Changes Incorporate New PTP Withholding and Reporting Rules – Notice 2022-23
The current QI agreement, Revenue Procedure 2017-15, will expire on December 31, 2022. The IRS has issued Notice 2022-23 that contains changes to the QI agreement and the IRS is expected to publish the final version of the new QI agreement before the end of the year. The new QI agreement will take effect on January 1, 2023.
The primary changes to the QI agreement contained in Notice 2022-23 relate to recent US tax changes under section 1446(f), applicable to the sale of publicly traded partnership (“PTP”) interests by non-US persons. Under section 1446(f), the purchaser of a PTP interest from a non-US person must apply 10% withholding on the sales proceeds. Section 1446(a) retains the current withholding on PTP distributions to non-US partners: 37% in case of non-US individual partners and 21% for non-US corporate partners.
The changes in Notice 2022-23 are designed to facilitate withholding and reporting obligations of QIs whose clients hold PTP interests. Specifically, the changes cover three areas; documentation of non-US clients that invest in PTPs, implementation of procedures to ensure PTP transactions are properly taxed and reported, and nominee reporting.
Note that Notice 2022-23 also changes the documentation and reporting procedures for QIs that make payments of PTP distributions or proceeds from the sale of PTP interests to private arrangement intermediaries, nonqualified intermediaries, non-US partnerships and non-US trusts. Discussion of these changes are not addressed in this news alert.
I. Changes to Documentation Procedures
In general, QIs may document direct non-US clients with either Form W-8 or documentary evidence obtained pursuant to the IRS approved KYC rules. Notice 2022-23 modifies the documentation rules to require QIs to obtain a US taxpayer identification number (“TIN”) from clients that invest in PTPs. This change applies to the use of both Form W-8 and KYC documentation.
II. Implementation of the Section 1446(a) and (f) Requirements
New procedures must be implemented by QIs to ensure that PTP distributions and proceeds from sales of PTP interests are taxed and reported. Notice 2022-23 sets fourth three possible solutions to implement procedures to comply with the new PTP rules.
A. Assume Primary Withholding and Reporting Responsibility for PTPs
The first option is for a QI to assume primary withholding and reporting responsibility for PTP transactions, both for PTP distributions and proceeds from the sale of PTP interests. Primary withholding and reporting responsibility in relation to PTPs is made on Form W-8IMY. Under this option PTP distributions and gross proceeds from the sale of PTP interests should be paid gross to the QI. The QI in turn applies the relevant withholding rate on PTP distributions and 10% withholding on sales proceeds. The QI must report PTP operations on Form 1042-S, and may do so on a withholding rate pool (“WRP”) basis for direct non-US clients that have provided a US TIN, however clients without a US TIN must be reported as paid to "unknown" recipients.
B. Disclosing QI
The second option, referred to as “disclosing QI,” requires the QI to provide documentation from impacted direct non-US clients to the counterparty, together with Form W-8IMY and a withholding statement. Importantly, the only documentation that a disclosing QI may utilize is a Form W-8 (e.g., BEN or BEN-E), and such form must show a US TIN. Under this option, the counterparty will ensure that withholding is applied and perform Form 1042-S reporting directly to the QI’s clients, thus the disclosing QI will not need to report the payments on Form 1042-S.
C. Non-Disclosing QI
The last alternative, referred to as a “non-disclosing QI,” provides that a QI does not disclose impacted non-US clients to counterparties, and instead provides Form W-8IMY and a withholding statement. The QI does not need to assume primary withholding and reporting responsibility for PTP transactions, however residual withholding responsibility still applies (e.g., in case the QI has knowledge that underwithholding occurred). Form 1042-S reporting will be performed on a WRP basis for non-US direct clients that have a US TIN, and for those clients without a US TIN as paid to "unknown" recipients.
III. Nominee Reporting Obligations
Non-US partners of a partnership engaged in a trade or business in the US are required to file a US income tax return. Treasury Regulation section 1.6031(c)-1T provides for the coordination between US partnerships (including most PTPs) and nominees (including all QIs) that hold partnership interests for another person. Specifically, a nominee holding a partnership interest on behalf of another person must provide information regarding the other person to the partnership, in order that the partnership can provide documentation to the non-US partner such that the non-US partner can fulfill any income tax return obligation. The information includes the name, address and US TIN of the partner, and a description of the interest in the partnership.
Notice 2022-23 incorporates the section 1.6031(c)-1T nominee reporting requirements in the new QI agreement for interests in PTPs held by investors. The impact for QIs will depend on the procedure chosen to implement the section 1446(a) and (f) changes.
In case of a disclosing QI, the information provided on Form W-8IMY, Forms W-8 from clients and the withholding statement should satisfy the section 1.6031(c)-1T requirements. However, when the QI provides this documentation to an upstream custodian (“QI’s nominee”) the QI must obtain from the QI’s nominee written confirmation that such is acting as a nominee for the PTP.
For QIs other than disclosing QIs, the information regarding impacted clients must be provided to the PTP or to the QI’s nominee. Alternatively, these QIs may instead provide information regarding distributions and sales of PTP interests to direct clients, however these QIs must also request information from the PTP regarding its deemed-sales procedures.
Lastly, Notice 2022-23 modifies the definition of an event of default to include material non-compliance with respect nominee reporting obligations.