Generally speaking, a QI is a non-US intermediary that has entered into a QI withholding agreement with the US tax authority, the IRS. That means if your financial institution holds client accounts that receive or expect to receive US-source income, you should consider applying for QI status. Operating as a QI can give your firm a competitive edge in a crowded marketplace, and Summit can help your firm every step of the way.

QIs enjoy the following benefits:

1. The ability to offer reduced tax withholding rates for your non-US clients.
The standard tax withholding rate for non-US individuals and entities on US-source income is a staggering 30%. The US government, however, has entered into tax treaties with a number of different countries that can reduce this withholding rate. If your firm is a QI, you will be able to offer these lower tax treaty withholding rates for your clients in select jurisdictions. Your clients located in the People’s Republic of China, for example, could enjoy a 10% withholding rate for most types of US-source dividends and interest if your firm operates as a QI. Non-QIs, meaning non-US intermediaries who are not QIs, are unable to offer these reduced rates and must withhold on these clients at the highest level: 30%. Being able to provide your clients with the lowest withholding rates may give your firm the edge it needs in today’s global marketplace.

2. Vastly reduced annual tax filings with the IRS
If your firm offers clients access to US markets and income, you are likely all too familiar with reporting your clients’ US-source income on Form 1042-S, filed annually with the IRS. Foreign financial institutions who are not operating as QIs are required under US tax regulations to file a separate Form 1042-S for each client receiving US-source income. For firms with thousands of such clients, this could mean the preparation and filing of thousands of Forms 1042-S, a major operational burden and expense. QIs, however, have the ability to file Form 1042-S in a “pooled” manner based on withholding rate and income type, potentially reducing the tax filing burden of thousands of forms each year down to ten forms or less.

3. Increased privacy protection for your clients and your business
Foreign financial institutions that offer access to US markets and trading to their clients commonly open accounts with US brokers or custodians under non-disclosed (“omnibus”) arrangements. However, if your firm is not operating as a QI, your US custodian must know the identities of your clients to withhold taxes and prepare the filing of Form 1042-S each year. This means disclosing identifying client information to your US broker or custodian, who may very well be a competitor in this global marketplace. QIs, on the other hand, are better equipped to protect client privacy by offering pooled withholding and tax reporting, which do not require disclosing client information.

Operating as a QI does not need to be complicated — Summit offers specialized services for QIs and those seeking to apply for QI status. 

With our experienced team of US tax law professionals, Summit offers the following QI-related services for your FFI:

1. QI application process, including basic personnel training and internal procedure setup to begin QI operations as smoothly as possible
   
   
2. Analysis of your existing QI operations, compliance procedures, and business impact, including US custodian account assessment, withholding statement preparation and review
   
   
3. Data preparation, reporting, and electronic filing of pooled Form 1042-S and Form 1042, including follow-ups and correspondence with the IRS
   
   
4. Assistance with QI periodic certifications and QI audits, also known as QI review reports
   
   
5. On-site, telephone and email support from our Hong Kong- and New York-based teams