SECTION 5. QI — Internal Revenue Bulletin 1998-15

AGREEMENT

.01 Scope of the agreement. An agreement may not cover U.S. branches of an eligible person. An eligible person is not required to include all of its foreign branches in the agreement. The IRS may require, however, that an eligible person agree to include certain of its branches to insure the disclosure of certain U.S. account holders. See §1.1441–1(e)(5)(iii) and section 5.02(3), below. In appropriate cases, an eligible person may request that the agreement cover its related nonU.S. affiliates or unrelated account holders that act as nominees, custodians, or agents of beneficial owners. If the IRS grants the request, each related non-U.S. affiliate or unrelated account holder must agree to be a signatory to the agreement.

.02 Terms and procedures regarding in- termediary withholding certificate. (1) Submission of QI-Form W–8. The agreement must specify that a QI will furnish its QI-Form W–8, with its QI-EIN, to withholding agents for reportable amounts in lieu of furnishing a Form W-8

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(4) Information to withholding agent. (a) In general. A QI must agree to identify the classes of assets covered by the QI-Form W–8 by following §1.1441– 1(e)(5)(v) and subparagraph (4)(c) of this section. In addition, the QI must state the rate of withholding for each class.

(b) Application of presumptions. To identify the relevant classes of assets, a QI may determine the status of its, or another intermediary’s, account holders by following the presumptions in §§1.1441– 1(b)(3), 1.1441–5(d) and (e), and 1.6049– 5(d)(2) through (d)(5). (c) Class of assets and withholding pool. (i) Definition. Generally, a class of assets is a group of assets that produces the same type of income (e.g., interest or dividends), is subject to the same rate of withholding, and is associated with the same type of payee or beneficial owner (e.g., foreign, U.S., or undocumented (i.e., a payee for whom the QI holds no or unreliable documentation)). Notwithstanding the general rule that a class of asset should produce the same type of income, a QI-Form W–8 may state that all assets held in a particular account are within a single class of assets if all the income from the assets in such account is subject to the same rate of withholding and the same type of information reporting. See, for example, subparagraph (4)(c)(ii)(C) of this section. The QI withholding agreement must require the QI to identify classes of assets on a country-bycountry basis. The income from each class of assets is a separate “withholding pool.” See section 5.07(3) for more information on withholding pools.

(ii) Application. (A) Foreign payees. Assets that are associated with foreign payees, that produce a specific type of income, and are subject to a particular withholding rate are a class of assets. Thus, there may be numerous classes of assets for the same type of income paid to foreign payees because of different withholding rates under the Code or an applicable treaty.

(B) U.S. payees. Assets associated with each U.S. payee that is a non-exempt recipient are a separate class. Assets associated with all U.S. payees that are exempt recipients are a single separate class.

stitute a separate class. A QI paying reportable amounts (other than U.S. source bank deposit interest or short-term OID) must presume that undocumented payees of those amounts are foreign unless the QI has actual knowledge that the payee is a U.S. non-exempt recipient. For reportable amounts that are bank deposit interest from a U.S. branch of a U.S. bank or similar financial institution or shortterm original issue discount, the QI must presume that the undocumented payee is a U.S. non-exempt recipient.

(D) QI assuming primary withholding responsibility. Assets for which a QI assumes primary withholding responsibility are a separate class. The QI does not have to identify separate classes of assets within that class if the assumption of withholding responsibility makes such a disclosure unnecessary. The QI withholding agreement may, however, require a QI to identify the assets with respect to which it assumes primary withholding responsibility on a country-by-country basis.

(iii) Example. (A) Facts. A QI (“QI1”) has foreign account holders. The QI1 also has account holders that are U.S. non-exempt recipients. Another account holder is a QI (“QI2”) that has assumed primary withholding responsibility. Finally, QI1 has some account holders for whom it does not have the required documentation. QI1 has not assumed primary withholding responsibility for any assets.

All account holders earn U.S. source interest that would qualify as portfolio interest if they gave the documentation required by §1.871–14(c)(2). They also earn U.S. source dividends. Some of the foreign account holders can benefit from a 15-percent reduced withholding rate under a tax treaty on dividend income while others cannot.

(B) Analysis. QI1 has the following classes of U.S. source assets and withholding pools:

(1) assets producing interest earned by foreign account holders claiming the portfolio interest exemption at source (a withholding pool of interest - zero rate);

(2) assets producing dividend income earned by foreign account holders claiming the 15-percent reduced rate at source under an income tax treaty (a withholding pool of dividends - 15% rate);

(3) assets producing dividend income earned by foreign account holders resid

ing in a non-treaty country (a withholding pool of dividends - 30% rate);

(4) assets producing interest income earned by each U.S. account holder (a withholding pool per account holder of interest reportable on a Form 1099 - zero rate);

(5) assets producing dividends earned by each U.S. account holder (a withholding pool per account holder for dividends reportable on a Form 1099 - zero rate);

(6) assets producing dividends and interest income earned by account holders for whom the QI1 does not hold all of the required documentation as specified under the agreement (a withholding pool for undocumented payees - 30% rate (presumed foreign)—Note: QI1 could divide this class of assets into one for dividends and another for interest income); and

(7) assets producing dividends and interest payable to QI2 for its foreign account holders (a withholding pool for which QI2 assumes withholding).

.03 Documentation requirements. (1) In general. The agreement must contain provisions covering the type of documentation a QI will obtain from its account holders. Generally, the QI must agree to the same documentation requirements that apply to withholding agents under chapters 3 and 61 of the Code. The QI may use any substitute form for a Form W–8 or Form W–9 that is acceptable to the IRS. The QI may include a substitute form in an account opening form. If a QI relies on documentary evidence in place of a Form W–8, the agreement must specify the type of documentary evidence upon which the QI may rely.

(2) Documentary evidence from bene- ficial owners. Beneficial owner documentary evidence is acceptable if the QI complies with the provisions of §1.6049– 5(c)(1). Generally, a QI will be permitted to rely on the “know-your-customer” procedures (as submitted for review pursuant to section 4.02(8) of this revenue procedure) if such procedures are acceptable to the IRS.

(3) Documentation supporting claim of reduced rate. A QI may not reduce the rate of withholding, or instruct a withholding agent to reduce the rate, unless it can associate the payment with valid documentation described in the section 1441 regulations or in the QI withholding agreement. If an account holder is not an

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individual, the QI must obtain a certification that the account holder meets the Limitations on Benefits article contained in any treaty the account holder invokes. See §1.1441–6(c)(5). If an account holder, other than an individual, is acting for its own account, the QI must also obtain a representation that the account holder is not a partnership for U.S. tax purposes. If the account holder is a partnership for U.S. tax purposes, then the QI must obtain a Form W–9 as described in §1.1441–1(d)(2) (if the partnership is a domestic partnership) or a Form W–8 as described in §1.1441–5(c) (if the partnership is a foreign partnership). In addition, if an account holder, other than an individual, claims the benefit of a reduced rate of withholding under a tax treaty, the QI must obtain the representations set forth in §§1.1441–6(b)(4)(i) and 1.894–1T(d).

(4) Documentation from intermedi- aries. When the QI receives a payment of a reportable amount for an account holder that is an intermediary (e.g., nominee, custodian, or agent), the QI must obtain beneficial owner documentation in the following manner:

(a) Intermediary that is not a QI. If the intermediary is not a QI, then the intermediary must give the QI a Form W–8 according to §1.1441–1(e)(3)(iii), including a statement described in §1.1441– 1(e)(3)(iv) regarding the allocation of payments. A QI that receives a non-QI intermediary Form W–8 may either give the non-QI intermediary Form W–8, with all the accompanying documentation, to the withholding agent or may use the non-QI intermediary Form W–8 as the basis for the certifications that the QI includes in its own QI-Form W–8 regarding the status of, and entitlement to benefits by, the non-QI intermediary’s account holders.

(b) Intermediary that is a QI. If the intermediary is a QI (i.e., a second tier QI), the second tier QI must give the first tier QI a QI-Form W–8. The first tier QI may give the second tier QI’s QI-Form W–8, and accompanying documentation, to the withholding agent. Alternatively, the first tier QI may use the second tier’s QI-Form W–8 as the basis for the certifications that the first tier QI includes in its own QI-Form W–8 regarding the status of, and entitlement to benefits by, the second tier QI’s account holders. If the first tier QI relies on the second tier QI’s QI

Form W–8 to certify to the withholding agent the withholding status of the second tier QI’s account holders, then the first tier QI must agree to allocate the assets associated with the second tier QI’s QIForm W–8 to the classes that the first tier QI has established for its own account holders as if the account holders of the second tier QI were the first tier QI’s own account holders.

(c) Assumption of primary withholding responsibility. If a QI has assumed primary withholding responsibility, it must generally assume that responsibility for all other intermediaries, whether or not they are QIs, that are before it in the chain of payment. If a second tier QI has agreed to assume primary withholding responsibility, then a first tier QI that has also assumed primary withholding responsibility does not have to withhold on income paid to the second tier QI. If the second tier QI has assumed primary withholding responsibility but the first tier QI has not, the first tier QI must agree to identify for the withholding agent those assets associated with the second tier QI’s QI-Form W–8 and on which there should be no withholding (other than under section 3406 of the Code, if applicable). See example under paragraph .02(4)(c)(iii), above.

(5) Standards of reliability and due diligence. A QI must agree to follow the due diligence obligations of §1.1441– 7(b)(2)(ii). The reliability of any documentation will be evaluated by the type of information contained in the documents, the procedures under which the documents are issued, and the ease with which the documents could be falsified.

(6) Renewal of documentation. Unless specified otherwise in the agreement, a QI must agree to follow the provisions of §1.1441–1(e)(4)(ii) regarding the renewal of the Forms W–8 and documentary evidence provided by its account holders.

.04 Assistance regarding taxpayer identification numbers. (1) Acceptance agents. A QI may agree to act as an acceptance agent, including a certifying acceptance agent, for purposes of section 6109 of the Code and the regulations thereunder. See Rev. Proc. 96–52, 1996– 2 C.B. 372, for the duties and obligations of an acceptance agent.

(2) TIN certifications. A QI may agree to assist its account holders in complying

with the requirements for a certified TIN under §1.1441–6(b). Only account holders claiming a reduced rate under an income tax treaty for certain payments (e.g., income from non-publicly traded securities) are required to obtain a certified TIN. See §1.1441–6(b)(1) and (2)(i).

.05 Recordkeeping obligations. The agreement must provide that the QI will maintain a record of the documentation obtained and reviewed under the agreement. The QI must maintain the documentation for any account holder for a period of three years after its validity expires. The documentation must also be available for inspection by the IRS or, if applicable, an approved external auditor.

.06 Withholding obligations. (1) QI assumes primary withholding responsibil- ity. A QI that assumes primary withholding responsibility must agree to withhold any amount due under section 1441, 1442, or 1443 of the Code in accordance with §1.1441–1(b)(1) and §1.1443–1(b). If applicable, the QI must also agree to withhold any amount due under section 3406 of the Code. In addition, the QI must agree to deposit the withheld amounts following §1.1461–1(a) and all other relevant deposit obligations. Under the agreement, the IRS may agree to special deposit procedures to facilitate remittances from a foreign country.

(2) QI that does not assume primary withholding responsibility. A QI that does not assume primary withholding responsibility nevertheless must agree to withhold if it knows that an amount should have been withheld from the payment and the full amount was not withheld. The QI must also agree to comply with withholding and deposit procedures in the same manner as described in paragraph .06(1) of this section for amounts that it withholds.

.07 Reporting obligations. (1) In gen- eral. The regulations under section 1461 of the Code require a QI to make returns on a Form 1042 and to provide information to the IRS and beneficial owners or payees on a Form 1042–S on a calendar year basis under the provisions of §1.1461–1(b), subject to the following modifications to which the IRS may agree.

(2) Form 1042 reporting. Generally, every QI shall file an annual Form 1042 and the form must include the following additional information:

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(a) A schedule providing information on reportable amounts of income subject to withholding under chapter 3 of the Code that the QI received during the calendar year. The schedule should list the name, address, and EIN of each withholding agent from whom the reportable amounts were received and the income type and rate of withholding;

(b) Information regarding overpayments or balances due, adjustments under §1.1461–2 and an explanation for the over- or underwithholding;

(c) A statement regarding the audit conducted by the QI’s internal auditors under the audit guidelines specified in the agreement (i.e., that the QI is complying with the agreement in all material respects or a description of the irregularities uncovered by the internal auditors and the actions undertaken to correct such irregularities); and

(d) A statement that an approved external auditor conducted an audit, when required, with a copy of the report of audit findings (see paragraph .09 of this section regarding verification procedures).

(3) Form 1042–S reporting. The agreement may waive the obligation for a QI to report beneficial owner information to the IRS on Forms 1042–S in appropriate cases. In place of beneficial owner information, the IRS may require the QI to report by country and withholding pools. An appropriate case may exist if beneficial owner information is otherwise available to the IRS, for example, pursuant to treaty exchange of information provisions, or the IRS decides that access to beneficial owner information is not necessary for compliance. Similarly, reporting by withholding pools may be sufficient for compliance purposes if the QI has agreed to adequate verification procedures as described in paragraph .09 of this section. The QI may provide the information on a Form 1042–S, as modified by the IRS to adapt to the withholding pool reporting requirements, on magnetic media, by electronic means, or on any form to which the IRS and the QI agree. The information must include the number of account holders in each pool. The type of withholding pool subdivisions the IRS may require for the payment of reportable amounts under chapter 3 of the Code (within the meaning of §1.1441–2(a)) includes the following:

(a) Type of income; (b) Withholding rate; (c) Country of residence of account holder; and

(d) Type of recipients (e.g., undocumented payees, U.S. payees).

(4) Furnishing a Form 1042–S to the beneficial owner or payee. The agreement may modify or waive the obligation under §1.1461–1(c)(1)(i) that the QI furnish a statement to a beneficial owner or payee on a Form 1042–S and provide for alternative reporting procedures.

(5) Reports related to claims of a re- duced rate under a tax treaty. The QI must agree to give the IRS, on request or on an annual basis, the names and addresses of its account holders that received a reduced rate of withholding under a tax treaty and that have certified that they meet the Limitation on Benefits provision and that they derive, within the meaning of §1.894–1T(d), the income receiving the benefit. The QI must also agree to disclose the names and addresses of account holders of any non-QI intermediary that has given the QI a Form W–8 or other documentation if the account holders have certified that they meet the Limitation on Benefits provision of a treaty and derive the income receiving the benefit. Generally, the IRS will agree to limit disclosure to account holders that receive more than an agreed upon amount (not less than $100,000) of treaty-benefited income in their QI account.

.08 Adjustments for under- and over- withholding, refund procedures, and un- derwithholding determined after the filing of Form 1042. (1) Adjustments. If a QI has not assumed primary withholding responsibility, it must agree that it will provide sufficient information to a withholding agent so that the withholding agent can make the adjustments for over- and under-withholding described in §1.1461– 2(a) and (b). If a QI has assumed primary withholding responsibility, it may make the adjustments itself in the manner described under §1.1461–2(a) and (b).

(2) Refunds. A QI withholding agreement may allow any net amount of overwithholding for a calendar year on a QI’s account holders which remains outstanding after the due date for filing the QI’s Form 1042 (not including extensions) to be refunded to the QI for its account holders (under procedures as the IRS may pre

scribe) if an adjustment under §1.1461– 2(a) cannot be made. (3) Underwithholding determined after filing a QI’s Form 1042. A QI, including a QI that does not assume primary withholding responsibility, must agree to file an amended Form 1042 to report any underwithheld tax which is determined after the filing of the QI’s Form 1042 for the calendar year in which the tax was underwithheld. In addition, the QI must agree to pay the tax due (including interest and penalties). This includes, but is not limited to, instances where the underwithholding is determined as a result of an audit by the QI’s internal or external auditors.

.09 Verification procedures. (1) In general. Unless the QI agreement allows for verification by an external auditor, a QI must agree to make records and account information specified in the QI withholding agreement available to the IRS for audit, and must agree to procedures for carrying out an audit of those records and information. The IRS must be able to verify that the QI has adequate systems and control procedures in effect to comply with the agreement. In addition, the IRS may require specific procedures to allow it to verify compliance with the QI withholding agreement for specific accounts.

(2) Verification of specific account in- formation. If a QI is not subject to audit under the approved external auditor procedure, described in paragraph .10(3) of this section, then the QI withholding agreement will contain procedures for IRS audits of account information. Generally, a QI that complies with the filing requirements on Forms 1042 and 1042–S (or otherwise makes account holder information available to the IRS) may be exempted from IRS audits or be subject to abbreviated IRS audits. If a QI has agreed to certify tax residence to the IRS under §1.1441–6(c)(2)(iii) based upon documentation the QI has obtained and reviewed, it must also agree to give the documentation to the IRS upon written request in the manner agreed. To conduct periodic compliance checks, the IRS may rely on sampling techniques to assure reliability of the examination without undue disruption to the QI. The agreement will specify the manner in which IRS compliance checks will take place. In appropriate cases, assistance may be

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obtained from the tax authorities of the countries where the QI activities are located.

(3) Approved external auditors. If, given local enforcement of know-yourcustomer procedures and local oversight and controls over the QI and its external auditors, the IRS determines it is appropriate, the following procedures will generally apply under the agreement.

(a) The QI must establish that it has implemented adequate internal procedures and accounting systems to comply with the QI withholding agreement and to verify its compliance with those procedures. Internal auditors must review those procedures and accounting systems on an annual basis as a regular part of their audit program. Their conclusions must be included in their annual audit report. A statement certifying that the annual review has taken place and the results of that review (including a notation of all irregularities observed and actions taken to address those irregularities) must be attached to the QI’s annual Form 1042 filed with the IRS.

(b) Verification must also be performed by external auditors. The QI must agree to an external auditor’s review after the first year of operation as a QI. Thereafter, the frequency and scope of compliance checks by external auditors will occur only at the request of the IRS, generally based upon a review of the QI’s Form 1042 or indicators that the QI may have compliance problems (e.g., large refund requests, large pool of undocumented payees). The scope of review by external auditors may be limited based on the scope of annual internal audits. In order for the external auditors to perform their audit effectively, the QI must agree to allow external auditors to have access to all of its relevant records for purposes of performing the audits.

(c) The external auditor must be approved by the IRS and designated in the QI withholding agreement. Subsequent changes of external auditors must also be approved by the IRS. To be approved, an auditor must be subject to regulatory supervision under the laws of the country or countries in which the QI’s activities under the agreement are expected to occur. The external auditor’s procedures must require it to verify that the QI complies with the terms of the agreement and

to report non-compliance findings under the agreement.

(d) Upon completion of the audit, the external auditors must issue a report of audit findings (or incorporate their audit findings as a separate part of a larger audit report) and provide the report to the IRS in English (and using U.S. dollars). The report must explain the scope and objectives of the audit, state the methodology used, and certify that the audit was conducted in accordance with applicable laws and regulatory requirements. The report must express the auditor’s opinion on the QI’s compliance with the terms of the agreement. The QI and the approved external auditor must agree to allow the IRS to communicate with the external auditors and review their workpapers, if necessary. If the external auditor’s report identifies compliance issues or if, based on a review of the external auditor’s report, the IRS determines that further checks are necessary, then the IRS may request that the external auditor perform additional audit procedures.

(4) Special rules for foreign branches of U.S. financial institutions. Generally, a QI that is a foreign branch of a U.S. financial institution will be subject to the same IRS audit procedures that apply to any U.S. taxpayer.

.10 Guarantee of payment. To insure collection of payments for underwithheld amounts, the agreement may require a guarantee to be furnished by the QI to the IRS. The guarantee may include a letter of credit, bond, or other surety in an amount to which the QI and the IRS agree. The amount of the bond or letter of credit must be commensurate with the approximate risk of underwithholding. Factors to be considered in this regard include the amount of U.S. investments made through the QI, the number of beneficial owners making U.S. investments, the type of investment and the characteristics of the beneficial owners, and the degree of reporting by the QI to the IRS. Generally, a QI that has substantial assets in the United States will be considered to have adequately guaranteed its withholding obligations.

.11 Approval and Execution. An agreement must be signed by the authorized representative of the QI and by the IRS. The Assistant Commissioner (International) will sign on behalf of the IRS upon

approval by the Associate Chief Counsel (International). To the extent an agreement covers a QI’s related non-U.S. affiliate or unrelated account holder, that affiliate or account holder must be a signatory to the agreement.

.12 Expiration, Termination and De- fault. (1) Term and events of termination. The period of the agreement will be between three and six years. The agreement may be renewed for further periods as specified in paragraph .13 of this section. Either the IRS or the QI may terminate the agreement prior to its term by delivering a 30-day notice of termination to the other party. The IRS will not give notice of termination until thirty days after it has delivered a notice of default to the QI. The IRS may deliver a notice of default at any time after an event of default under the agreement has occurred or after a significant change in the circumstances of the QI has occurred such as a merger, changes in the business or operations of the QI, or bankruptcy.

(2) Events of default. Events of default include the determination upon audit or otherwise that the QI has failed to comply with the procedures required by the agreement in a way that (1) causes, or may cause, significant underwithholding, excessive refunds, or an excessive number of undocumented payees, or (2) impedes, or may impede, the disclosure of the identity of persons who are required to be disclosed under the agreement. An event of default also includes the lack of cooperation by the QI or an approved external auditor in connection with an audit of the QI or with inquiries by the IRS related to verifying compliance by the QI. The agreement will define when underwithholding or inadequate reporting is deemed to be significant. A QI will also be in default if it makes material misrepresentations on its Form W–8; it has actual knowledge at the time a payment is made that documentation regarding a significant number of account holders is lacking, incorrect, or unreliable; or it fails to perform any other material duty or obligation required of it under the agreement. The QI may respond to the notice of default by making an offer to cure within thirty days. The IRS will accept or reject the offer to cure, or make a counter-proposal, within ten days.

.13 Renewal. A QI may renew a QI withholding agreement by submitting an

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application for renewal to the IRS no earlier than one year and no later than six months prior to the expiration of the agreement. In the application for renewal, the QI will update the information it provided in the original application. Before approval of any renewal of the agreement, the IRS will require an audit of the QI.

.14 Effective date of agreements. The agreements entered into under §1.1441– 1(e)(5) will be effective for all accounts opened on or after the date specified in the agreement. For accounts existing on the effective date of the agreement, the requirements to obtain documentation generally will not apply until the expiration of the one-year period beginning on the agreement’s effective date. Until the documentation is obtained for these accounts, the QI generally will be permitted to rely on any documentation or information in an existing account file. In the absence of any documentation or indication, or actual knowledge, the QI will be allowed to presume that an account holder is a foreign person based on the indicia of foreign status described in §1.1441–1(b)(3)(iii)(A). The presumption shall not be effective for purposes of obtaining the benefit of the portfolio interest exemption under section 871(h) or 881(c) of the Code or the benefit of a tax treaty.