M E M O R A N D U M
May 7, 2009
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.
- “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.
- 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
- 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
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.