The new QI agreement

At the end of last year the IRS published the Revenue Procedure 2022-43 which updates the QI agreement. 

This new QI agreement mainly creates additional rules for QIs (1) effecting transfers of interests in publicly traded partnerships (PTPs) or (2) receiving distributions made by PTPs on behalf of QI account holders. It also impacts rules in terms of QI reporting and periodic certifications.

This contract is effective as of 1 January 2023 for a six-year term. The banks acting as QI must have renewed their agreement with the IRS before 1st May. 

In that respect, the U.S. Internal Revenue Services (IRS) is transitioning the QI portal to new sign-in system ID.me for a better security of the IRS systems. The IRS  updated its login procedures on a number of online applications including the login to the online QI application and account management system (QAAMS). 

In order to have access to the modernised sign-in system, the QIs should create an account with Login.gov or ID.me as soon as possible and at the latest before August 2023.

The 2023 QI agreement generally adopts changes proposed by the IRS in Notice 2022-23, which expanded the scope of the QI agreement to apply to QIs are permitted to assume withholding and reporting responsibilities for purposes of Sections 1446(a) and (f).

The new QI agreement establishes new rules including a new withholding tax of 10% which will apply to sales of shares of US Publicly Traded Partnerships (US PTP). This new withholding tax will be calculated on the gross amount of the sale or when transferring a PTP and should be levied on customers. In addition, under certain conditions, sales and distributions of Non-US PTPs engaged in a "US trade or business" are also affected and fall under the scope of taxation according to the new section 1446(f) (see Notice 2022-23 of the IRS).

In addition, the Non-US Partner needs to obtain a US TIN from the IRS and provide a new W-8 form to the bank. It will also have to complete a US tax return with respect to those transactions.

It is important for the QIs to decide (if not already done) whether they would like to facilitate PTP investments in 2023 and beyond. QIs should be prepared to:

1. Distinguish PTPs from other products or investments;

2. Communicate with the customers and upstream agents on PTP investments; 

3. Update withholding and reporting systems; and

4. Execute enhanced process and control mechanisms, including controls to limit PTP investments.

The banks acting as QIs will need to update their systems in order to file their 1042 Form electronically. They will also need to attach the reconciliation performed on their 1042-S/1042 reporting to their QI periodic certification for each year of the certification period.

Another strategic decision for the QIs would be to determine the periodic review year. For many QIs the year 2022 is the second year of their current three-year periodic certification cycle. These QIs are required to certify to the IRS on their compliance with the obligations of the QI agreement ultimately: 

• 1 July 2024, if the year 2022 or 2021 is selected as review year; or

• 31 December 2024, if the year 2023 is selected as review year.

Even though the due dates may seem far off, we recommend that QIs already assess and decide which year is to be their review year. Many QIs typically select the third year of the periodic certification cycle, while there are clear advantages to selecting the second year. 

For example, a QI with a certification cycle closing at the end of 2023, has the following benefits when it selects 2022 as review year:

• Benchmark: QI would be tested on its compliance with the obligations of the current QI agreement; a certain and earlier applied benchmark. When selecting 2023, compliance with the new PTP rules may also be tested for the first year that these rules are in effect.
  

• Timespan: QI would have an 18-month timespan between the end of the review year and the certification due date, opposed to a 12-month timespan when selecting the last year as the review year. This duration is even shorter considering the time required to finalise the Forms 1042, 1042-S, 945 and 1099 reporting. The additional months may be crucial in case of time pressure from operational activities or in case there are any curable findings or risk areas.