Qualified Intermediary Program

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01 Jul 2009 Qualified Intermediary Program

Impact of Contemplated Changes on the Finance Industry

In May 2009, President Obama and Treasury Secretary Geithner announced the Administration’s international tax reform plan. The changes, if enacted, are said to be the most comprehensive tax reform since 1986.1 The tax reform plan is primarily aimed at curbing international tax avoidance by both US multinationals and individuals.2 Details of the proposed tax reform were unveiled on May 11, in the  US  Treasury  Department’s  Green  Book

explaining President Obama’s fiscal  2010 budget,3 however at the time of this writing, draft legislation  has  not  yet  been  released.    The proposed changes includes an extensive reform of the Qualified Intermediary Program, which was established in 2001 to improve the withholding and reporting of US-source income sent to foreign financial institutions receiving it on behalf of their account holders.4

 

Background

 

Recent events, most notably the UBS case, have exposed weaknesses in the Qualified Intermediary Program.5 American clients  of UBS’ North American Private Banking business unit masqueraded as foreign persons behind sham entities domiciled in offshore jurisdictions in order to avoid paying US taxes on assets held in their offshore accounts.6     Under the current

Qualified Intermediary Agreement the qualified intermediary is, in principle, not obligated to look behind corporations to see whether the beneficial owner is American.7 The Agreement also did  not require foreign financial institutions to collect Form W-9, the reporting form for US persons, if a US account earned only foreign-source income paid to and held in accounts outside the United States.8

 

This is all set to change if President Obama’s international tax reform proposals are enacted into law. The proposals seek to strengthen the Qualified Intermediary Program by increasing reporting required of qualified intermediaries, increasing tax withholding on transactions involving non-qualified intermediaries and imposing a legal presumption against users of non- qualifying  intermediaries  and  increased  penalties  for

failing to report overseas investments.9

 

Increased Reporting Requirements for Qualified Intermediaries

 

Foreign financial institutions will face increased compliance costs, as qualified intermediaries will no longer benefit from certain reporting exceptions based on their foreign status.10 Under the proposed tax reform, qualified intermediaries would be required to report information on their US clients to the same extent that US financial intermediaries must.11 Therefore, qualified intermediaries would be required to report US and foreign-source dividends paid to a US

person.12 Qualified intermediaries will also be required to collect information about beneficial owners of foreign

entity account holders and specifically report US persons who are beneficial owners to the Internal Revenue Service (‘IRS’).13

 

Qualified intermediaries will also be required to report transfers of money or property with a value of more than USD 10,000 to a foreign bank, brokerage or other financial account on behalf of a US person or on behalf of any entity owned by a US person.14

A US person or any qualified intermediary that forms or acquires a foreign entity on behalf of a US person (of which the US Person holds more than 50% of the ownership interest) will be required to report the foreign entity that is formed or acquired to the IRS.15

 

Withholding Tax on Payments Made Through Nonqualified Intermediaries

 

US financial institutions will be required to treat reportable payments16 made to nonqualified intermediaries as though they were made to an unknown foreign person and therefore withhold tax at a rate of 30%.17  Investors must disclose their identities

and demonstrate they are not evading US taxes in order to obtain a refund for the amount withheld.18

 

Under the proposal, a withholding agent would also be required to withhold tax at a rate of 20% on gross proceeds from the sale of any reportable security, when paid to a nonqualified intermediary that is located in a jurisdiction in which the United States does not have an income tax treaty with a satisfactory exchange of information program.19    Given that Switzerland agreed

to a revised double taxation agreement with the United States on 18 June 2009, it is unlikely that Swiss financial institutions which are not qualified intermediaries would be implicated by this provision of the tax reform.

 

Legal Presumptions Against Users of Nonqualified Intermediaries

 

The Administration’s tax reform plan would create a negative presumption that any foreign bank, brokerage or other financial account held by a US person at a nonqualified intermediary contains enough funds (USD 10,000) to trigger FBAR (Foreign Bank Account Report) filing requirements to the IRS.20 Any failure to file an FBAR will be considered willful if an account at a nonqualified intermediary contains an amount greater than USD 200,000 at any point during the year.21

Increased Penalties

 

The Administration intends to give the proposed changes force by increasing penalties for failing to report overseas investments for US Persons. In order to deter the use of overseas accounts to evade US taxes, the changes would double the penalties (against US Persons) applicable to understatements from transactions that involve foreign accounts held by US

Persons.22 However, it is not clear whether the proposed plan would also include increased penalties for qualified intermediaries for insufficient reporting.

 

The Administration’s plan would also extend the statute of limitations on international tax enforcement from 3 years to 6 years after the taxpayer reports required information.23

 

Effective Date

 

The proposed tax reform would be effective beginning in the calendar year after they are enacted. If enacted this year, the proposals would apply for the 2010 tax year.24

 

 

Our Experience

 

lecocqassociate provides a full range of financial regulatory, corporate and commercial advice in relation to the structuring and incorporation of entities.

This newsletter is for information purposes only. It does not constitute professional advice or an opinion. Please contact Mr. Dominique Lecocq on moc.e1498386786taico1498386786ssaqc1498386786ocel@1498386786lrd1498386786 for any questions.

 

1 The Tax Reform Act of 1986 drastically reduced the number of deductions and number of tax brackets; See also Martin A. Sullivan, Obama Launches International Reform: The Battle Begins, Tax Notes Today (May 8, 2009).

2 Press Release, Office of the Press Secretary, The White House,

Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas (May 4, 2009).

3 US Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals (May 2009).

4 Application Procedures for Qualified Intermediary Status Under Section 1441; Final Qualified Intermediary Agreement, Rev. Proc

2000-12.

5 Meg Schreve, IRS Examining Methods to Strengthen QI Program, Shulman Says, Tax Notes Today, (April 1, 2009).

6 Janet P. Levaux, UBS Admits to Tax Evasion, to Pay $780 Million,

Research Magazine (Feb. 19, 2009).

7 Banking Secrecy Practices and Wealthy American Taxpayers, House Ways and Means Select Revenue Measures Subcommittee, (Mar. 31, 2009) (statement of Rep. Richard E. Neal); See generally Final Qualified Intermediary Withholding Agreement.

8 Final Qualified Intermediary Withholding Agreement, §2.44(B); See also IRS

Examining Methods to Strengthen QI Program at 2.

9 Press Release, Office of the Press Secretary, The White House, Leveling the

Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas (May 4, 2009).

10 General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals at 42.

11 Id.

12 Id.

13 Id.

14 Id. at 48.

15 Id. at 50.

16 Payments of US source fixed or determinable annual or periodical gains, profits or income. Id. at 43.

17 Id. at 43.

18 White House Press Release (May 4, 2009).

19 Id. at 44.

20 Id. at 52.

21 Id.

22 Id. at 56.

23 Id. at 54.

24 See generally General Explanations of the Administration’s Fiscal Year 2010 Revenue Proposals.