Once again, we’ve invited subject matter expert Ross McGill to share his insights on tax matters.
US tax regulations are complicated and they have a number of deadlines associated either with meeting the regulatory standards or providing some options to give you more time to comply. In this blog, Ross McGill, Chairman of TConsult Ltd, one of the world’s foremost experts on US tax regulations, gives non-US financial firms a heads-up on some of the closest deadlines, why they exist and what you can do to make the most of them.
You can find his previous post regarding what it means to be a qualified intermediary (QI) versus a non-qualified intermediary (NQI) here.
February - You’re running out of time to file for an extension for 1042-S reporting
Any non-US financial firm that receives US sourced income on behalf of its clients is subject to reporting of that income to the US Internal Revenue Service under the US Internal Revenue Code Chapter 3. The only exception to this reporting rule is if you are a non-qualified intermediary and you have fully disclosed all your clients to another withholding agent. You need to start your reporting projects in January or February and the process goes all the way through to September each year. The standard deadline for everyone in the payment chain is March 15, 2021 to submit your information returns (1042-S) and your tax return (1042) to the IRS with respect to income received in the previous tax year (January to December 2020). However, almost all financial institutions, whether they are QIs or NQIs, submit requests for extensions of time to file. Each return has a different form and submission method, but, once filed, you get a 30 day extension for information returns and a 6 month extension for your tax return. That means that your new 1042-S deadline is April 14th and your new 1042 deadline is September 14th which gives you more time to prepare and make sure that you file correctly and timely in order to avoid IRS penalties that can theoretically reach $6m or more if you are deemed to be in ‘intentional disregard’ of the US tax regulations.
March - If you want to be a QI you have until the end of March to apply and get your QIEIN backdated
Qualified Intermediary status is a badge of acceptability for the IRS. Being a QI has several benefits, not least is the ability to give tax treaty benefits to clients that are entitled to them and claim them. QIs can also pool their direct individual and entity clients for the purpose of withholding and reporting. So, if you have exposure to the US securities market, QI status is definitely something to consider so that you become part of that very exclusive club.
You can of course file an application to be a QI at any time of the year and there are many benefits to being a QI. As I noted, one of the biggest benefits is that you are able to report to the IRS on a pooled basis while NQIs must report each beneficial owner and each type of that receives US sourced income individually and separately to the IRS. That can be the difference between thousands of 1042-S forms as an NQI and less than twenty as a QI. It also means that you don’t have to worry about data protection issues because, unlike NQIs, you won’t be disclosing your customers to a foreign government.
If you can get your application in to the IRS before March 31st, generally, the IRS will issue a QI EIN but importantly, it will back date the effective date to January 1st 2021. That means that, for all intents and purposes, you were a QI for the whole of 2021 and your reporting of income received in 2021, which is due in March 2022 can all be done on a pooled basis – much easier.
April - If you want to apply for Consolidated Compliance Group status, you have until April 1st to get your application in to the IRS.
If your firm is a member of a group of commonly owned or commonly controlled financial institutions, the burden of compliance to US tax regulations can be very complex if each firm in the group has to figure out its obligations on its own. There are two solutions. The first is to concentrate risk in one of the group by using a set of Private Arrangement Intermediary (PAI) arrangements.
The second and more common is to apply to the IRS to operate a Consolidated Compliance Group (CCG) under a Common Compliance Program (CCP). At least two members of the group must be QI and your application must be received by April 1, 2021. Even if you don’t have two QIs in your group, you can still make the application as long as one other member applies to be a QI at the same time so that you meet the criteria. This means that you have just one set of compliance rules for the whole group and one Responsible Officer can make certifications for the whole group.
These projects and tasks are all manageable if you know what the deadlines are, what benefit the give you and how to apply them. There are way too many financial firms out there that think that NQI status is OK (its not), that they can ask for a W-8 then just file it (they can’t), that 30% is an acceptable tax rate even if your clients are entitled to a lower rate (no it isn’t) and that they don’t need to report if the tax rate was the maximum 30% (wrong).
Please note: The views, information and opinions expressed are those of Ross McGill and do not necessarily represent those of ViewTrade and its employees. The purpose of this information is to educate and inform. This blog post does not constitute professional advice or services.