QI Regime - Frequently Asked Questions

What is the QI Regime? 

The Qualified Intermediary (QI) Regime is a program established by the U.S. Internal Revenue Service (IRS) to facilitate proper tax withholding and reporting on U.S. source income paid to non-U.S. persons. It allows financial institutions to assume specific withholding responsibilities and simplifies compliance with U.S. tax regulations.

Who can become a Qualified Intermediary?

A QI can be a non-U.S. financial institution, such as banks, brokers, or custodians, that enters into an agreement with the IRS to manage tax documentation, withholding, and reporting obligations for its clients.

What are the benefits of being a QI?

• A financial institution will need to comply with US tax law whenever they are part of a transaction with a U.S. based payer or payee. By registering as a QI, the withholding and reporting burden is lessened by:Streamlined withholding tax procedures

• Reduced administrative burden for clients initiating payments

• Ability to provide collective reporting instead of individual reporting for certain income types
• Enhanced credibility and compliance with U.S. tax regulations and regulators

What are the responsibilities of a QI?

A QI is responsible for:

• Identifying account holders and their tax residency status

• Collecting and validating tax documentation (e.g., Form W-8BEN, W-9)

• Withholding the appropriate amount of U.S. tax on payments and making deposits to the IRS

• Filing tax reports with the IRS, including Form 1042-S and Form 1042

• Conducting periodic compliance reviews or audits and responsible officer certification

How does a financial institution apply for QI status?

A financial institution must apply via the IRS’s Qualified Intermediary Application and Account Management System (QAAMS). The IRS reviews the application, and if approved, the institution enters into a formal QI agreement.

What types of income are common and subject to tax withholding?

Common income types subject to withholding include:

• Dividends from U.S. securities

• Interest from U.S. bonds and deposits

• Royalties and licensing fees

• Certain capital gains and substitute dividend payments

How does a QI determine the appropriate withholding rate?

A QI determines withholding rates based on:

• The tax residency status of the beneficial owner

• The presence of a valid tax treaty between the U.S. and the beneficial owner's country

• The documentation provided by the client (e.g., Form W-8BEN)

• The type of income being paid and it’s source

What are the reporting requirements for a QI?

A QI must report U.S. source income paid to non-U.S. persons to the IRS using:

• Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons)

• Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding)

And any income paid to U.S. persons using:

• Form 1099 (based on payment type)
• Form 945 (Annual Return of Withheld Federal Income Tax, if applicable)

What happens if a QI fails to comply with IRS regulations?

Non-compliance with QI obligations will be identified during the periodic review and may result in:

• Penalties and fines imposed by the IRS

• Loss of QI status
• Increased withholding obligations and reporting requirements
• Legal and reputational risks

How often must a QI undergo a compliance review?

A QI is required to conduct a periodic compliance review, typically once every three years, and submit a Responsible Officer Certification to the IRS to confirm compliance with the QI agreement.

Can a QI apply reduced withholding under tax treaties?

Yes, a QI can apply reduced withholding tax rates for income beneficiaries who provide valid tax documentation and qualify under a tax treaty between their country and the U.S. The treaties apply to specific payment types and differ by country.

How does the QI Regime relate to FATCA compliance?

While the QI Regime primarily deals with U.S. withholding tax obligations, the Foreign Account Tax Compliance Act (FATCA) requires financial institutions to report U.S. account holders to the IRS. Some QIs may also need to comply with FATCA requirements if they qualify as a Foreign Financial Institution (FFI) and allow U.S. persons to own an account.

Where can I find further information and advice?

For more information, visit the IRS website or consult tax professionals specializing in international tax compliance.

How Can TAINA Help with QI Compliance?

The global rise in enforcement through tax authority reviews has further increased the risk for financial institutions. It is more important than ever to address your tax form validation process. The TAINA Platform assists in QI regime compliance with a seamless end-to-end process whilst maintaining an up to date, robust and detailed form ruleset. 

At TAINA we continue to monitor the IRS regulatory landscape and track both IRS and OECD drafts and published updates to their regulations. TAINA’s fully automated Validation Platform can help financial institutions of all types lighten their compliance burden and prove their tax compliance whilst improving efficiency, reducing cost, mitigating risk, and improving their overall customer and investor experience.

Using our flexible and lightweight platform you can automate and streamline your validation process whilst ensuring you have good year-end data that will result in clean reporting to tax authorities.

For more information on how our fully automated Validation platform can add value to your business, get in touch or request a demo to see it in action.