Qualified intermediary application process contains a number of surprises.

• Author: Fox, George
• Position: Tax procedure

Rev. Proc. 98-27 spells out the application procedures for entities wanting to become qualified intermediaries (QIs). QI classification is important to foreign intermediaries (including foreign branches of U.S. financial institutions) that want to (1) protect the identity of their non-U.S. customers from disclosure on information returns and (2) retain account-opening documentation in conformity with the foreign local "know-your-customer" requirements.

Together with simultaneously published Notice 98-16, Rev. Proc. 98-27 contains a number of significant nuances, some clarifications and, in certain instances, conflicting information, when compared to the information originally appearing in Ann. 96-23.

Eligibility

Although Rev. Proc. 98-27 specifically limits its application to foreign financial institutions, foreign clearing organizations, foreign branches of U.S. financial institutions and U.S. clearing organizations, Notice 98-16 states that any person desiring a QI withholding agreement may submit a draft agreement in the general manner described in Rev. Proc. 98-27. The IRS reserves the right to require specifically that an eligible QI agree to include certain of its branches (to ensure the disclosure of certain U.S. accountholders).

Additional Accountholder Disclosures

If an accountholder is not an individual, the QI must obtain a certification that the accountholder meets the "Limitation on Benefits" article contained in any treaty the accountholder invokes. The names and addresses of such persons must be furnished to the Service, as well as the names and addresses of accountholders who have certified compliance with the Limitation on Benefits provisions from any non-QI intermediary that has given the QI a Form W-8, Certification of Foreign Status, or other documentation.

Generally, the IRS will limit disclosure to accountholders that receive more than an agreed-on amount (not less than $100,000) of treaty-benefited income in their QI accounts. In addition, if an accountholder other than an individual is acting for its own account, the QI also must obtain a representation that the accountholder is not a partnership for U.S. tax purposes and derives the income as a "resident" of the treaty jurisdiction in conformity with the recently issued Sec. 894 temporary regulations.

Requirement to Furnish Form W-9

For reporting on Form 1099, QIs must disclose to the withholding agent the identities of all U.S. nonexempt recipient accountholders...