers
  4. Foreign branches of U.S. financial institutions described in (1) through (3), above

The Proposed Agreement clarifies that a QI may act as a QDD only when acting as a principal for payments it makes with respect to potential section 871(m) transactions (to the extent such payments are not deductions allocable to effectively connected income) or payments it receives with respect to potential section 871(m) transactions or underlying securities (to the extent such payments are not effectively connected income). However, once a QI elects to act as a QDD, it must act as a QDD for all of the aforementioned payments it makes or receives as principal.  In addition, a QI that acts as a QDD will be required to act as a QDD with respect to any securities lending transaction or sale-repurchase transaction that it enters into if that transaction is a section 871(m) transaction.  

The Proposed Agreement clarifies that, with respect to these transactions, the QI acting as a QDD is deemed to be a principal and, therefore, must follow the QDD rules rather than rules applicable to intermediaries.  For all other purposes, a QI may not act as a QDD when it makes or receives a payment as an intermediary.

KPMG observation

The Proposed Agreement sets forth the general rule that a QI may act as a QDD only when acting as a principal. Generally, when acting as an intermediary, the regular procedures applicable to intermediaries will apply instead of the QDD rules. For example, the QI may elect either to act as a QI or as an NQI with respect to the transaction and, when acting as a QI, may elect whether to assume primary responsibility for withholding and reporting with respect to the payments. However, in order to provide clarity regarding when a QI is acting as principal vs. intermediary in cases where it is not clear (e.g., with respect to collateral postings), and in order to prevent duplicative withholding, the Proposed Agreement treats a QI that has elected to act as a QDD as the principal with respect to every securities lending transaction or sale-repurchase transaction that is a section 871(m) transaction. This means that QIs acting as QDDs will have an obligation to assume primary withholding and reporting with respect to such transactions.  

Withholding and reporting obligations of a QDD

The Proposed Agreement provides that a QDD must assume primary withholding and reporting obligations under chapter 3 and 4, and must assume primary Form 1099 reporting and backup withholding obligations for all payments it makes as a QDD with respect to a potential section 871(m) transaction, if the amount paid is an amount subject to chapter 3 or 4 withholding or a reportable payment under chapter 61. This requirement of the QDD to assume primary withholding and reporting applies regardless of whether the payments are dividend equivalent payments.

In addition to satisfying its withholding tax liability under chapters 3 and 4, a QDD that is not a foreign branch of a U.S. financial institution also will be required to satisfy its QDD tax liability and report such liability on its Form 1042. The QDD’s tax liability is the sum of the QDD’s liability under sections 871(a) and 881 for: (1) its section 871(m) amount (as defined below); (2) its dividends received that are not associated with a potential section 871(m) transaction and its dividend equivalent payments received in its non-dealer capacity; and (3) any non-dividend or non-dividend-equivalent payments received with respect to a potential section 871(m) transaction.  

The Proposed Agreement defines a QDD’s “section 871(m) amount” as the total dividends on underlying securities associated with potential section 871(m) transactions and dividend equivalent payments that the QDD receives in its dealer capacity less the dividend equivalent payments and the qualifying dividend equivalent offsetting payments that the QDD makes with respect to the same dividend in its dealer capacity. The section 871(m) amount does not include amounts made or received by the QDD when acting in its non-dealer capacity. A dealer, for purposes of the Proposed Agreement, has the same meaning as used in Reg. section 1.871-15(a)(2) and section 475(c)(1), which is “a taxpayer who regularly purchases securities from or sells securities to customers in the ordinary course of a trade or business, or regularly offers to enter into, assume, offset, assign or otherwise terminate positions in securities with customers in the ordinary course of a trade or business.” For purposes of determining whether a dealer is acting in its dealer capacity, only the dealer’s activities as a derivatives dealer are taken into account.  Thus, the QDD is presumed to be acting in a dealer capacity with respect to transactions properly reflected in a QDD’s dealer book and is treated as acting in its non-dealer capacity for payments received by a QDD when acting as a proprietary trader.   

The term “qualifying dividend equivalent offsetting payment” means any payment made with respect to a potential section 871(m) transaction that would be a dividend equivalent payment but for the fact that it is either made to a U.S. person or is effectively connected income of a non-U.S. person. Notwithstanding the prior sentence, a qualifying dividend equivalent offsetting payment does not include a payment made to a U.S. non-exempt recipient if that U.S. person has not provided any necessary waiver required to release the U.S. person’s name, address, and TIN to the IRS or the QI has not collected and maintained such information as required under the Proposed Agreement

An “underlying security associated with a potential 871(m) transaction” refers to any underlying security held by the QDD to manage the risk of price changes with respect to a potential section 871(m) transaction entered into by the QDD in the normal course of its business as a dealer. Therefore, the QI cannot treat a security as associated with a potential section 871(m) transaction when the QI holds the stock in a non-dealer capacity (e.g., as a proprietary trader).

Once the QDD tax liability is determined, the QDD is subject to deposit requirements with respect to its QDD tax liability on the same time frame that would apply for amounts withheld under chapter 3 of the Internal Revenue Code. The QDD tax liability is to be determined for dividend and dividend equivalent amounts at the time the dividend is paid on the underlying security and for other payments at the time of payment.

KPMG observation

Because a QDD is required to act as a QDD for all payments received with respect to potential section 871(m) transactions—including payments that are not dividends or dividend equivalent payments and including dividend and dividend equivalent payments received for which there are no offsetting payments being made—the QDD will be receiving amounts that are potentially subject to tax under chapters 3 or 4 and that would have been withheld upon at source but for the QDD being exempt from withholding.  Accordingly, the QDD will have the obligation to determine and pay over this tax liability as part of its obligation as a QDD. 

QDDs documentation requirements

Under the Proposed Agreement, a QDD must document every account to which it makes a reportable payment or qualifying dividend equivalent offsetting payment (or payment that otherwise would have been a qualifying dividend equivalent offsetting payment but for the QDD’s failure to obtain a waiver or collect and maintain information about a U.S. non-exempt recipient account holder) in accordance with the documentation rules of the Proposed Agreement. The Proposed Agreement broadens the definition of an “account” when applicable to a QDD to include any potential section 871(m) transaction or underlying security when the QDD receives payments as a principal and any potential section 871(m) transaction where the QI makes payments as principal. A similar expansion was made with respect to the term “account holder.” 

KPMG observation

The expanded definition of a financial account when applicable to a QDD effectively eliminates the account concept since the definition now covers any potential section 871(m) transaction or underlying security, regardless of whether such transaction is entered into through a financial account.  

Substitute interest

In response to comments received by the industry requesting an expansion of the QSL regime, the Proposed Agreement permits a QI to assume primary withholding and reporting with respect to payments of U.S. source 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 dealer in securities. In such case, when the QI agrees to act as a QI with respect to the substitute interest payments, the QI must assume primary withholding and reporting responsibility for all such payments of substitute interest, including primary responsibility for Form 1099 reporting and backup withholding. 

KPMG observation

This simplifying rule was added so that a QI does not need to make the determination of whether a payment is a substitute interest payment or an actual interest payment and may simply provide a Form W-8IMY, assuming primary withholding and reporting in either case. However, unless the Form 1042-S instructions are modified, the QI may still be required to determine whether the payment constitutes interest or substitute interest for reporting purposes. 

Modifications to definitions

The Proposed Agreement contains many definitional changes and additions.  Most of these new definitions relate to the new QDD rules, and to the rules governing withholding QIs that make substitute interest payments, and were added to be consistent with the definitions provided under section 871(m). In addition, the Proposed Agreement added the following new definitions:  

  • Dividend equivalent
  • Potential section 871(m) transaction
  • Qualified derivatives dealer
  • Section 871(m) transaction
  • Substitute interest
  • Underlying security
  • Underlying security associated with potential 871(m) transactions

The definition of “payment” was also modified to incorporate the rules set forth in Reg. section 1.871-15(i) as they relate to dividend equivalents and dividend equivalent offsetting payments. 

Additional information reporting obligations

As expected, the Proposed Agreement requires a QI acting as a QDD to complete Form 1042-S reporting for the dividend equivalent payments that are subject to chapter 3 or 4 withholding.  In addition, a QI acting as a QDD will have separate Form 1042-S reporting requirements to report the amount of the qualifying dividend equivalent offsetting payments that represent payments:

  • To U.S. persons that would have been dividend equivalent payments if made to non-U.S. persons; and
  • To non-U.S. persons in regard to effectively connected income

As indicated above, the Proposed Agreement provides that a QI acting as a QDD must, upon request, provide the IRS with the name, address, and TIN of any U.S. non-exempt recipient to whom it makes a qualifying dividend equivalent offsetting payment. The QI also must obtain a waiver for this disclosure from such U.S. persons.  If the waiver is not obtained, the Proposed Agreement provides that the payments will not be treated as qualifying dividend equivalent offsetting payments, and those payments must be reported in a separate pool on a Form 1042-S.  A failure to obtain any necessary waiver or to maintain the name, address, and TIN with respect to a significant number of U.S. non-exempt recipients to whom the QDD makes a payment that would otherwise be a qualifying dividend equivalent offsetting payment is treated as a material failure under the Proposed Agreement.

Finally, as it relates to reporting modifications, Section 9.04 of the Proposed Agreement contains the rules for collective refunds when the QI or other withholding agent in the chain has imposed excess withholding. Historically, there had been tension when a QI chose not to utilize the collective refund procedure for overwithholding (note that excessive refunds claims are an event of default) yet failed to provide the account holder with a recipient-specific Form 1042-S reflecting the overwitheld amount. The Proposed Agreement contains new language requiring a QI that does not apply for a collective refund to provide the account holder receiving the payment with a Form 1042-S if requested. 

KPMG observation

The new requirement relates to the IRS’s refund requirements. Without a valid Form 1042-S issued in the name of the beneficial owner, the IRS will not process a refund claim. This new provision is expected to help those account holders obtain refunds more efficiently. That said, because the IRS seems to struggle with refund claims, it might have been more effective to modify the event of default language to clarify the types of excessive refund claims that could result in an event of default (e.g., excessive claims resulting from a QIs lack of adequate internal controls). 

Detailed guidance for compliance review

The Proposed Agreement contains significant additions to the compliance review provisions, including:  

  • The possibility of a compliance review waiver for small QIs
  • Added flexibility regarding the review period
  • Review requirements more in line with the prior external audit process
  • Detailed sampling information (including safe harbors)
  • Comprehensive lists relating to the information to be included in the reviewer’s report to the QI’s RO as well as the review information the RO must provide to the IRS 

Waiver opportunity for small QIs

The agreement in place prior to July 1, 2014, allowed for three possible waivers from the external audit requirement (a requirement that the agreement imposed twice in the agreement’s six-year term): 

  • QIs whose reportable amounts did not exceed $1 million in the audit year
  • QIs whose reportable amounts exceeded $1 million but did not exceed $4 million and who had acceptable audit results in the first required audit of the six-year term
  • QIs who utilized their internal function to perform the testing otherwise carried out by an external auditor

While the current QI agreement does permit the use of internal audit, it does not include the possibility of a “review” (formerly referred to as an audit) waiver for smaller QIs.  

The Proposed Agreement provides a possible waiver of the periodic review requirement for QIs that do not have reportable amounts that exceed $5 million in each year covered by the certification period. Similar to the prior waivers, the QI must submit an application that, among other information, requires the QI to disclose detailed account information, including the number of accounts that have valid documentation and those that have no (or invalid) documentation. The QI also must certify that it timely filed Forms 1042, 1042-S, 945, 1099, and 8966 (or local law equivalent) for all calendar years covered by the certification period. It is important to note that QIs that are part of a consolidated compliance program or those that act as QDDs cannot request a review waiver.  

Finally, notwithstanding the IRS accepting an application for a waiver from the compliance review, the QI’s RO is still required to make the certification regarding adequate internal controls.

KPMG observation

While the addition of a possible audit waiver is welcomed, the application requirements may be excessively burdensome for QIs that have lower reportable amounts but a larger number of accounts that have received those reportable amounts. Specifically, because the application requires the QI to report the number of validly documented and undocumented accounts, this means a documentation review for every account that received a reportable amount will be required. While this requirement is not new as it relates to waivers, it imposes a significant cost hurdle for many QIs that would otherwise qualify for the waiver.

It is presumed that the inability for a QI acting as a QDD to obtain a compliance review waiver will be limited to the agreement effective January 1, 2017 (i.e., it would not be a limitation in the agreements effective January 1, 2020, and beyond).  Specifically, it is presumed that the limitation is due to the fact that the QDD rules are new and Treasury and the IRS want assurance that they are properly implemented. Finally, it is anticipated that smaller QIs that are part of a consolidated compliance program will be allowed to request a review “exclusion” in accordance with the IRS’s historical administrative practice.

Review period flexibility

The current agreement provides that the review period is the calendar year prior to the certification period. Thus, for a QI that entered into its agreement on the first effective date, July 1, 2014, the review period would be calendar year 2017. There were two problems with this requirement.  First, for QIs that wanted to use an external reviewer, there are anticipated scheduling concerns given that all QIs are on the same review schedule. (Note this was a significant issue with the audit requirements under the initial proposed agreement when all QIs were required to have an audit conducted for their 2002 QI activities. To alleviate that bottleneck, Treasury and the IRS staggered QI audits for all subsequent years). Second, the RO certification must be submitted by July 1, 2018. This is problematic because most QIs extend their Form 1042 filing requirement to September 15th. As a result, the RO certification predates the time the reviewer could perform the requisite reporting reconciliation for the review period.

The Proposed Agreement provides that a QI can choose any year within the certification period as its review period. (There is a noteworthy exception for a QI that acts as a QDD. These QIs must continue to use 2017 as the review period due to the fact that the QDD rules will not be in effect until that time.)  

KPMG observation

While the ability to choose any year within the certification period for the review period alleviates the first problem outlined above, the second problem remains for any QI that acts as a QDD or chooses 2017 as its review year. Specifically, it is unlikely that such a QI will have filed its Form 1042 for the review year by the time the RO certification, including the reporting reconciliation information, is due to the IRS. In addition, given the reason for the QDD limitation, it is anticipated that this restriction will not be included in subsequent agreements as the QDD rules will be in effect for the entire certification period in all subsequent agreements.  Finally, given the substratification rules outlined below and the fact that this limitation on the review period for QDDs was not identified in the current QI Agreement such that many QIs would have relied upon the rules in current QI Agreement to select an earlier review period, it is anticipated that the IRS would permit a QI that acts as a QDD to select a different year for the review of normal QI activities (limiting the 2017 mandate to the testing of the QI’s QDD activities only). 

Review requirements closer aligned to prior external audit process

The actual periodic review, as set forth in the Proposed Agreement, is aligned to the phased external audit process set forth in Rev. Proc. 2002-55. Specifically, the review is now focused on the testing of accounts and transactions as opposed to a substantive analysis of the adequacy of the QI’s policies, procedures, and internal controls. This makes sense because, if the test results of the documentation, withholding, and reporting are favorable, the adequacy of the QI’s process speaks for itself. One important point is that the new testing rules do not seem to incorporate the concept of the “spot check” for withholding. In the past, if the documentation was adequate, the auditor was only required to review 20 accounts for purposes of the withholding tests. Reviewing all accounts in the sample for withholding purposes will add considerable cost to the overall review. 

KPMG observation

As outlined below, the sampling formulas set forth in the Proposed Agreement are a safe harbor (meaning IRS approval is not required). Thus, it is possible for a reviewer to seek IRS approval to test a smaller number of accounts in the withholding review to the extent the sample accounts are properly documented.

Detailed sampling information, including substratification requirements and safe harbors

Addressing numerous comments regarding the compliance review, the IRS has included detailed guidance regarding the actual testing of accounts in the Proposed Agreement. Specific to this, the Proposed Agreement provides that, for testing purposes, there are three possible samples. That is, the population should be stratified into the following “sample units:”  

  • QI accounts
  • Accounts for which the QI acted as a QDD
  • Accounts to which the QI made payments of substitute interest as a withholding QI

The sample units must be further separated into strata (for QI accounts the strata is very similar to the pre-2014 agreement, with the exception of an additional stratum for accounts held by recalcitrants and Nonparticipating FFIs.) When the QI acts as a QDD or makes substitute interest payments as a withholding QI, those accounts will be excluded from sample unit of “QI accounts.” The Proposed Agreement contains a sampling formula that the reviewer may use as a safe harbor (meaning it does not need IRS approval). The error rate in the formula is adjusted slightly for each sample unit, resulting in a maximum number of 321 for QI Accounts, 259 for QDD accounts, and 100 for accounts receiving substitute interest payments. As in the past, the minimum sample size is 50. Also similar to the past, the sampling methodology includes an ability to further substratify by dollar amounts.  

One surprising inclusion is the requirement to project an underwithholding amount or to propose to the IRS an alternative method for determining such underwithholding.  Historically, projection of underwithholding was initiated by the IRS and was not required where the error rate was below a certain threshold (generally 3%-4%).

KPMG observation

The sampling provisions in the Proposed Agreement make clear that, for purposes of testing FATCA compliance, the population is the same as above. That is, the QI’s reviewer is not required to select a separate sample of accounts for which the QI is not acting as a QI for purposes of FATCA testing. This clarification will be very well received.

Detailed information relating to reviewer reports to RO and RO reports to IRS

The Proposed Agreement contains a detailed list of questions that the RO must answer and submit to the IRS as part of the RO certification. The list includes questions relating to events of default, significant changes in circumstances, identification of the reviewer, and a comprehensive list of questions relating to the review (e.g., number of accounts reviewed, results relating to the testing of documentation, withholding, and reporting, as well as information from the reporting reconciliation exercise).   

The Proposed Agreement also includes a list of items that the reviewer must include in the periodic review report. Specifically, the agreement provides that the report must include information regarding the sampling methodology and the steps taken to determine the entire population of accounts was identified for sampling purposes. In addition, the reviewer’s report must include information relating to each sampling unit, reportable amounts and reportable payments made to the various strata, as well as amounts withheld in both the population and samples. 

KPMG observation

It is anticipated that QI ROs will be surprised by the level of detail that must be provided to the IRS as part of the RO certification. It was generally understood that the type of information to be provided would be high level information related to the testing results only. The detail of information required in the Proposed Agreement actually exceeds the information contained in the QI reports submitted by the external auditors in the past.

Changes to treaty claims

Corresponding to the new limitation on benefits (LOB) certifications contained in the recently updated Form W-8BEN-E, the Proposed Agreement requires a QI that utilizes the alternative documentation rules for treaty claims (i.e., documentation listed in the “KYC (know your customer) Attachment” and a treaty statement) to update the treaty statement language to include a certification that the entity meets the appropriate LOB certification described in the new Form W-8BEN-E and, in particular, the specific category of the LOB provision it satisfies. For pre-existing account holders (e.g., pre-2017 account holders for existing QIs) that are currently documented with the KYC/treaty statement alternative, the QI has two years to obtain the updated statement.

The new agreement also contains two new due diligence provisions relating to treaty claims. First, the QI may not rely on a Form W-8BEN-E or treaty statement if it has actual knowledge that the LOB certification is incorrect. Second, the new rules provide that a QI has reason to know that a treaty claim is invalid if the treaty claim is made with respect to a treaty that does not exist or is not in force. With respect to the latter requirement, for a preexisting account holder, this rule applies only if there is a change in circumstances or at the time the written limitation on benefits statement is provided.  

KPMG observation

It is unusual that the transition period for preexisting accounts documented with KYC and a treaty statement are not on par with those documented with a Form W-8BEN-E. Withholding agents must begin using the new Form W-8BEN-E on November 1, 2016. Thus, for example, a QI that obtained the old version of the form may rely on that form until the end of its validity period (December 31, 2019) for the treaty certifications. Under that scenario, the new form with the LOB certifications would not be required until January 1, 2020. If using the alternative documentation procedures, the QI must obtain a new treaty statement with the revised LOB certifications by January 1, 2019, an entire year earlier.

Similarly unusual is the specific due diligence rule relating to reason to know that a treaty claim is not valid if the beneficial owner is claiming a treaty benefit under a treaty that does not exist. We are not aware of situations when a QI granted treaty benefits under a treaty that was non-existent or not in force. Instead, the general practice has been to verify the existence of both the treaty and the particular article claimed and to only accept the documentation to establish non-U.S. status when the treaty claimed was not in existence or not in force. In providing a phased-in approach for this standard of knowledge, Treasury and the IRS seem to be taking the position that a QI would not have previously have had an obligation to confirm that a treaty was in existence and in force prior to granting treaty benefits, which is not consistent with the industry practice. 

Finally, while the imposition of an actual knowledge standard to the LOB provision indicates that less due diligence is required with respect to the LOB provision than would otherwise apply to the treaty claim in general, and would seem to suggest that the QI is not required to research whether the LOB provision claimed is one that is relevant to the particular treaty under which the claim is made, this distinction is not as clear as one might hope.

Changes to responsible officer rules

The current Proposed Agreement requires the QI to have the same RO for both QI and FATCA compliance, though the RO was permitted to delegate its duties. The Proposed Agreement provides that the QI RO must be listed in the FATCA registration portal but clarifies that this person is not required to be the same RO for purposes of the QI’s FATCA compliance.

KPMG observation

This modification was made in response to industry comments. Specifically, Treasury and the IRS received many comments that the QI compliance and FATCA compliance were often handled in different areas within the organization and, as a result, it was impractical for the same person to be named the RO.

Term of agreement and renewal instructions

While the current agreement expires December 31, 2016, and was not the normal six-year term, it was believed that the shortened term was intentional to align the validity period of the QI agreement with the FFI and Intergovernmental Agreements.  Interestingly, the Proposed Agreement is effective for the more limited “three full calendar years.”  It is not clear why the original six-year term has not been reinstated.  A prospective QI must submit Form 14345, Application for Qualified Intermediary, Withholding Foreign Partnership, or Withholding Foreign Trust Status. 

An existing QI that is an FFI, a Direct Reporting NFFE, or a Sponsoring Entity of a Direct Reporting NFFE may renew its agreement on the FATCA registration website.  An existing QI that is an NFFE acting as an intermediary (i.e., not with respect to its shareholders) must renew its agreement by submitting a request for renewal to the Foreign Payments Practice in New York.

 The new agreement, once finalized, will be effective January 1, 2017. For a new QI, the effective date of the agreement will hinge on the submission date of the QI application and whether the QI has received any reportable payments prior to such submission. Specifically, if a prospective QI submits it application prior to March 31, the agreement will be in effect as of January 1 of that year. In addition, if the application is submitted after March 31 but the prospective QI has not received any reportable payments prior to that date, its Proposed Agreement will also have an effective date of January 1 of that year. If, however, the submission date is after March 31 and the prospective QI has received a reportable payment prior to the submission date, its Proposed Agreement will be effective as of the first day of the month in which the QI application is approved and the QI-EIN issued. For example, a prospective QI that submits an application on May 3, 2017, and has received a reportable payment prior to that time, will have QI status beginning on the first day of the month in which the IRS approves the QI application and assigns the QI-EIN.

For a seamless transition, an existing QI must submit its request for renewal prior to March 31, 2017. In doing so, the new agreement will have an effective date of January 1, 2017.

KPMG observation

Because information reporting is based on the calendar year, the early cutoff is likely to cause reporting difficulties for QIs that attain such status on a date other than January 1. Specifically, these QIs will need to have dual reporting processes in place for that initial year—reporting as a nonqualified intermediary from January 1 of that year, and QI reporting from the date of QI status through the end of the year. It is not clear why Treasury and the IRS are departing from the prior retroactive applicability for applications made mid-year.

Modifications to PAI, joint account, and agency rules

The updated PAI rules make clear that a QI that is acting as a QDD may not enter into a PAI agreement with any account holder for which is acts as a QDD. Presumably this is because the IRS wants to directly contract with QDDs and does not want an entity that is not an eligible entity for purposes of the QDD rules to act as a PAI. The proposed rules also require the PAI to certify to the QI during each certification period that is has maintained its FATCA status as a certified-deemed complaint FFI during that period. Finally, the proposed rules depart from prior rules as relating to the compliance review and certification requirements. Under prior rules (those in effect prior to 2014), a PAI was required to undergo an external audit of its compliance and was not permitted to request a waiver from such audit. Under the proposed rules, the PAI is permitted to forgo the review requirement if the QI has obtained a compliance review waiver. If there is no such waiver, the PAI can either conduct an independent review (as required pre-2014) or can pass up its account holder information to be included in the QI’s internal or external review.

The joint account provisions for certain partnership and trusts were modified to expand the option to partnerships and trusts that are Owner Documented FFIs as well as to partnership and trusts that hold accounts that are excluded from the definition of a financial account under Annex II of an Intergovernmental Agreement or Reg. section 1.1471-5(a). Similar changes were made to the agency provisions set forth in Section 4.06 of the agreement. Interestingly, both provisions explicitly prohibit the application of the provisions if the QI is acting as a QDD with respect to the partnership or trust’s account.  (Note that an update to the current agreement included any NFFE that was not a WP or WT.  This change was needed because, as originally drafted, a Passive NFEE could not avail itself to these rules.) One interesting change for these accounts is the new compliance provision that requires a partnership or trust to conduct its own compliance review and submit a written report to the QI’s RO if it does not provide the requisite documentation for review by QI’s external or internal reviewer.

Finally, the Proposed Agreement requires the RO to provide the names and addresses of each partnership and trust to the IRS as part of the compliance certifications.

KPMG observation

It is not clear why the joint account provisions are not available to a QI that is acting as a QDD. The joint account rules require the partnership or trust to provide all underlying owner documentation and the QI applies the highest rate of withholding for any one owner. In addition, none of the partnership or trust’s owners can be a U.S. person or any person subject to chapter 4 withholding and reporting. Also unclear is the compliance review requirement for partnerships and trusts treated as joint accounts. The joint account provisions explicitly mandate the partnership or trust to provide proof that it has provided all ownership documentation (e.g., partnership agreement) to the QI’s reviewer within 90 days of a request. Because providing proof that the documentation provided is comprehensive when requested by the QI’s reviewer is a condition for using the joint account rule it is unclear why there are compliance requirements for those partnerships or trusts that do not provide such proof.

Finally, it is not clear why Treasury and the IRS are requiring the RO to disclose the names and addresses of partnerships and trusts treated as joint accounts. The primary purpose of the rule was to address local law prohibitions of recipient specific Form 1042-S reporting that would have otherwise been required for the underlying owners.  Presumably, the same prohibitions exist for the disclosure of the partnerships and trusts themselves.   

Removal of references to Limited FFIs

Finally, the IRS has removed references relating to Limited FFIs and Limited Branch requirements in the Proposed Agreement. This is because the FATCA status of a Limited FFI or Limited Branch will not be in existence after December 31, 2016.  Consequently, those provisions will no longer be relevant.

Treasury and the IRS are accepting comments with respect to the proposed QI agreement. The deadline for comments is August 31, 2016.  


For more information, contact a tax professional with KPMG’s Washington National Tax practice:

Laurie Hatten-Boyd | +1 206 913 4489 |

Danielle Nishida | +1 212 954 2774 |


For information specifically concerning section 871(m), contact:

Dan Mayo | +1 973 315 2658 |

Mark Price | +1 202 533 4364 |

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The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

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