Financial services operational tax update – Q1 2023

Financial services operational tax update - Q4 2022

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On 13 December 2022 the IRS and Treasury Department released Revenue Procedure 2022-43 (the 2023 QI Agreement). Revenue Procedure 2017-15 (2017 QI Agreement) has now been superseded by the 2023 qualified intermediary (QI) Agreement with respect to QI obligations effective 1 January 2023. All QIs are required to renew the QI agreement via the IRS portal by 1 May 2023, relating to a technical issue with the Qualified Intermediary Application and Account Management Systems (QAAMS).

The majority of the updates in the 2023 QI Agreement relate to the 1446(a) and (f) compliance obligations regarding PTPs, and specific qualified derivatives dealers (QDD) and QSL updates, but there are some other important changes that impact all QIs.

Responsible officer certifications

The requirement to reconcile Form 1042 and 1042-S

As part of the three yearly periodic certification, all QIs will have to provide reconciliation information of Form 1042 and 1042-S (including amended forms) for each year of the certification period. The information will have to be uploaded as an attachment on the QAAMS. That's in contrast to the current requirement to only provide a reconciliation for the year subject to periodic review.

Certification-related information that QIs must provide at the end of each certification period

Unlike the 2017 QI Agreement, the 2023 QI Agreement mandates that all QIs upload the periodic review report at the time of periodic certification.

Deadline for completion of periodic certifications

A QI that chooses the third year of the certification period to undertake the periodic review was required to submit its periodic certification by 31 December of the year following the end of the certification period. Under the 2023 QI Agreement, it's now possible for the QI to seek a possible extension to this date, subject to IRS agreement.

Documentation

Validity standards for documentation

The validity of treaty claims as described in FAQs one and two of the QI Withholding Foreign Partnership (WP) and Withholding Foreign Trust FAQs has been incorporated in the 2023 QI Agreement. For accounts opened from 1 January 2018, where a withholding certificate contains a US mailing or permanent address, the QI may rely on documentary evidence provided by the account holder for treaty purposes only where it holds a permanent residence address in the jurisdiction of the treaty claim.

Reporting

Furnishing recipient-specific Form 1042-S to account holder

Under the 2017 QI Agreement, where a QI has over withheld and didn't apply the collective refund procedure, the QI is required to provide a recipient-specific Form 1042-S to the account holder. The 2017 QI Agreement didn't provide a time limit for when an account holder can request a recipient-specific Form 1042-S. Under the 2023 QI Agreement, however, an account holder must now request a Form 1042-S within two years from the year of payment, and where the payment is subject to section 1446(a) or (f), the time limit for a request has been extended by a year to three years from the year of payment. The account holder must also provide a US TIN to make such a request. The additional year granted for payments subject to 1446(a) and (f) is intended to provide the account holder additional time to file their own US income tax return.

1446(a) and (f) requirements

The proposed requirements contained in Notice 2022-23 have been largely incorporated within the 2023 QI Agreement. However, the IRS has modified some of the requirements due to concerns raised by stakeholders with respect to disclosing QIs, partner reporting and documentation validity.

The best effort to obtain US TIN

The 2023 QI Agreement now includes a 'best efforts' solicitation requirement to obtain a US TIN from account holders who hold PTP interests. The prescribed requisition procedures must be followed to maintain the validity of withholding certificates from foreign partners. The 'best efforts' provision will enable disclosing QIs to maintain their status for the entire amount of payment despite not providing a US TIN for an account holder. This allowance, however, doesn't relieve the responsibility of a QI to obtain a US TIN to apply a reduced rate of withholding.

Disclosing QIs

QIs acting as a disclosing QI – a QI that doesn't assume either primary withholding or pooled reporting responsibility – must provide payee-specific documentation for the entire amount of a PTP distribution or the amount realised from the sale of PTP interest. Under the proposed requirements, a disclosing QI wasn't able to act as a disclosing QI for the entire amount of a payment made to multiple account holders where any account holder failed to provide its US TIN despite the QI’s effort to obtain a TIN. Under the 2023 QI Agreement, the requirement for a US TIN on a Form W-8 has now been relaxed as long as the QI complies with the best efforts requirement.

Partner reporting - nominee holding a PTP interest

Under the proposed requirements, all QIs not acting as disclosing QI were required to issue the account holder with a written statement (or statements) that corresponded to the information that the PTP would have provided the account holder on a Schedule K-1. This has now been amended under the 2023 QI Agreement to allow for a QI (that isn't acting as a disclosing QI) to provide the account holder with the Schedule K-1 issued by the PTP to the QI as well as certain allocation information.

Disclosing QIs would have been required to provide a written statement (or statements) to their nominee that corresponds to the information that the PTP would have provided the account holder on Schedule K-1. Under the 2023 QI Agreement, provided the disclosing QI maintains fully segregated and disclosed accounts with the nominee, the disclosing QI isn't required to provide such a written statement.   

Notice 2023-8

The Treasury Department and the IRS released Notice 2023-8 (Notice) confirming US regulations will be amended shortly such that where entities are organised outside of the US and trade only on a non-US stock market the broker may presume the entity isn't a PTP for US tax purposes and hence not be required to withhold. However, the relief is subject to the absence of actual knowledge by the broker that the entity is a PTP for US tax purposes (unless the PTP provides a qualifying notice).  The Notice also extends relief from withholding to short sales of PTPs subject to limitations. Brokers may rely on the Notice before the final regulations are released. The relief may also be availed of by QIs subject to the 2023 QI Agreement.

Qualified derivatives dealers and qualified securities lenders

The 2023 QI Agreement reflects other recent IRS announcements (including Notice 2022-37) to defer certain provisions contained within Section 871(m) of the IRS regulations and the consequential impact on QIs that have elected to be a QDD / QSL. For example, periodic reviews for QDDs won't be required in 2023 or 2024, although QDDs will be required to certify they made good faith efforts to comply with Section 871(m) regulations and the 2023 QI Agreement.

To find out more about operational tax risks and opportunities, get in touch with Martin Killer