SECTION 2. WITHHOLDING AND

REPORTING REQUIREMENTS UNDER CHAPTERS 3, 4, AND 61 AND SECTION 3406

.01 In General. (A) Withholding and Reporting under Chapter 4 on Payments Made to Foreign Financial Institutions and Other Payees . Section 1471(a) requires a withholding agent to deduct and withhold a tax equal to 30 percent on any withholdable payment made to an FFI, unless the FFI agrees to and complies with the terms of the FFI agreement to satisfy the obligations specified in section 1471(b) (a participating FFI), is deemed to meet these requirements under section 1471(b) (a deemed-compliant FFI), or is treated as an exempt beneficial owner under § 1.1471–6. Section 1472(a) requires a withholding agent to deduct and withhold a tax equal to 30 percent on any withholdable payment made to an NFFE unless such entity provides a certification that it does not have any substantial U.S. owners, provides information regarding its substantial U.S. owners, or an exception otherwise applies.

A participating FFI (including a reporting Model 2 FFI) or registered deemedcompliant FFI (including a nonreporting Model 2 FFI treated as registered deemed

compliant but excluding a reporting Model 1 FFI) will satisfy its requirement to withhold under sections 1471(a) and 1472(a) with respect to direct account holders that are entities by withholding on withholdable payments made to nonparticipating FFIs and recalcitrant account holders under the FFI agreement, § 1.1471–5(f), or an applicable Model 2 IGA. See the FFI agreement, § 1.1471– 5(f), and the applicable Model 2 IGA for the additional withholding requirements that may apply to withholdable payments made to direct account holders that are individuals and are treated as recalcitrant account holders. A reporting Model 1 FFI or a registered deemed-compliant Model 1 IGA FFI will satisfy its requirement to withhold under section 1471(a) with respect to direct account holders by withholding on withholdable payments made to nonparticipating FFIs to the extent required under the applicable Model 1 IGA. A withholding agent (including a participating FFI or registered deemedcompliant FFI) that is required to withhold on a withholdable payment must report the payment on Form 1042–S, Foreign Person’s U.S. Source Income Subject to Withholding.

A participating FFI (including a reporting Model 2 FFI), a registered deemedcompliant FFI (including a reporting Model 1 FFI and a nonreporting Model 2 FFI treated as registered deemedcompliant), or a registered deemedcompliant Model 1 IGA FFI must also report certain account information regarding a U.S. account (or U.S. reportable account) that it maintains to the extent required under the FFI agreement, § 1.1471–5(f), a Model 1 IGA, or a Model 2 IGA, as applicable to the FFI’s chapter 4 status. A participating FFI (including a reporting Model 2 FFI) or registered deemed-compliant FFI (other than a reporting Model 1 FFI) must report certain information about accounts that it maintains that are held by recalcitrant account holders (or non-consenting U.S. accounts). A participating FFI (including a reporting Model 2 FFI), registered deemed-compliant FFI (including a reporting Model 1 FFI and a nonreporting Model 2 FFI treated as registered deemedcompliant), or registered deemedcompliant Model 1 IGA FFI must, for a

transitional period, report certain information about accounts it maintains that are held by nonparticipating FFIs. A withholding agent (including an FFI with respect to payments made to an NFFE that were not already reported as made to U.S. accounts (or U.S. reportable accounts)) is also required to report withholdable payments made to an NFFE (other than an excepted NFFE) with substantial U.S. owners on Form 8966, FATCA Report, even though no withholding is required. See §§ 1.1472–1(b)(iii) and 1.1474–1(d) and (i).

(B) Withholding and Reporting under Chapter 3 on Payments to Foreign Per- sons . Sections 1441 and 1442 require a withholding agent to deduct and withhold a tax equal to 30 percent on any payment of U.S. source fixed or determinable, annual or periodical (FDAP) income that is an amount subject to withholding (as defined in § 1.1441–2(a)) made to a foreign person. A lower rate of withholding may apply under the Code (e.g., section 1443), the regulations, or an income tax treaty. Generally, a withholding agent must also report the payments on Forms 1042–S regardless of whether withholding is required. See § 1.1461–1(c).

(C) Backup Withholding under Section 3406 and Reporting on Payments to Cer- tain U.S. Persons under Chapter 61 . Under sections 6041, 6042, 6045, 6049, and 6050N (chapter 61 or the Form 1099 reporting provisions), payors of interest, dividends, royalties, gross proceeds from the sales of securities, and other fixed or determinable income must report payments made to certain U.S. persons (i.e., U.S. non-exempt recipients or presumed U.S. non-exempt recipients) on the appropriate Form 1099 unless an exception to reporting applies. See §§ 1.6041–4(a); 1.6042–3(b)(1)(iii); 1.6045–1(g)(1)(i); 1.6049–5(b)(12); and 1.6050N–1(c)(1)(i). Under section 3406, a payor must generally obtain a Form W–9, Request for Taxpayer Identification Number and Certification, from a U.S. payee receiving a payment reportable on a Form 1099 or must otherwise backup withhold under section 3406 and report the payment on Form 1099.

(D) Coordination of Withholding and Reporting Requirements under Chapters 3 and 4 . With respect a payment that is subject to withholding under chapter 4, a

Bulletin No. 2014–29 151 July 14, 2014

a QI agreement will be subject to the FATCA requirements applicable to its chapter 4 status for all of the accounts that it maintains irrespective of whether the FFI is acting as a QI with respect to such an account (or with respect to a central bank of issue, all accounts that it maintains and that are held in connection with a commercial financial activity and for which it receives a withholdable payment). When an FFI chooses to act as a QI with respect to an account that it maintains, the FFI will continue to have the obligation to comply with its FATCA obligations applicable to its chapter 4 status, except when such FATCA obligations have been explicitly modified in the QI agreement. The agreement also references a QI’s chapter 4 requirements as required to coordinate those requirements with the QI’s other requirements under the QI agreement.

For example, the QI agreement specifies when a QI’s FATCA requirements with respect to its account holders (including U.S accounts) will satisfy its chapter 61 reporting obligations for payments made to its account holders, and when a QI may provide or receive a withholding statement that applies this coordination rule by permitting a QI to allocate payments (or receive payment allocations) to a chapter 4 withholding rate pool of U.S. payees. The QI agreement addresses the coordination rule for chapters 4 and 61 reporting with respect to when a QI assumes or does not assume primary reporting and backup withholding responsibilities under chapter 61 and section 3406.

(C) QIs Acting as Qualified Securities Lenders (QSLs) . The revised QI agreement permits a QI to act as a QSL with respect to payments of U.S. source substitute dividends consistent with Notice 2010–46, 2010–24 I.R.B. 757. Pursuant to the QI agreement, a QI that acts as a QSL is required to act as a QSL with respect to all U.S. source substitute dividends that it receives as an intermediary or dealer. The QI agreement is intended to otherwise incorporate the requirements applicable to a QSL pursuant to Notice 2010–46 or any subsequent guidance prescribing the requirements of the QSL.

(D) Reporting under Section 1472. As described in section 2.01(A) of this revenue procedure, a QI will be required to

withholding agent may credit any tax withheld under chapter 4 against its liability for any tax due with respect to the payment under chapter 3. A withholding agent may use a single Form 1042–S to report information required under both chapters 3 and 4 with respect to a withholdable payment of U.S. source FDAP income subject to withholding under chapter 4 and for which a credit against the beneficial owner’s chapter 3 liability, if any, may be claimed. Thus, a withholding agent that reports on Form 1042–S a withholdable payment that has been withheld upon under chapter 4 may provide certain information on the same Form 1042–S about the beneficial owner for purposes of chapter 3. With respect to a withholdable payment of U.S. source FDAP income that is not subject to withholding under chapter 4 and that is an amount subject to withholding (or reporting) under chapter 3, a withholding agent is also required to report the applicable chapter 4 exemption code in addition to the other information required to be reported on Form 1042–S.

For additional coordination of the withholding and reporting requirements of a participating FFI (including a reporting Model 2 FFI), registered deemedcompliant FFI (including a reporting Model 1 FFI and a nonreporting Model 2 FFI), or a registered deemed-compliant Model 1 IGA FFI under chapters 3, 4, and 61, and section 3406, see sections 3.01(B), 3.04(B) and 8.04 of the QI agreement.

.02 Responsibilities of Intermediaries that Enter into the QI Agreement. When the IRS enters into a QI agreement with a foreign person, that foreign person becomes a QI. A QI is a withholding agent under chapters 3 and 4, and a payor under chapter 61 and section 3406 for amounts that it pays to its account holders. The general obligations of a QI as a withholding agent and payor are described in section 1.01 of the QI agreement and are relevant to whether an event of default occurs under section 11.04 of the QI agreement.

.03 Highlight of Changes to the QI Agreement. A summary of the significant changes to the existing QI agreement is as follows:

(A) Non-Financial Entities Acting as QIs . The scope of eligible entities allowed to apply for and enter into the existing QI agreement is generally limited to FFIs, foreign clearing organizations, and foreign branches of U.S. financial institutions and U.S. clearing organizations. Nonfinancial foreign corporations that sought to claim treaty benefits on behalf of shareholders or that sought to act as intermediaries for account holders that are unrelated persons generally could only apply to enter into QI agreements by executing riders to the agreements because the agreements did not provide guidance on how an entity other than an entity described in the preceding sentence could operate as a QI. The revised QI agreement clarifies that a non-financial foreign corporation or intermediary is eligible to enter into the QI agreement and describes the specific requirements for such an entity to the extent they differ from the requirements applicable to a QI that is an FFI. Thus, for a non-financial foreign corporation or intermediary, the QI agreement in section 4 of this revenue procedure may be executed without the need for any rider to the agreement. Treasury and the IRS will, however, consider comments requesting further revisions to the agreement to address the requirements of QIs that are not FFIs. Notwithstanding these revisions to the agreement, a non-financial entity will require approval from the IRS to obtain QI status as described in section 3 of this revenue procedure, and the IRS expects that foreign flow-through entities entering into withholding agreements on behalf of their owners for chapters 3 and 4 purposes will generally be required to obtain status as a withholding foreign partnership or withholding foreign trust.

(B) Coordinating Chapter 4 Require- ments of QIs that are FFIs. In the case of a QI that is an FFI, the revised QI agreement, generally reflecting the provisions under § 1.1441–1(e)(5), limits status as a QI to an FFI that is a participating FFI (including a reporting Model 2 FFI), a registered deemed-compliant FFI (including a reporting Model 1 FFI and a nonreporting Model 2 FFI treated as registered deemed-compliant), a registered deemedcompliant Model 1 IGA FFI, a limited FFI, or under certain conditions a central bank of issue. An FFI that has entered into

July 14, 2014 152 Bulletin No. 2014–29

withhold under section 1472 to the extent required in the QI agreement. Regardless of whether a QI assumes this withholding obligation under the QI agreement and regardless of whether the QI is an FFI, a QI will be required under the agreement to assume primary reporting obligations for section 1472 purposes with respect to passive NFFEs that have substantial U.S. owners (or controlling persons that are specified U.S. persons) and will not be required to provide specific payee information to other withholding agents for purposes of this reporting. A QI will also be required to act as a direct reporting NFFE for purposes of reporting its substantial U.S. owners under § 1.1472– 1(c)(4) when it acts as a QI on behalf of its shareholders.

(E) Private Arrangement Intermediar- ies (PAIs) . Under the existing QI agreement, a QI may enter into an agreement with another intermediary (private arrangement intermediary or PAI) under which the PAI would generally fulfill the obligations of a QI without the need to execute a QI agreement with the IRS. To coordinate with the requirements of foreign entities under chapter 4, under the revised QI agreement, only a QI that is an FFI is allowed to enter into an agreement with a PAI. Additionally, to be eligible to be treated as a PAI, the intermediary must be a certified deemed-compliant FFI under § 1.1471–5(f)(2) (other than a registered deemed-compliant Model 1 IGA FFI). To coordinate with the withholding and reporting requirements of chapter 4, the QI agreement permits PAIs to allocate payments to a chapter 4 withholding rate pool on a withholding statement provided to a QI that treats the intermediary as a PAI, in addition to the allowance for a PAI to allocate payments received from the QI to chapter 3 withholding rate pools. The QI agreement also specifies that an intermediary cannot act as a PAI with respect to its direct account holders that are qualified intermediaries, withholding foreign trusts, withholding foreign partnerships, participating FFIs (including reporting Model 2 FFIs), registered deemedcompliant FFIs (including reporting Model 1 FFIs and nonreporting Model 2 FFIs treated as registered deemedcompliant), or registered deemedcompliant Model 1 IGA FFIs. Finally, the

compliance requirements of a PAI are coordinated with the compliance requirements applicable to a QI in section 10 of the QI agreement.

(F) Treatment of Certain Partnerships and Trusts . The revised QI agreement includes in sections 4.05 and 4.06 the joint account and agency options in sections 4A.01 and .02 of the existing QI agreement, which allow a QI to enter into an agreement with a nonwithholding foreign partnership or nonwithholding foreign trust to apply simplified documentation, withholding, and reporting requirements for payments made to these entities. Similar to the modifications applicable to a QI’s agreement with a PAI, the revisions to these procedures specify and limit the chapter 4 statuses required of partnerships and trusts (including their partners, owners, and beneficiaries, as applicable) to which a QI may apply the procedures of sections 4.05 and 4.06.

(G) QI’s Documentation Requirements for Chapters 3 and 4 Purposes . The revised QI agreement updates the documentation requirements under the existing QI agreement to reference the documentation requirements applicable to a QI with respect to payees to which it makes withholdable payments and, with respect to a QI that is a participating FFI (including a reporting Model 2 FFI), a registered deemed-compliant FFI (including a reporting Model 1 FFI or a nonreporting Model 2 FFI treated as registered deemedcompliant), or a registered deemedcompliant Model 1 IGA FFI, the due diligence requirements applicable to the FFI’s chapter 4 status. For documenting its direct account holders for chapters 3 and 61 purposes, the QI agreement retains the requirement limiting a QI that is an FFI’s use of documentary evidence to documentary evidence permitted under the QI’s know-your-customer rules. Thus, as under the existing QI agreement, a QI may act as a QI only in a jurisdiction with know-your-customer rules approved by the IRS. The requirements relating to the use of documentary evidence do not apply to an NFFE acting as a QI, as such entity is required to obtain Forms W–8 and W–9 from its account holders. The QI agreement also incorporates changes to the documentation requirements applicable to a QI for chapter 3 purposes consistent with

the temporary regulations under section 1441 (see T.D. 9658). For example, the QI agreement modifies the documentation validity standards for QIs in section 5.10 to account for the reason to know standards applicable to a withholding agent with respect to an account holder’s claim of foreign status as reflected in the revisions made by the temporary regulations to § 1.1441–7(b).

(H) QI’s Presumption Rules and Reli- able Association of Payments . Section 5.13(C) of the existing QI agreement specifies the presumption rules applicable to a QI, including the presumption rules applicable to a QI making reportable payments for chapter 61 purposes other than amounts subject to chapter 3 withholding, and substantially incorporates the presumption rules for withholding agents and U.S. and non-U.S. payors under the chapters 3 and 61 regulations as then in effect. The revised QI agreement modifies the presumption rules of the existing QI agreement to coordinate with the presumption rules of chapter 4 with respect to a payee of a withholdable payment and with the revisions to the presumption rules made in the temporary coordination regulations applicable to payors of reportable payments. See § 1.6049–5(d)(2) and (3). The QI agreement also revises the circumstances in which a QI can avoid application of the presumption rules by modifying the rules for when the QI can reliably associate a payment with valid documentation for how intermediaries and flowthrough entities may provide withholding statements to withholding agents (including QIs) for chapter 4 purposes.

(I) QI’s Reporting on Form 1042–S . The QI agreement substantially modifies the existing QI agreement with respect to a QI’s Form 1042–S reporting requirements by adding the reporting required with respect to certain intermediaries and flow-through entities that provide chapter 4 withholding rate pool information to the QI on withholding statements. The revised requirements also reference the Form 1042–S requirements of a QI with respect to its direct account holders when chapter 4 withholding applies, and allow the QI to file Forms 1042–S with respect to a chapter 4 withholding rate pool.

(J) QI’s Compliance Procedures . Under the existing QI agreement, unless a QI

Bulletin No. 2014–29 153 July 14, 2014

requested an IRS audit instead of an internal audit or qualified for a waiver, the QI was required to engage an external auditor to complete an audit of the second and fifth full calendar years that the QI agreement was in effect, and the external auditor was required to provide its findings directly to the IRS. The revised QI agreement replaces the external audit requirement with an internal compliance program. As part of the internal compliance program, a QI is required to designate a responsible officer who will oversee the QI’s compliance with the QI agreement, make the periodic certifications to the IRS described in section 10.03 of the QI agreement, and provide certain factual information regarding the QI which will vary depending on the amount of reportable amounts received by the QI. The periodic certification will be required every three calendar years (including extensions to the agreement). Although the QI will be required to arrange for the performance of a periodic review of its compliance with the QI agreement, the revised agreement provides more flexibility than the existing agreement with respect to the auditors that will be eligible to perform the review as well as the content of the auditor’s report, which will no longer be required to be filed with the IRS absent a specific request. Additionally, the auditor’s procedures will be required to conform to the review procedures outlined in section 10 of the QI agreement rather than the more prescriptive audit steps set forth in Revenue Procedure 2002–55, thereby permitting the auditor to excise more judgment regarding the specific steps required to conduct the review.

(K) Events of Default . The revised QI agreement specifies that when the QI is acting as a nonqualified intermediary with respect to a non-QI designated account (as defined in section 2.66 of the QI agreement), the QI’s compliance with its obligations under chapters 3 and 61 and section 3406 are factors in determining whether an event of default has occurred under section 11.04 of the QI agreement.

(L) Term of the Revised QI Agreement . For all QIs that enter into the revised QI agreement, the agreement will expire, unless otherwise previously terminated, on December 31, 2016. The term of the revised QI agreement is consistent with the

term of the FFI agreement. See Revenue Procedure 2014–13, as revised by Revenue Procedure 2014–38, for more information about the FFI agreement.