IRS releases final 2023 QI Agreement

Executive summary

The final 2023 qualified intermediary agreement was released in Rev. Proc. 2022-43

Final QI Agreement effective Jan. 1, 2023

The IRS recently released Rev. Proc. 2022-43 on Dec. 14, 2022 finalizing the 2023 qualified intermediary (QI) withholding agreement proposed under IRS Notice 2022-23 (released May 3, 2022) and referenced in Treas. Reg. section 1.1441-1(e)(5). The new QI agreement applies beginning Jan. 1, 2023, while the prior QI agreement in effect under Rev. Proc. 2017-15 expired on Dec. 31, 2022.

The final QI agreement largely mirrors the proposed agreement previously published by the IRS, but also includes several important changes discussed in more detail below that significantly alter the 2017 QI agreement issued under Rev. Proc. 2017-15. The primary changes focus on a QI’s compliance obligations under IRC sections 1446(a) and (f), as well as clarification regarding the “best-effort” standard for collecting US taxpayer identification numbers (TINs), clarification on disclosing QI requirements, Qualified Derivatives Dealers (QDD) and Qualified Securities Lenders (QSL) specific updates, and some updates to the QI periodic certification requirements. The changes are particularly important for QIs that withhold taxes under sections 1446(a) and (f) on foreign investors’ sales or transfers of interests in publicly traded partnerships (PTPs) and their receipt of distributions from PTPs.  Under the new agreement, QIs are allowed to assume withholding tax responsibility on a payment-by-payment basis and may act as a disclosing QI by providing specific payee documentation such as withholding tax certificates to withholding agents for payments of PTP distributions or amounts realized from the sale of a PTP interest which, according to the IRS, generally relieves the QI from withholding and reporting on those payments.

QIs that would like to renew their existing QI agreement are required to do so between Jan. 1, 2023 and March 31st, 2023 using the IRS QI, Withholding Foreign Partnership, Withholding Foreign Trust, Application and Account Management system (QAAMS). Going forward, any new applicants must apply on or before March 31 in order for their agreement to have an effective date of January 1 for the year in which they apply.

RSM Observation:  Interestingly, the revenue procedure affords no grace period or other transition relief for entities with QI agreements previously in effect.  It is therefore imperative for QIs to evaluate the impact of changes on their reporting and withholding obligations and to update existing processes and procedures to ensure that they are prepared to comply with new requirements in effect as of Jan. 1, 2023.   

An overview of key changes

Specific changes to in the 2023 QI agreement are detailed below:

TIN solicitation requirements related to US accounts: The new agreement clarifies that a QI is required to use its best efforts to collect TINs, but may accept withholding certificates. Under the rules, a QI may establish that a failure to obtain or provide an account holder’s US TIN is due to the failure of the QI’s account holder to provide information after the QI has used its “best efforts” to acquire the TIN. A QI will be determined to have used its best efforts if it can show:

• That it made an initial written solicitation for the account holder’s US TIN in 2023;
• an additional written request was sent (if necessary) in the subsequent year; and
• a third written request was issued the next year.

The “best effort” rule does not eliminate the QIs requirement to collect a TIN when applying a reduced rate of withholding for amounts paid under sections 1446(a) or (f).

Qualified Derivative Dealer/Qualified Securities Lenders requirements: The 2023 QI Agreement lists several changes impacting both QDDs and QSLs. Specifically, the final agreement under Rev. Proc 2022-43 does not include the anticipated QDD periodic certification reporting requirements or the requirement for a sample of QDD accounts. These items are expected to be released in a future update to the final agreement. As it now stands, the final agreement is in line with the transition relief granted under Notice 2022-37, which extended prior transition relief for section 871(m) rules for another two years.

While a QDD is not required to perform a periodic review for calendar years 2023 and 2024 with respect to its QDD activities, the 2023 QI agreement requires a QDD to certify that it made a good faith effort to comply with the Section 871(m) regulations and relevant provisions of the 2023 QI Agreement part of its periodic certification. The 2023 QI agreement further states that a QDD must include information about dividends received while acting as an equity derivatives dealer on its withholding statement for 2023 and 2024.

The 2023 QI Agreement further clarifies a QDD’s withholding and reporting obligations. Under the new agreement, a QDD must perform primary chapter 3 and chapter 4 withholding and reporting responsibilities, as well as primary Form 1099 reporting and backup withholding responsibilities for payments made as a QDD with respect to Section 871(m) transactions. Moreover, a QI acting as a QDD remains liable for its QDD tax liability and must report that liability on the appropriate US tax returns.

The 2023 QI agreement provides further guidance indicating that a QI that is a QDD (or a QI with a branch that is a QDD) should file:

• Form 1120, U.S. Corporation Income Tax Return, if it is a domestic corporation;
• Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, if it is a foreign corporation; or
• Form 1065, U.S. Return of Partnership Income, if it is a partnership.

In addition, all QDDs that are partnerships must file Forms 1042-S with respect to any amounts under the 2023 QI Agreement for any reportable or withholdable Fixed, Determinable, Annual, or Periodical (FDAP) income allocated to each of their foreign partners. The Form 1120-F or Form 1065 must be filed whether or not it would have to be filed if the entity were not a QDD. Although the Form 1065 does not have a Schedule Q, each QDD of a QDD partnership must provide comparable information.

Disclosing QI requirements: A QI is generally permitted to document the status of an account holder that is a partner in a PTP as either a foreign or US person for purposes of Sections 1446(a) and (f) under requirements similar to those used under chapter 3 or chapter 4 withholding. However, under the new final agreement a QI that does not assume primary withholding responsibility under sections 1446(a) or (f) may either provide pooled account holder information or act as a disclosing QI by providing its withholding statement and specific payee documentation to the respective withholding agent. The new agreement clarifies that when a QI acts as a disclosing QI, it must disclose all payees for the entire amount of a PTP distribution or amount realized from the sale of a PTP interest. On this basis, a disclosing QI is prohibited from acting as a nonqualified intermediary with respect to any account holder and retains the residual withholding requirement that applies when the withholding agent underwithholds.

The final 2023 QI Agreement also clarifies that a disclosing QI may provide a Form W-8 for each non-US account holder receiving the payment regardless of whether the Form W-8 includes a US TIN. This provision was included to address concerns that a QI would not be permitted to act as a disclosing QI if one or more account holders fails to provide their US TIN despite QI’s best efforts. A QI may also act as a disclosing QI for payments allocable to US account holders by providing account holders’ Forms W-9 to its withholding agent.

Partner information reporting: When a QI is not acting as a disclosing QI for a PTP distribution or amount realized to an account holder, Notice 2022-23 proposed requiring the QI to issue to the account holder a statement as described in Reg. sec. 1.6031(c)-1T, which provides referencing the person’s distributive share of partnership income, gain, loss, deduction or credit required to be shown on the partnership tax return (generally form 1065) with respect to an account holder/partner holding a PTP interest.

The final 2023 QI agreement includes several provisions specific to K-1 reporting summarized below:

• A QI not acting as a disclosing QI for a PTP distribution or amount realized to an account holder is permitted to provide to an account holder with a copy of the K-1 issued by the PTP to the QI along with the proper allocation percentage applicable to the account holder in lieu of a separate statement for purposes of Treas. Reg. section 1.6031(c)-1T(h);
• A disclosing QI is not required to provide the Treas. Reg. section 1.6031(c)-1T(a) statement to the QI’s nominee to the extent the nominee maintains fully segregated and disclosed accounts for the disclosing QI’s account holders/partners that include all information sufficient for the PTP to issue the statement. If the statement is required it must include a US TIN for a foreign account holder/partner only when the account holder/partner provided the US TIN to the QI.

Documentation validity period: The final 2023 QI Agreement clarifies that the documentation validity period for section 1446 purposes is the same as the general Form W-8 validity period of three years after the year the  form was signed (barring a change in circumstances). This update clarifies that QIs are not required to obtain revised documentation from account holders for each payment of a PTP distribution or amount realized from the sale of a PTP interest which is welcomed relief to address industry concerns with the administrative burden of resoliciting documentation.

Allowance for collective refunds: Under the final agreement, QIs are still not permitted to file for collective refunds for account holders in cases where overwithholding under sections 1446(a) or (f) occurs. According to the IRS, this request was not adopted because of the US income tax return filing requirement applicable to foreign persons receiving effectively connected income. Thus, the 2023 QI Agreement includes the same restriction as that specified in Notice 2022-23, which prohibits  a QI’s use of the collective refund procedures for overwithholding under section 1446(f) or on a PTP distribution..

Presumption Rules update: The proposed agreement under Notice 2022-23 and in Treas. Reg. section1.1446-4(d)(1)(iii) addressed the presumption rules for undocumented account holders only where the nominee also does not receive a qualified notice for a PTP distribution. The final agreement is updated to clarify that the general presumption rules of section 1446(a) apply in all other situations when determining the status of an undocumented account holder as a foreign individual or corporation when the QI cannot reliably associate a payment subject to section 1446(a) withholding with valid documentation from a partner.

Compliance and certification procedures: The review steps and compliance requirement updates for Sections 1446(a) and (f) withholding under Rev. Proc 2022-43 include:

• Review of documentation for account holders receiving PTP distributions and amounts realized from the sale of PTP interests;
• A determination of any underwithholding for QIs acting as disclosing QIs;
• Review to ensure compliance with statement requirements to nominees for Schedule K-1 reporting; and
• QIs are required to confirm that the QI did not apply the joint account option for section 1446(a) or (f) purposes.

Responses to public comments: Rev. Proc 2022-43 includes the Treasury and IRS responses and requests for clarification received since the 2017 QI Agreement was published. A summary of these responses is below:

• The 2023 QI Agreement incorporates several Frequently Asked Questions (FAQs) from the prior version of the QI Agreement including:

  • FAQs #1 and #2 which address limiting the validity of a claim of foreign status to instances where a direct account holder has a US mailing or permanent address on file and permits a QI to rely on account holder documentary evidence obtained before Jan. 1, 2018 for treaty claim purposes despite the absence of a permanent residence address. The QI must have a permanent residence address for the direct account holder in the jurisdiction associated with the documentary evidence if the account holder was documented after Jan. 1, 2018;
  • FAQ #3 which defines “Agreement” to include the relevant KYC rules included in a country attachment on IRS.gov relevant to the QI (or a branch of the QI);
  • FAQ #4 which provides the requirements for beneficiaries of a tax-free plan to be treated as a direct account holder was adopted into the 2023 QI Agreement; and
  • FAQ #11 (Certifications and Periodic Reviews), which allows a QI to rely on a valid Form W-8IMY it has on file for a partnership or trust to determine a permissible chapter 4 status for joint account treatment. A QI is no longer required to obtain an additional certification of chapter 4 status and to make the representation under Appendix I that it received these certifications.

• The final 2023 QI Agreement also addresses various other comments received from industry which should provide clarification on or relief from various issues including:

  • Limitation on benefits - A QI must now report the specific limitation on benefits (LOB) category claimed by an entity account holder only on a recipient-specific Form 1042-S and not for pooled reporting. The 2023 QI Agreement allows QIs to avoid the need to report withholding rate pool information on separate Forms 1042-S for each LOB category;
  • Pooled reporting - A QI that has filed pooled Form 1042-S reporting is now required to provide an account holder with a recipient-specific Form 1042-S if the recipient makes a written request for the form within two full calendar years following the year in which the QI made the payment for which the Form 1042-S is requested, and provides the QI its US TIN. If a QI files a Form 1042-S to report a payment subject to section 1446(a) or (f) withholding, an account holder has three years, rather than two, to make a written request for recipient-specific Form 1042-S reporting. Under those circumstances, the QI must provide the account holder with a separate Form 1042-S for each reportable amount paid to the account holder for the calendar year so the account holder can properly reflect all reportable income paid by the QI on the account holder’s US tax return;
  • Copies of Forms 1042-S for disclosing QIs - When a recipient-specific Form 1042-S is issued by a QI to an account holder of an underlying disclosing QI, the QI must also issue a recipient copy of the Form 1042-S to the disclosing QI;
  • Extensions for periodic certifications - A QI electing to perform a periodic review for the third year of its certification period is required to submit its periodic certification by Dec. 31 of the year following the end of the certification period. A QI, may, however, seek an extension. which the IRS will consider  on a case-by-case basis;
  • Terminating QIs - The 2023 QI Agreement provides relief for the requirement of a QI terminating its QI agreement to submit a final certification within six (6)months.   Under the final agreement, if a QI terminates its QI agreement in the final year of a certification period, the QI must still submit a periodic review report covering one of the two years before the year of termination unless the QI is granted a waiver. Otherwise, no periodic review is required for the final certification period of a QI terminating its QI agreement. A combined periodic review is allowed for a predecessor QI when a predecessor QI merges into or is acquired by a successor QI and the predecessor QI is required to submit a periodic review report due to its termination. The predecessor QI and successor QI must make separate certifications for the period covered by the combined periodic review.

• Emailing notices to QIs - The 2023 QI Agreement now allows written notices sent by QIs to the IRS to be either mailed via registered, first-class mail or e-mailed to the IRS. The 2023 QI Agreement also states that the IRS will send notices to a QI by secure e-mail to the QI’s responsible officer and other contact persons designated by the QI. In contrast, the 2017 QI Agreement generally required all notices sent by a QI or the IRS to be mailed via registered, first-class airmail.

• Application and renewal for QI status and new published listing of QIs: The 2023 QI Agreement is effective as of Jan. 1, 2023. All QI agreements that were in effect prior to Jan. 1, 2023, expired on Dec. 31, 2022. QIs attempting to renew their agreements are required to do so through QAAMS by March 31, 2023. Agreements renewed by March 31, 2023, will be effective as of Jan. 1, 2023, and will avoid any disruptions of their QI status.

New applications must be submitted on or before March 31 to have an effective date of Jan. 1 of the year in which they apply. Regardless of when a QI enters into the new agreement, it will expire on Dec. 31, 2028, unless terminated or renewed before that date. Additionally, all new and renewing QI applicants will be required to consent to have the QI name, status and QI-EIN disclosed on a published list on the IRS website to prevent entities that are not QIs from misrepresenting themselves.

For more information on any changes to the QI Agreement and how these changes may impact your organization, please contact a member of our FATCA and Global Information Reporting team or visit our website.