Why Qualified Intermediary (QI) Status Matters for Brokers

Foreign financial institutions have gained precedence in recent times as cross-border investments have become an area of interest. In the US, such institutions need to meet certain regulatory requirements to be able to operate seamlessly, offering benefits to their clients. One such requirement is the Qualified Intermediary status, a designation given to foreign financial institutions by the IRS.

This article elaborates why the Qualified Intermediary status is essential for brokers, what are some of the disadvantages faced by non-QI, how to become a QI status, and how QI ultimately supports long-term economic transparency and investor confidence. You can explore deeper with our whitepaper: Tax Efficiency in Global Markets: Why Qualified Intermediary (QI) Matters. Click here to download the whitepaper.

What is Qualified Intermediary (QI) Status?

A QI, or a Qualified Intermediary status indicates that a foreign financial institution interested to offer their services in the US is officially recognised by the IRS, easing their withholding and reporting obligations under 3 (withholding tax on U.S. source income paid to foreign persons) and chapter 4 (known as FATCA) of the Internal Revenue Code.

The qualified intermediary program was established by the IRS to improve U.S. tax compliance, balance compliance and account holder confidentiality, simplify withholding and reporting, and enhance U.S. market access.

A foreign financial institution that is also an IRS Qualified Intermediary represents trustworthiness, reliability and transparency to prospective investors.

Here is a simple comparison of a QI (Qualified Intermediary) vs a NQI (non-qualified intermediary):

Why QI Status Matters for Brokers: Key Benefits

The QI program for brokers is framed to ensure the following:

Regulatory Compliance: Brokers with QI status strictly adhere to the IRS withholding and reporting rules. This means better operational control and command over internal processes, rather than depending on US custodians to ensure seamless operations.

Client Trust & Transparency: Institutions which have IRS Qualified Intermediary status tend to attract quality clients who look for transparency and strict compliance with IRS tax rules, reducing the risk of potential penalties. When clients deal with QI brokers, they are confident about getting the most out of tax benefits without disclosing their information.

Market Access: Qualified Intermediary brokers have better access to the US market. The QI status allows them to facilitate seamless investments for their clients, leading to satisfactory investment returns without a lot of financial restrictions. This opens up more opportunities for such institutions to work with their US-based counterparts. As mentioned earlier, Qualified Intermediary brokers are considered to be reliable partners. Hence, major US financial institutions prefer working with QI brokers than Non QI ones.

Operational Efficiency: A QI streamlines the process of tax documentation collection and validation in-house, and reduces reliance on upstream custodian. A QI is allowed to consolidate tax reporting at the tax pool level, minimizing tax filing burdens and reducing operational costs.

Competitive Edge: Brokers with QI status are considered to be a class apart. To investors, it is a symbol of transparency, as such institutions follow a strictly proctored process, ensuring that their clients get the best out of their investments in the legally correct manner.

Risks of Operating Without QI Status

If you are an NQI broker or institution, there are several risks associated with not being a QI broker that may hinder your progress in the US market.

Reliance on US Witholding Agents

An NQI status can be limiting to a lot of foreign brokers, as the IRS requires them to tie up with IRS- approved withholding agents to ensure seamless compliance with tax rules. This affects the overall turnover time of operations, and over withholding of payments, as withholding agents may levy higher withholds due to lower tax risk tolerance. When that happens, NQI institutions cannot claim collective refunds from the IRS on behalf of their clients, something brokers with QI status can.

Complicated Tax Reporting Process

Tax reporting can be lengthy and complicated for NQI institutions/brokers, causing flawed outcomes, further complicating the process.  For example, An NQI broker or institution must file 1042-S for individual account holders, which gives room for manual errors. Similarly, institutions without an IRS Qualified Intermediary status must hand over accurate client information to the associated U.S withholding agent – a process that requires intricate coordination, accurate documentation and verification. These processes are less complicated for brokers with QI status.

Reliability & Compliance

Operating without QI status, a foreign financial institution may be seen as less reliable and less compliant, which translates to reduced credibility in institutional partnerships.

Better Access

A QI status brokerage or financial institution allows easier access to the market’s resources, especially treaty benefits on withholding tax, something NQIs cannot. This ensures a steady flow of high-quality, reliable clients. Reduced withholding rates on returns can be a major attraction for high-value clients. Without this, foreign investors who are looking to invest in U.S markets may be discouraged from investing, leading to considerable business losses for brokers.

How to Become a Qualified Intermediary

If you are a financial institution facilitating cross-border investment, here is how to secure a Qualified Intermediary status from the IRS.

Fulfil KYC Requirements

To become a QI, foreign institutions must fulfil the KYC rules laid down by the IRS. The IRS website lists the country jurisdictions that meet their requirements.  If you are a broker/foreign institution located in any of these countries, you are eligible to submit QI applications. If not, the country’s KYC rules must be approved by the IRS, post which they will be listed on the official IRS website. Viewtrade has assisted in obtaining the KYC approvals for a few countries.

The Process

Aspiring candidates may submit their applications through the QAAMS (The QI/WP/WT Application and Account Management System), a secure, web-based platform where one can apply, renew, certify or terminate QI, and manage information online.

The system user guide provides comprehensive guidance in accessing the system and completing the application.

A QI applicant must notably have an account opening and KYC process that is sufficient to determine the identity and tax residency of customers receiving U.S. source income. These policies and procedures will be entered/attached in the application.

In addition, a QI applicant will designate a responsible officer to manage QI application, ongoing compliance, and complete QI periodic certifications.

After the QI application has been submitted, it takes approximately 1 to 3 months for the IRS to review and respond. Once approved, the applicant will receive a QI-EIN shortly that will be used exclusively for QI activities.

After obtaining QI status, a QI will be required to complete a QI certification every three years to certify its compliance with the QI agreement.

The certification requires a QI to select one of the three years covered by the certification period as the periodic review year and conduct internal or external review, except when a QI is eligible and obtains a waiver of periodic review requirement. A copy of the certification can be found in the QI agreement appendix.

In conclusion, a QI status lets foreign financial institutions access and navigate the market within the US, while ensuring compliance with the IRS regulations. It is a sign of reliability, transparency and trustworthiness to potential investors who wish to invest in US markets. There are several advantages to this certification, the most important being that it enables clients to access treaty benefits and reduced withholding taxes on their returns, improving the overall operational efficiency.

Download our whitepaper – Tax Efficiency in Global Markets: Why Qualified Intermediary (QI) Matters for a deeper dive into this topic.