Doing business in the US or with American investors? If so, you’ll know that operational taxes can be a tough area. Today’s business environment is a highly dynamic one, marked by close regulatory attention and rapid technological development, and so in this article we want to help you test how compliant your organisation is with its operational taxes.
Operational taxes are the withholding taxes (WHT), transactional taxes, and compliance obligations (due diligence and tax/investor reporting) that exist under the US Qualified Intermediary (QI), FATCA and CRS regimes, as well as US tax compliance requirements. Below you will find our 5-question checklist, designed to help you determine to what extent your organisation is compliant with key QI requirements.
Have you collected, updated, and reviewed all IRS forms (or equivalents) and KYC information for clients investing in the US market?
The determinations of whether a payee is a US or non-US Person and of the applicable tax rate are generally made on the basis of the tax documentation on file. If a bank cannot reliably associate a payment with valid documentation, it must apply certain presumption rules or it may be liable to tax, interest, and penalties. For accounts maintained by QIs prior to 1 January 2017 with documentary evidence, and for which treaty benefits are being claimed, the QI is required to obtain the appropriate limitation on benefits statement prior to 1 January 2019.
Are you confident that the amount withheld by you, or by your upstream custodian, on US source income is correct?
Withholding certificates (like Form W-8IMY) and withholding allocations are used by banks acting as intermediaries, agents, or entities characterised as flow-through entities (such as partnerships) to certify their status as an intermediary, foreign partnership, or any other person acting as an intermediary. As the correct setup of (omnibus, segregated, etc.) accounts, maintained by custodians, is essential for the correct application of withholding rules, such setups should be carefully designed and considered.
Do you use an internal or external tool to produce 1042-S electronic reports and to systematically validate 1042 returns in order to avoid errors and penalty notices?
Form 1042-S, which can only be filed electronically, must be filed with the IRS by March/April 15, whereas Form 1042 must be mailed, on paper, by March/April 15 to the IRS. Experience shows that wrongly completed 1042-S and 1042 forms frequently lead to undue penalties notices, from the IRS, and overpayment of tax.
Do the employees of the bank receive periodic QI training?
A QI-responsible officer must communicate the relevant policies and procedures to any line of QI business that is responsible for obtaining, reviewing, and retaining a record of documentation; making payments subject to withholding; reporting payments and accounts; or entering into potential section 871(m) transactions. Thus, periodic department-wide or business-unit-specific training sessions should be organised.
Does your bank have a robust QI compliance program?
A QI is required to adopt a compliance program under the authority of a Responsible Officer or, if a consolidated compliance program has been adopted, then under the authority of a Responsible Officer of a compliance QI. The QI’s compliance program needs to include policies, procedures, and processes sufficient for a QI to satisfy the documentation, reporting, and withholding; and sufficient for a Responsible Officer of a QI to make the certifications required under the QI agreement. The QI needs also to perform or arrange for the performance of a periodic review or audit. The QI certification due date for a QI that selected 2017 for its periodic review is 1 March 2019.
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