Ross McGill

June 1, 2020|8 Minutes

QI Status – Is It Worth It?


To QI, or not to QI? That is the question – and one we get asked about an awful lot. The decision to become a QI should not be entered into lightly, but all too often firms are finding the choice is taken out of their hands. But before you start down the road to becoming a QI, you should take some time to understand what that means for both your customers and your firm, and just how much resource you will need to dedicate to make it happen. That’s why we’re here – to help you along that path, step by step.

The Difference Between QI and NQI

Before you can understand whether you should stay an NQI or if you need to become a QI, you need to know what the difference is.

  • A QI (Qualified Intermediary) is a non-US financial institution that’s entered into a QI agreement with the IRS. This agreement states that the QI must implement certain documentary procedures in order to identify its clients who invest in US securities. They can also use those certifications to grant a reduced rate of US withholding tax on their behalf, if their clients have claimed one. They can do all of this without revealing their client’s identity to anyone – either upstream financial institutions or the IRS themselves.
  • Any intermediary, that receives US sourced income on behalf of their clients, that doesn’t enter into this agreement is, by default, an NQI, or Non-Qualified Intermediary. While NQIs don’t have any agreements with the IRs, their overall responsibilities in terms of documentation, withholding and reporting are the same as a QI. The difference lies in the way that they meet those obligations. Generally, the regulations are written on the basis that, in order to avoid a punitive 30% withholding tax, NQIs have to disclose the information of their customers to a QI or US withholding Agent (USWA). This is done by sending all the W-8s plus a withholding statement that allocates all the income received to one of those customer. This causes a potential conflict and also a potential data privacy issue with one counterparty disclosing its customers to another – who is likely also to be a competitor. Understandably most QIs don’t want to handle an unknown, but potentially very large and complex amount of work flowing from a pile of documentation about customers that aren’t even their own.

In other words, being a QI is actually much less work, and gives your customers a much higher level of privacy. Yes, there is a process to go through in order to become a QI, but once you have that status, the documentation procedure is much simpler, you don’t have to reveal clients details, you can take advantage of the reduced withholding tax rate, and you can been obtain refunds on over-withholding on the behalf of your clients. Overall, it’s the smart move.

Should You Take The Leap?

We have, in the past, come across quite a few firms who seem to believe that by remaining an NQI and not taking up QI status, they are somehow exempt from IRC Chapter 3. We just want to take a moment to tell you that this, unfortunately, is categorically untrue. We also come across firms that clearly act on behalf of clients but still present a form W-8BENE to their counterparty to certify (under penalty of perjury) that they are not intermediaries in order to avoid NQI status. We’ve even come across some US Withholding Agents insisting that their clients become QIs, and refusing to open accounts unless they have QI status in Chapter 3. In other words, we’ve seen it all.

If your institution has decided to take the leap into becoming a QI (or been told you have to be a QI), then the first thing you need to do is talk to a professional (us), and we can walk you through what becoming a QI really means, and how it’s done. Because while the application process might be relatively simple (and we use that word very carefully!), the consequences of becoming a QI can be very significant for your firm. Becoming a QI is about more than just paperwork – the due diligence, withholding, reporting and oversight elements – but it also impacts your firm on an operational level – rate pool accounts, withholding status vs non-withholding status and so forth – a lot of which won’t have been explained by the US Withholding Agent.

It’s no secret that since 2001 the IRS has been keen to get as many QIs signed up as possible. In fact, there’s also a belief that if the QI regulations had been more widely adopted right from the start, in the form of QI agreements, then FATCA regulations might not have been needed at all. Most of this is down to non-compliance of NQIs, who are satisfied with their 30% tax rate and are happy to ignore their tax return and reporting obligations. But with some quick ‘back of an envelope’ maths, we can work out that if the IRS actually imposed a penalty on every single NQI that failed to file a tax return since 2001, the total would be somewhere around $85bn (not including interest, of course). Now that the IRS is imposing such fines, becoming a QI is the best way to avoid them.

At TConsult, we spend a lot of our time helping firms understand the issues around QI and NQI status, with in-house training courses and bespoke consultation. We also provide customised support services for QIs, and support for NQIs wanting to enter the QI programme. If you would like to know more, just get in touch with us to arrange a chat with one of our subject matter experts.

Ross McGill

Ross is the founder and chairman of TConsult. He has spent over 26 years working in the withholding tax landscape with companies developing tax reclaim software and operating outsource tax reclamation services.

Ross not only sees the big picture but is also incredibly detail oriented. He can make even the most complex issues simple to understand. He has authored 10 books (including two second editions) on various aspects of tax, technology, and regulation in financial services, making him one of the leading authorities in the world of tax.