SECTION 3. HIGHLIGHTS OF THE

PROPOSED MODIFICATIONS TO THE QI AGREEMENT

.01 Withholding under sections 1446(a) and (f).

The proposed modifications to section 3 of the QI agreement provide general requirements for QIs with respect to withholding under sections 1446(a) and (f). QIs are permitted to assume primary withholding responsibility under sections 1446(a) and (f) on a payment-by-payment basis based on a valid withholding certificate permitted under the modifications to section 6 of the QI Agreement and without regard to whether the QI assumes withholding under chapters 3 and 4 for payments other than PTP distributions. The modifications to section 3 of the QI agreement specifically provide that a QI that assumes primary withholding responsibility on any portion of a PTP distribution will be required to assume withholding responsibilities for the entire distribution. The modifications also reference each of the amounts subject to withholding on a PTP distribution and how a QI is to determine each amount for purposes of withholding. For cases in which a QI does not assume primary withholding under

section 1446(a) or (f) for a payment, a QI is permitted to provide to its withholding agent the withholding statements and other information described in the modifications to section 6 of the QI agreement and is subject to the same residual withholding requirement that applies to its withholding under chapter 3 or 4 when another withholding agent withholds less than the required amount.

.02 Documentation for purposes of sections 1446(a) and (f).

Under the modifications to section 5 of the QI agreement, a QI is permitted to document the status of an account holder that is a partner in a PTP as a foreign or U.S. person for purposes of sections 1446(a) and (f) under requirements generally similar to those for payments subject to chapter 3 or 4 withholding (that is, using either documentary evidence or withholding certificates). However, when a QI acts as a disclosing QI by providing specific partner documentation to a withholding agent for withholding under the final regulations, the QI is permitted to document the status of an account holder based on only a withholding certificate. See section 3.03 of this Notice. A QI must also document an account holder using only a withholding certificate for purposes of applying an exception to withholding under section 1446(a) or (f) based on an account holder’s claim under an income tax treaty or for applying an exception to withholding under section 1446(a) for an entity described in section 501(c). The modifications also include requirements for QIs to document nonqualified intermediaries, flow-through entities, and other QIs to which a QI pays amounts realized or PTP distributions and describe how a QI reliably associates the documentation with payments made to account holders or interest holders in those entities. A limitation rule is added, however, that a QI may not reliably associate a payment of an amount realized under section 1446(f) with the account holders of a nonqualified intermediary regardless of whether specific information about the account holders of the nonqualified intermediary is provided to the QI. If a QI is unable to reliably associate a payment of an amount realized or an amount subject to withholding under section 1446(a) on a PTP distribution with valid documentation, the QI must

treat the account holder as a foreign person under the presumption rule added to section 5.13(C)(5) of the QI agreement and withhold at the applicable rate under section 1446(a) or (f) except when backup withholding under section 3406 would apply to an amount realized. See §1.1446(f)4(b)(4) for coordinating withholding under sections 3406 and 1446(f).

.03 QI withholding certificates and withholding statements.

The modifications to section 6 of the QI agreement allow a QI to furnish a qualified intermediary withholding certificate when paid an amount realized or PTP distribution. When a QI does not assume primary withholding responsibility under section 1446(a) or (f), the QI must also provide to its withholding agent a withholding statement that includes either withholding rate pools or specific payee information (and associated payee documentation) in lieu of withholding rate pool information when acting as a disclosing QI. If a QI provides withholding rate pool information to a withholding agent with respect to an amount realized, however, the QI may combine the withholding rate pool information for its account holders with the account holders of another intermediary only if the intermediary is a QI. In the case of a PTP distribution, a QI must determine its withholding rate pools based on each amount subject to withholding on the distribution as determined by the QI’s withholding agent.

.04 Reporting on Form 1042-S. Under the modifications to section 8 of the QI Agreement, a QI may file Forms 1042-S on a pooled basis to report amounts realized and amounts subject to withholding on PTP distributions to the same extent generally permitted for other payments covered by the QI agreement. If a QI acts as a disclosing QI, however, the withholding agent or broker for the QI is required to file Forms 1042-S with respect to the account holders of the QI that are partners in a PTP, and the QI is not required to file a Form 1042-S unless it knows or has reason to know that a correct Form 1042-S was not issued to a partner. If a QI is provided account holder documentation from another QI acting as a disclosing QI, the QI is also required to report on Form 1042-S with respect to the account holder when the QI assumes primary withholding

May 16, 2022 1064 Bulletin No. 2022–20

responsibility. In cases in which a QI does not act as a disclosing QI it must also issue a separate Form 1042-S when requested by an account holder under the conditions specified in the modifications. The modifications also include the conditions for a QI to issue a separate Form 1042-S to report an amount realized paid to an account holder of a nonqualified intermediary rather than to an unknown recipient (despite that reliance on account holder documentation is not permitted for the withholding) and require a QI to issue a separate Form 1042-S to an account holder of a nonqualified intermediary to which the QI pays a PTP distribution.

.05 Requirements under §1.6031(c)-1T. In general, under §1.6031(c)-1T(a), a nominee holding an interest in a partnership directly or indirectly on behalf of another person is required to provide to the partnership (or agent designated by the partnership or another nominee) certain information about the nominee and the person on whose behalf the nominee holds an interest (including the name, address, taxpayer identification number of the nominee and such other person, and a description of any interest in the partnership that the nominee holds, acquires, or transfers on behalf of such other person during the partnership taxable year). If a nominee does not provide the information described in the preceding sentence with respect to such other person, under §1.6031(c)-1T(h) the nominee is in general required to provide to the person a statement covering the person’s distributive share of partnership income, gain, loss, deduction, or credit required to be shown on the partnership return, and any additional information as required under the Code with respect to items related to the person’s interest in the partnership.

The provisions of §1.6031(c)-1T are incorporated into the QI agreement in new section 8.07 to facilitate the U.S. tax filings of foreign partners required to report effectively connected income from their holdings and sales of PTP interests (which apply regardless of whether the tax due is withheld). The modifications require a QI acting as a disclosing QI to provide to the PTP or QI’s nominee the statement described in §1.6031(c)-1T(a) with respect to an account holder holding a PTP interest (including an account holder that

is an intermediary in certain cases). In other cases, a QI may provide the statement described in the preceding sentence to the PTP or may instead provide the statement to the account holder that is described in §1.6031(c)-1T(h) with respect to the account holder’s PTP interest. The QI must also facilitate the account holder’s receipt of deemed sale information for purposes of section 864(c)(8) when requested.

.06 Private arrangement intermediaries and agency and joint account options for partnerships and trusts.

The modifications add to the procedures under section 4 of the QI agreement for QIs that maintain arrangements with private arrangement intermediaries (PAIs) that hold PTP interests for account holders and provide the cases for which a QI may use the agency and joint options when paying a PTP distribution or amount realized to a partnership or trust. A QI is permitted to withhold on payments of amounts realized and PTP distributions made to a PAI under requirements similar to those that apply in the case of a disclosing QI that is an account holder of a QI (rather than allow the PAI to assume primary withholding or provide withholding rate pools). As a result of this treatment, a QI may determine its withholding on an amount realized paid to a PAI by reference to the statuses of the PAI’s account holders (rather than treat the PAI as a nonqualified intermediary as described in section 3.02 of this Notice) and must satisfy the requirements of §1.6031(c)-1T(a) with respect to each PAI account holder to which a QI pays an amount realized or PTP distribution during the year. A QI may apply the agency option with respect to a foreign partnership providing a certification for a modified amount realized or for an amount subject to withholding under section 1446(a) on a PTP distribution unless the partnership is a PTP (as an upper-tier PTP is not permitted to provide partner information to a lower-tier PTP for section 1446(a) withholding). With respect to a trust, a QI may apply the agency option only for a trust that is a grantor trust given that a simple trust is not permitted to provide beneficiary information for section 1446(a) or (f) withholding. In cases for which the agency option is not specifically permitted, a QI is not otherwise required to provide information to a

withholding agent or report with respect to the interest holders in a partnership or trust under the regulations to sections 1446(a) and (f) (such that the agency option has no application). However, the modifications do not permit a QI to use the joint account option for payments of PTP distributions or amounts realized. As the use of this option is not otherwise permitted when a partnership or trust has a U.S. partner, owner or beneficiary, its use would be of limited application if applied to those payments.

.07 Refunds and underwithholding. Given the filing requirements of foreign partners for reporting their effectively connected income referenced in section 3.05 of this Notice, a QI is not permitted to file a collective refund with respect to withholding under section 1446(a) or (f). If a QI overwithholds under section 1446(a) or (f), the QI may apply the reimbursement and set-off procedures to the same extent permitted for chapters 3 and 4 purposes. If a QI does not withhold at the rate required under section 1446(a) or (f), the QI may apply the procedures for underwithholding that apply for purposes of chapters 3 and 4.

.08 Events of default and material failures.

The modifications include material failures for cases in which a QI fails to withhold as required under sections 1446(a) and (f) or fails to comply with the reporting requirements of new section 8.07. The modifications include similar events of default for when a QI fails to comply materially with either of those requirements.