Trying to decide if your financial institution should become a QI or not is a difficult decision, and one a lot of people struggle with. But if you’ve weighed up all the pros and cons and decided that becoming a QI is the right course for you, you might be wondering what happens next. What exactly do you need to do to become a QI, and how does it all work?

What Is A QI?

QI stands for Qualified Intermediary. There are currently 3 jurisdictions that have QI programs:

• The USA
• Ireland
• Japan (who are also a QFI for government bonds)

But when most people talk about their institution becoming a QI, they’re talking about the US Qualified Intermediary Program. The QI Program refers to Chapters 1,3,4,31 and 61 of the US Internal Revenue Code, which effectively controls the processes of documenting clients, due diligence processes, tax withholding, information returns and US tax returns for all non-US financial institutions.

That sounds complex, but there is a reason for it. The US is a combination tax jurisdiction because it allows non-residents to claim tax relief at source and because there is both a quick refund system and a standard refund system. Both the tax relief at source and quick refund system are incorporated into the QI program, which essentially appoints a non-US financial institution to be a withholding agent under contract with the IRS.

Why Become A QI?

There are some benefits to being a QI. Most notably, the authority to grant tax treaty relief to clients that claim it. Secondly, you would also gain the ability to withhold tax on a pooled basis in most circumstances, as well as reporting to the IRS on a pooled basis in most circumstances. So, you don’t have to disclose who your clients areto anyon else (including the IRS).

This is a big benefit if you have domestic data protection laws to be concerned with. Many firms in the payment chain for the US dividends require their customers to be QIs, so it’s no surprise that we get calls and emails all the time from firms who have been told to become a QI, or who have applied and become a QI but have no clue what happens next.

Can You Meet The Criteria?

Before you get too excited, it’s important to know that not every firm can become a QI. In fact, there are some criteria that you’ll need to fulfil before you can even be considered eligible.

KYC

The first criteria is that the IRS must have approved your jurisdiction’s ‘Know Your Customer’ (or KYC) rules. There are currently 77 jurisdictions that have approved KYC rules, so you’ll need to check if your jurisdiction is on the list. If your jurisdiction’s rules haven’t been approved, then you’re out of luck. You can’t be a QI.

Of course, you can apply for your jurisdiction’s KYC rules to be approved by the IRS. Be warned though, this process can take many months, and you’ll have to do most of the legwork to get it done. This includes creating a proforma of the required KYC attachment, as well as answering around 18 questions about your regulatory and legal frameworks, and how you onboard new customers.

We’re going to take a moment to toot our own horn here, because the most recent additions to the list of approved KYC rules (most notably Saudi Arabia) were the result of our help, and we’re already working on getting two more jurisdictions for the approved list.

Regulations

Once you know your jurisdiction’s KYC rules are approved (or you have gone through the above process and had them approved), then you come to the second criteria for applying to become a QI. This is called Regulatory Oversight. Now, not all financial institutions are regulated, but if you want to become a QI then you must be a regulated financial institution and subject to control and oversight – all of which will be listed on the IRS KYC attachment.

The QI Process

Once you know your jurisdictions KYC rules are approved (or you have gone through the above process and had them approved), then you have some hoops to go through. There are three main stages you will need to go through.

Compliance: You will be required to provide a Global Intermediary Identification Number, otherwise known as a GIIN. This is what links your QI application to your compliance with the US anti-tax evasion regulations commonly known as FATCA. At this stage it’s also worth making sure that you haven’t been penalised by the IRS in your previous capacity of non-qualified intermediary – the default status for any financial institution receiving US sourced income that isn’t a QI.

Application: Now it’s time to apply! You do this at the IRS website, where you will need to register for a QI Employer Identification Number (or QIEIN). Which isn’t as simple as it sounds, since you’ll need an account at the Qualified Intermediary Application and Account Management System (also known as QAAMS – did we mention the IRS loves their acronyms?) portal. Once you have that, there are several steps to the application process. You will need to:

• Complete a form SS-4 to make your application for AIEIN
• Answer a set of questions about your firm (jurisdiction, GIIN, contact person and responsible officer) as well as our clients (types and numbers).
• You may also need to upload two documents, Attachment A and Attachment B. Attachment A is a description of your firm, and Attachment B is a copy of your account opening procedures for individuals and entities. This is not the same as your KYC attachment.

Grant of QI Status: Once you’ve made your application, you’ll need to get into the habit of checking back at QAAMS to see the status of your application. If you’re successful, you’ll get a notice that your application has been approved, and you’ll subsequently get a QIEIN in the mail and via the portal.

And those are all the easy bits!

Congratulations!

You’ve just effectively signed a 205 page, 6-year contract with the US government. If you’re a stickler for reading the fine print, you can read it in full in the US Revenue Procedure 2022-43. The contract’s effective date can be found on your QIEIN notice, and this will tell you when your status as a QI is calculated from.

If you applied before March 31^st in any given year (or after March 31^st with no US-sourced income received), then you’ll typically have your QIEIN back-dated to the 1^st of January. Otherwise, your QIEIN will have an effective date of the month after your QIEIN was issued.

If you’ve not read my other blogs, you need to know that your QIEIN effective date is important, because it tells you when you’ll have to certify to the IRS that you complied with the QI agreement. It will also control what your reporting will look like in the second year of your contract.

But Wait…

There’s more! Once all of this is done, your next steps will be critical. If you get any of it wrong, you could be in for a world of pain and potential financial penalties. If you get it right, then you’ll have a shiny new badge of compliance, and the ability to grant tax treaty benefits to clients without disclosing who they are. And from summer 2024, it’s likely that your firm’s name will also appear on the IRS published list of QIs.

At TConsult, we work with financial institutions to understand what being a QI truly means, and work through the application process with them step by step if that’s the route they choose to go down. If you have questions, or you would like to know more about the QI process, just get in touch with the team today and we would be happy to help.