QIs - confidentiality, with limitations.

• Author: Packard, Pamela
• Position: Qualified intermediaries; IRS rules for foreign entities

The new regulations on qualified intermediaries (QIs) that became effective Jan. 1, 2001 create a possible conflict between a QI and the IRS after the signing of a QI agreement.

A QI is a foreign entity or a foreign branch of a U.S. entity that enters into an agreement with the Service on U.S. tax withholding and reporting obligations for its customers. Generally, a QI is a foreign financial institution, a foreign clearing organization or a foreign branch of a U.S. financial institution or U.S. clearing organization. Pursuant to an agreement with the IRS, the QI certifies its customers' eligibility for a reduction in withholding rates without disclosing their identities. A payor can treat a person as foreign if the payor can reliably associate the payment with documentation that establishes that the person is the beneficial owner of the income or a foreign payee.

Primary Advantage

QIs do not have to disclose the identity of their foreign customers. Foreign entities or foreign branches of U.S. entities can benefit from this advantage as of Jan. 1, 2001. Additionally, most of the reportable payments to the Service are made on a pooled basis. The confidentiality aspect is essential for all foreign entities with QI status located in countries that guarantee bank secrecy to their customers under national law. At first glance, it seems that the QI regime solves the conflict facing foreign entities caught between the obligation to disclose their customers' identities for U.S. tax purposes and the obligation of maintaining confidentiality for the customer under foreign national law.

However, in certain circumstances, the new QI regime creates further conflict for foreign QIs, when confidentiality cannot be maintained.

Cases in Which Confidentiality Is Not Maintained

Nonexempt U.S. recipients. Disclosure of a taxpayer's identity is required for all nonexempt U.S. recipients. Thus, confidentiality is not maintained for U.S. citizens and residents. In this context, the following unsolved situations exist:

* The foreign "know-your-customer-rules" (KYC) accepted by the IRS do not require that a bank determine whether a customer might be subject to U.S. taxation because of dual citizenship (one of which is U.S.), U.S. permanent residence status or U.S. resident alien status. The QI rules do not require the foreign QI to go beyond the documentation normally required under the KYC rules to establish identity. This interpretation has been confirmed in...