IRS Adds Five New FATCA FAQs Addressing QDD, QI, and WP Concerns

The IRS updated its FATCA frequently asked questions to include five new FAQs.  The new FAQs address issues involving qualified intermediaries (QIs) that are or are seeking to become qualified derivatives dealers (QDDs), non-financial foreign entities (NFFEs) seeking to become withholding foreign partnerships (WPs), the period review requirements applicable to QIs that are QDDs, and the independence standard applicable to external reviewers of a QI, WP, or withholding foreign trust (WT).

Three FAQs were added to the “New Applications/Renewals” section, the first two of which address QIs.  In FAQ#17, the IRS clarifies that a QI that is not currently a QDD does not have to wait for its QI agreement to expire before applying for QDD status.  It also reiterates that branches of QIs wishing to become QDDs must complete their own separate QDD application.  FAQ#18 addresses the effective date (i.e., the date on which the QI can represent itself as a QDD on Form W-8IMY) of a newly-granted QDD status.  If a QI is granted QDD status prior to March 31 of a calendar year, or after March 31 for QIs that have not received any reportable payments before being granted QDD status, that status will become effective as of January 1 of that year.  Otherwise, QDD status will become effective the first day of the month in which the QDD application is approved.  FAQ#19 addresses the circumstances in which an NFFE that is a foreign reverse hybrid entity (a foreign entity that is fiscally transparent for foreign tax purposes but not transparent for U.S. tax purposes) can become a WP (a status reserved for foreign reverse hybrid entities that are FFIs under section 6.03(C) of the WP agreement).  The FAQ clarifies that a foreign reverse hybrid entity that is an NFFE may apply to be a WP but only with respect to payments of personal services income effectively connected with a U.S. trade or business.

The IRS also added a new section titled “Certifications and Periodic Reviews,” consisting of two review-related FAQs.  FAQ#1 addresses the circumstances in which QIs that are QDDs can avoid periodic review for certification periods ending in 2017 and 2018.  Section 10.07 of the QI agreement permits waivers of periodic review requirements for QIs not acting as QDDs, but Notice 2017-42 extended this waiver to QIs that are QDDs for its QDD activities with respect to certification periods ending in 2017 and 2018.  This left open the question of whether such QIs could seek a waiver of periodic review for their non-QDD activities.  FAQ#1 answers this question in the affirmative and provides instructions on the process of applying for a waiver.  In FAQ#2, the IRS expands on the requirement in section 10.04 of the QI agreement and section 8.04 of the WP and WT agreements that an external reviewer of a QI, WP, or WT not review the work of others in the same “firm,” a standard that has raised questions.  Accordingly, the IRS clarifies that for years before 2018, external reviewers may apply the standards otherwise applicable to their engagement to conduct the review (e.g., procedures for a certified public accountant).  The IRS intends to provide further guidance for calendar years 2018 and later.