M E M O R A N D U M

May 7, 2009

 

TO: Distribution

FROM: FROM: Burt, Staples & Maner LLP

RE: Drastic Changes to Qualified Intermediary (“QI”) Program Proposed by Obama

The Obama Administration has proposed to Congress sweeping changes in the QI program and the way nonqualified intermediaries (“NQIs”) are treated. If these proposals are adopted, NQIs will be greatly disadvantaged relative to QIs and U.S. financial institutions. At the same time, all financial institutions, U.S. and foreign, QI and NQI, would see an increase in their compliance burden. The White House has released only an outline of the proposals as part of a package of international tax reforms; more details will be unveiled with the full budget proposal later in May.

NQI-Targeted Proposals

  • “U.S. payments” to individuals through NQIs would be subject to 20-30% withholding, refundable only if the individuals “disclose their identities and demonstrate that they’re obeying the law.”
  • Accounts of U.S. citizens at NQIs would be presumed to have enough money in them to trigger foreign bank account reporting (“FBAR”) rules, and if an NQI account ever has more than $200,000 in it, a failure to file an FBAR report would be presumed willful, and therefore subject to more severe penalties. (Separately, the Administration would double the FBAR penalties.)
  • U.S. investors would be required to report transfers to or from NQIs on their income tax returns.

QI-Tightening Proposals

  • QIs would be required to comply with U.S. tax reporting rules to the same extent as U.S. financial institutions, requiring QIs to report foreign source income and broker proceeds of U.S. persons. Such reporting is generally not required now if the QI is not U.S.-owned.
  • Treasury would be authorized to publish regulations requiring that, in order for a financial institution to be a QI, all “commonly controlled financial institutions” also be QIs.
  • The proposals state that “U.S. customers at QIs would no longer be allowed to hide behind foreign entities.” In addition, all financial institutions would be required to report transactions on behalf of U.S. individuals that “establish a foreign business entity” or effect transfers to/from foreign financial accounts.

Clearly, the Administration wants tighter rules, and it could make virtually all of these changes on its own through regulations and modifications to published guidance. Changes are, therefore, quite likely. Financial institutions should consider whether NQIs in their groups can or should be converted to QIs, and how QIs in their groups will cope with the enhanced reporting requirements.

 

 






























 

 

 

 
   
  Back to Client Letters
   
   
   
  © Copyright 2014. Burt Staples & Maner, LLP
Site Designed By: DC Web Designers, a Washington DC Web Design Company