On January 4, 2017 the IRS published Revenue Procedure 2017-15 (the "2017 QI agreement") that contains the new QI agreement and incorporates many of the proposals from Notice 2016-42. The 2017 QI agreement introduces major changes to the QI agreement contained in Revenue Procedure 2014-39 and will require QIs to implement procedures regarding, among others, the QI compliance program and treaty documentation for entity clients. Below are highlights of the main issues that QIs will need to consider.
1. Term, Renewal and Effect
The 2017 QI agreement took effect on January 1, 2017, and has a six year term. Existing QIs will need to renew their QI agreement by March 31, 2017 utilizing the "QI/WP/WT Application and Accounts Management System," a new IRS portal located at https://www.irs.gov/businesses/corporations/qualified-intermediary-system.
Intermediaries that wish to obtain QI status will have a QI agreement with effect from January 1, 2017 in case application for QI status is made before March 31, 2017. QI status for applications made after this date generally will begin on the first of the month in which QI status is approved and a QI-EIN is issued, although QI status retroactive to January 1 will be available in case the applicant has not received reportable payments prior to the date QI status is approved.
2. Treaty Documentation for Entity Clients
In line with the April 2016 revision of Form W-8BEN-E, QIs are now required to obtain treaty limitation on benefits ("LOB") certification from entity clients. QIs may either request Form W-8BEN-E or revise the treaty statement to include the LOB certifications in case the KYC documentation procedures are used. The new LOB treaty certifications are required for all entity accounts opened on or after January 1, 2017 and transition rules apply for QIs to request such certification from legacy clients. In general, LOB certifications from legacy clients will be required upon the expiry of Form W-8, if utilized, and must be obtained by the end of 2018 from such clients that were instead documented pursuant to the KYC procedures. Importantly, the 2017 QI agreement provides that the treaty and LOB certifications obtained pursuant to the KYC documentation rules will have a three calendar year validity period, the same as Form W-8BEN-E.
From a practical standpoint, these changes will require QIs using KYC for entity clients to incorporate the LOB certifications from Form W-8BEN-E into account opening forms as well as track the validity period of such certifications. Additionally, QIs will need to keep track of the type of the applicable LOB certification for purposes of the factual information required under the QI compliance program, and potentially for Form 1042-S reporting (although no LOB code is required if reporting on a withholding rate pool basis ("WRP")).
3. 1042-S Reporting and Collective Refunds
Under the previous QI agreements, the exclusive method to refund overwithholding for direct clients that were reported on a WRP basis was through the collective refund procedure. In case a QI did not pursue such refund procedure, a WRP client that suffered overwithholding could rely solely on the hope that the QI would agree to provide a Form 1042-S so the client could individually pursue a refund claim with the IRS. The 2017 QI agreement changes this, and in case the QI does not pursue the collective refund procedure it must provide clients, upon request, a specific Form 1042-S.
This change will require QIs to closely monitor the withholding rates for clients included in Form 1042-S WRPs to ensure the correct, and lowest available, withholding rate. When a new Form 1042-S is issued after the original forms have been submitted, an amendment of such forms will almost certainly be required. In order to avoid continuous amendments to Form 1042-S with each request from clients, QIs may choose to provide all clients that have been subject to NRA withholding with specific Form 1042-S.
4. QI Compliance Program & Initial Certification Period
The 2017 QI agreement largely incorporates the QI compliance program outlined in Notice 2016-42. In general QIs will be required to implement a QI compliance program under the authority of the responsible officer ("RO") that includes policies, procedures and systems to ensure the QI's obligations are respected. In general, the QI compliance program requires periodic certification by the RO, a periodic review and submission of factual information regarding the review period.
The QI compliance program must under the supervision of the RO and include written policies and procedures, training, oversight of systems and processes related to QI compliance and monitoring of business changes. The individual assigned the role of RO must be a person with authority to establish and supervise the QI compliance program, such as an officer or director of the QI.
The certification period is three calendar years and the initial certification period will be the first three full calendar years the QI agreement is in effect, including renewals. Afterwards the certifications period will be every three years. For QIs that had a QI agreement in 2014 under Revenue Procedure 2014-39, the 2017 QI agreement will be a renewal of that QI agreement, and thus the initial certification period for these QIs will cover 2015, 2016 and 2017.
QIs may choose which year during the certification period will be subject to the periodic review and certification. In case the QI choses the third year, the RO certifications must be submitted to the IRS by December 31 of the year following the certification period, and for QIs that choose the first or second year, or that request a waiver, the deadline for the RO certifications will be July 1 of the year following the certification period.
As introduced in Notice 2016-42, the 2017 QI agreement brings back sampling and spot check procedures similar to the prior QI audit rules, which QIs can utilize as a safe harbor for purpose of the periodic review. The 2017 QI agreement also reintroduces the availability of a waiver of the periodic review for QIs that have not more than $5m in reportable amounts for each year of the certification period.
5. Qualified Derivative Dealers ("QDD")
The IRS continues to work through the framework for the new QDD regime. Pursuant to Notice 2016-76, the QDD regime will be phased-in during 2017 and QDD withholding has been the delayed until 2018. For 2017, QIs that seek QDD status must use their best efforts to comply with the applicable chapter 3 and chapter 4 requirements.
The QDD rules bring an unparalleled level of complexity and the impact of these rules should be carefully considered before seeking QDD status. Importantly, QDD status should be utilized only by QIs that act as a principal in derivative transactions that potentially could give rise to (US source) dividend equivalent payments (e.g., derivative contracts that reference US equities).