What is Qualified Intermediary (QI)?
A Qualified Intermediary (QI) is a person or foreign financial institution qualified under specific sections of the U.S. Internal Revenue Code (IRC). It acts as an intermediary for tax withholding and reporting purposes.
In the context of Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding), a QI facilitates the reporting of U.S.-source income paid to non-U.S. persons and ensures compliance with withholding requirements under Chapter 3 (IRC sections 1441-1446) and Chapter 4 (FATCA, IRC sections 1471-1474).
Roles and Responsibilities
- Withholding on US-source Income:
QIs calculate and impose appropriate withholding taxes-either the default 30 percent rate or a reduced treaty rate-on dividends, interest, or royalties paid directly to foreign account holders. All these figures appear in Form 1042-S, along with classification of income type, tax withheld, and exemptions. - Investor Classification:
QIs identify account holders as U.S. persons, foreign persons, or FATCA-subject entities using documentation such as Form W-8 (i.e., W-8BEN for individuals) to verify tax status and eligibility for treaty benefits. - Income Reporting:
QIs complete and submit Form 1042-S for every non-U.S. recipient, given the source of the income, the withholdings to be made, and relevant Exemption Codes (e.g., “04” for treaty exemptions). They also give copies to recipients as of March 15 of next year. - Documentation and Record-keeping:
These include accurate recording by QIs, containing W-8 forms, FATCA statuses, and withholding certificates that support the information reflected in the Form 1042-S, which are obligatory to be kept for audits or inquiries by the IRS. - Remittance of Taxes:
QIs deposit the withheld taxes to the IRS by Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and ensure that remittances are made timely to avoid penalties. - Compliance with FATCA and Treaties:
QIs ensure compliance with FATCA by identifying U.S. account holders and reporting their activities, while also applying tax treaty provisions when applicable, which may reduce or eliminate withholding.
QI vs. Non-QI Status on Form 1042-S:
- A QI assumes primary withholding and reporting responsibility, often using its own QI Employer Identification Number (QI-EIN) on Form 1042-S.
- A non-QI intermediary shifts these duties to upstream payers, complicating the process for FFIs and account holders.
- Box 15a on Form 1042-S typically lists the QI’s QI-EIN, indicating its role in the payment chain.
Key Requirements:
- QIs must enter a formal QI Agreement with the IRS, renewable every three years.
- They undergo periodic compliance reviews to maintain QI status.
- Documentation errors (e.g., missing W-8 forms) may trigger backup withholding (24%) or penalties.