Significant changes to the U.S. Qualified intermediary agreement


The IRS recently published Notice 2022-23, which includes proposals to update the Qualified Intermediary (‘QI’) agreement for new tax rules that apply to Publicly Traded Partnership (‘PTP’) distributions and transfers. The purpose of the Notice is to give the industry time to implement changes and to provide feedback before the proposals are finalised. The comment period is very short ; closing on 31 May. Final revisions, incorporating any changes resulting from industry comments, will be incorporated in the upcoming revised QI Agreement, effective on 1 January 2023. This means that QIs will not know the final and full extent of the revisions until the new QI Agreement is published at a future date this year.

A PTP is an entity with its interests traded on an established securities market or is readily tradable on a secondary market. Distributions from a PTP are generally subject to US withholding tax and transfers can be subject to a 10% withholding tax unless certain exemptions apply. The proposed changes describe options and obligations for QIs transferring PTP interests or receiving distributions from a PTP.

There are significant complexities in identifying these instruments, understanding how they should be taxed, and supporting reduced withholding for account holders in receipt of PTP amounts:

  • PTP’s globally are in scope for these regulations, however there is currently no definitive list identifying PTPs in the market.
  • QIs have not previously been able to assume withholding responsibility for PTP distributions. As a result, QI payment and reporting systems are not equipped to identify, process or withhold on these income streams.
  • Clearing organisations have indicated that they will not assume withholding responsibility for PTP payments. As a result, non-withholding QIs may be required to assume withholding primary withholding responsibility should they wish to continue offering these products to their account holders.
  • A core tenant of the QI Agreement – the ability to rely on documentary evidence (in conjunction with a treaty statement, as applicable) to support treaty benefits – is not available with regards to payments of PTP income. In order to support reduced withholding on PTP income or gains, a QI will be required to obtain Form W-8BEN or W-8BEN-E. The W-8 must specifically mention the PTP for which the account holder claims reduced withholding
  • Withholding QIs, and non-withholding Qis providing withholding statements with pooled rates to upstream payors will be required to issue detailed PTP statements to each account holder in receipt of PTP income. This net new reporting requirement will be effective for calendar year 2023 and the Notice states that non-compliance may result in a material failure or event of default.
  • The US TIN from the W-8 will need to be obtained to put it on the 1042-S to match it to the income tax return filed in the US/5.02(B) and (C) are specific that you need a US TIN on the form/because if PTPs are the only income for which a QI has to collect/report any type of TIN, then that's a disconnect to current systems.

Next steps for Asset and Wealth Managers

To ensure readiness for the 1 Jan 2023 effective date, QIs should conduct an impact assessment to determine whether and how their customers invest in PTPs. Compliance options should be assessed, target operating models developed and business cases for change should be prepared to provide sufficient time to implement changes. In our experience many QIs do pay income subject to these rules and will be affected by these new obligations. QI's might consider implementing measures to prevent clients investing in PTPs or only allow PTPs that issue qualified notices providing that transfers are not subject to withholding. Responsible Officers will be obligated to certify compliance with these obligations.

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Maud Poncelet

Maud Poncelet

Avocat, Associée, PwC Société d'Avocats