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US Qualified Intermediary – preparing to recertify

Martin Killer Martin Killer

Qualified Intermediary firms must periodically certify compliance to the IRS, and for most firms this will be due in 2021. Martin Killer looks at regulatory expectations for recertification and what to do now.

The Internal Revenue Service (IRS) Qualified Intermediary (QI) Agreement included in Revenue Procedure 2017-15 imposes a series of compliance obligations on those institutions that have registered as QIs in the USA, including periodic certification to the IRS.

These requirements also impose obligations related to a QI’s Foreign Account Tax Compliance Act (FATCA) compliance status, despite domestic tax authorities having primary oversight for FATCA. Similar requirements apply to withholding foreign partnerships and trusts that have entered into equivalent agreements with the IRS.

What does the QI Agreement require?

The QI Agreement requires all QIs to appoint a responsible officer (RO), who has specific responsibilities to maintain processes and procedures to ensure compliance with the agreement.

As part of these obligations, the RO must provide a three-yearly periodic certification to the IRS (via the IRS online QI registration system). Appendix I of the QI Agreement sets out the specific statements upon which the certification is based. Many QIs made their first certification to the IRS for the period ending 31 December 2017, so the next certification period runs from 1 January 2018 to 31 December 2020, for which certifications are due in 2021. 

Prior to making the IRS certification, a QI must undertake a periodic review of its compliance during one year of the certification period (unless it is able to meet specific conditions for a waiver). 

Underpinning the RO certification is the QI Compliance Programme, which comprises a range of activities established by the QI to meet its obligations under the QI Agreement. In practice this may include a QI technical compliance manual, as well as operating procedures allocating compliance responsibilities, and providing the RO with suitable oversight of all QI processes. 

Given that many QIs must undertake a periodic review during 2021, now is a good opportunity to assess the extent of the current compliance status and consider a QI compliance healthcheck. Importantly, a QI healthcheck can focus on specific areas of a QI Compliance Programme – for example, where new customer documentation has been received or new procedures have been established that impact QI compliance –  and cover similar regimes such as FATCA and the Common Reporting Standard (CRS). 

This can provide valuable assurance around the QI’s compliance status, and help the QI identify and remediate any errors prior to the periodic review.

Differences between the periodic review and RO certification

The periodic review can be undertaken by an external party or an internal function, subject to it being independent of the RO and technically competent to undertake the review. However, the RO is primarily responsible for ensuring the QI establishes and maintains an effective QI Compliance Programme (see section on 'Preparing for recertification') throughout the certification period, as well as making the certification to the IRS.

The periodic review comprises a series of tests focused on a sample of the QI’s accounts in relation to customer documentation, withholding tax and IRS reporting. Firms must produce a written report covering the factual results of the periodic review, a copy of which may be requested by the IRS. The scope of the review is not expected to incorporate wider areas of the QI Compliance Programme.

Assuming the initial certification period covered 1 July 2014 to 31 December 2017, the next certification period runs from 1 January 2018 to 31 December 2020. As was the case for the initial period, a periodic review must be undertaken in relation to one calendar year within the certification period unless a waiver is applicable. The results of the review must be finalised prior to the RO making the certification and they are typically uploaded to the IRS system as part of the RO making the final certification.

For the certification period from 1 January 2018 to 31 December 2020 certifications are due by:

  • 1 July 2021 – where a periodic review is undertaken for calendar year 2018 or 2019, or a waiver application is made
  • 31 December 2021 – where a review is undertaken for calendar year 2020.

Penalties for non-compliance 

Where a certification is not submitted in time, or it is subsequently determined that the QI has not complied with the requirements of the QI Agreement, the IRS can penalise the QI under the terms of the QI Agreement. 

For example, the IRS could treat this as a material failure – or worse, an event of default – and seek to remedy the position in accordance with the QI Agreement. At a minimum, a QI could expect some form of enquiry by the IRS to ascertain how the failure arose, identify any underlying compliance issues and make sure the QI implements procedures to prevent similar failures occurring in the future. This could require significant time and resource commitments from the RO and others involved in the QI processes.

The wider commercial and reputational aspects of imperilling QI status could also be substantial. Where any issue arose with respect to the QI’s FATCA compliance, and the QI is resident in a Model 1 Intergovernmental Agreement jurisdiction, the IRS would most likely contact the domestic tax authority and take appropriate action to address FATCA requirements. 

Preparing for recertification

While there is no gold standard, compliance programmes should reflect the complexities of the QI’s business and align with other processes that the QI manages as part of its FATCA/CRS requirements (in particular those mandated under domestic FATCA/CRS legislation). It should also align to wider obligations, such as Know Your Customers (KYCand anti-money laundering (AML), breach reporting, change in circumstances and the Senior Managers and Certification Regime. As noted, the QI’s FATCA compliance status is relevant to the QI Compliance Programme. 

In the UK, processes to support the Corporate Criminal Offence legislation, introduced in 2017, will also be relevant to its QI compliance procedures.

At a minimum, a QI Compliance Programme would typically include the following, and firms can use this to assess their readiness for recertification:

  • Systems and processes that are critical to ensure the QI’s compliance with its documentation, withholding and reporting obligations
  • Evidence of any other reviews undertaken of QI and FATCA compliance (outside of the periodic review requirement) and the results of those reviews
  • Evidence of colleague training and technical updates to reflect technical and commercial business changes
  • Appropriate two-way communications channels that provide the RO with effective oversight of QI compliance processes and capability to inform downstream 
  • The ability for the RO to detect and disclose material failures and events of default (with respect to the QI Agreement) to the IRS
  • To the extent the QI envisages it may meet the conditions to apply for a waiver that it is has the relevant processes in place to ensure QI compliance and provide relevant information to the IRS upon request
  • Going forward, the approach to compliance with Section 871(m) and Qualified Derivatives Dealer (QDD) status where applicable

For more information on QI recertification and compliance healthchecks, contact Martin Killer.

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