Reconciliation Data Cruncher

Relevant for the applicability of the treaty are all customers who have U.S. securities in their portfolio that generate income (i.e. interest or dividends). The QI determines the tax residency of its customers and the applicable double tax treaty, applies the required tax rate to the income and regularly remits the withheld tax to the U.S. Internal Revenue Service (hereinafter referred to as IRS). Finally, annual reporting must be made separately by customer group and type of income, among other things, on Form 1042-S. Approximately 50 individual items of information must be reported on the form.

As of January 1, 2001, the U.S. Internal Revenue Service (hereinafter referred to as IRS) required financial institutions worldwide to enter into a contract (hereinafter referred to as QI contract) that includes terms and conditions for documenting and monitoring customers and withholding tax on U.S. income. The starting point for the initial introduction in 2001 was that the U.S. assumed that many U.S. citizens had accounts/deposits with foreign banks and were not properly disclosing them on their tax returns (and thus avoiding taxes). This regulation therefore forms the basis for additional global tax transparency policies that exist today, e.g. FATCA (Foreign Account Tax Compliance Act), CRS (Common Reporting Standard)/AEOI (Automatic Exchange of Information).

The contents of this contract were fundamentally revised as of 01.07.2014 and expanded to include various requirements from the FATCA regulations. The term of the current contract ends on 31.12.2022 and can only be extended by the QI itself via the IRS online portal. The previously known procedure of the periodic external audit (formerly QI audit; today Periodic Review) and the associated application for an audit exemption (so-called waiver) has been abolished with the new contract and the QIs are obliged to implement an internal "Compliance Procedure" (see Section 10 of the Revenue Procedure 2017-15). QI Qualified Intermediary is an intermediate custodian that has entered into a withholding agreement with the IRS.

QI's have the obligation to implement a compliance program in accordance with the QI Agreement, the obligation to properly document customers in accordance with the guidelines provided by the IRS. Furthermore, the obligation to comply with the regulations in the QI or private law agreement and the attachments applicable to the respective domiciliary countries to take into account national legitimation and documentation rules (attachments), the obligation to inform the upstream QI immediately of changes in its own QI status by means of a W-8IMY, act as a paying agent ("withholding agent") under IRC Chapter 3 (non-U.S. persons), Chapter 4 (FATCA) and Chapter 61 (U.S. persons) and to pay the withheld taxes to the IRS accordingly in full and on time. Lastly, to comply with the relevant reporting obligations (1042, 1042-S, 945, 1099), and meet the FATCA requirements applicable to it.

The QI must appoint a Responsible Officer (RO) with sufficient authority (e.g., directive rights, audit and review) to perform the RO's duties and ensure compliance with QI compliance program requirements. The RO must be registered as an RO on the QI application and in the IRS's Account Management System. The primary responsibility of the RO QI (or delegate) is to establish an appropriate QI/FATCA compliance program that meets the requirements of Section 10 of the QI Agreement. In order to be able to fulfill these duties and, in particular, to determine the adequacy and effectiveness of the internal control system; they must subject it to a regular audit. The RO QI must act as the contact person for all QI relevant topics or requests regarding further documentation or additional review measures vis-à-vis to the IRS. He/she is responsible for the topic towards the IRS, is authorized to issue instructions to the relevant areas with regard to implementation and any corrections, and ultimately forms the final decision-making authority.

In accordance with Section 10.03 of the QI Agreement, the Responsible Officer must make a so-called "periodic certification" to the IRS every three years. An important component of this is the certification of internal controls, whereby a distinction is made between a limited and an unlimited certification. A limited certification is required if there is either a so-called breach of contract (Event of Default) or a so-called material failure, which has not yet been remedied when the certification is submitted. The definition of material failures and breaches of contract are regulated in the QI contract, but contain various discretionary powers, which is why it is crucial to have comprehensible documentation on the exercise of these discretionary powers. In addition, the RO must document in writing all procedures, processes, reports, or certifications used to certify internal controls.

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