International Bankers Wary Of US QI Proposals

by Mike Godfrey, Tax-News.com, Washington

06 August 2009

Senior figures from the international banking industry have been meeting with high-ranking officials from within the Obama administration to express their concern over proposals to strengthen the Qualified Intermediary (QI) program.

The QI program was established in 2000 to encourage foreign banks to report details of their US clients to the US Internal Revenue Service (IRS) for income tax purposes, but the system has holes – as evidenced by the high profile case of Swiss bank UBS – which President Obama is keen to close. However, the proposals are controversial and critics argue that the onerous reporting burdens that they will impose on banks and their clients may be unworkable in practice.

In late June, the Institute of International Bankers (IIB) organized a round of meetings in Washington with Treasury and Internal Revenue Service officials and senior staff on the Congressional tax writing committees to express its concern “regarding the practical difficulties with the Obama Administration’s legislative proposals in the Qualified Intermediary area," according to its August newsletter.

While Congress is understood to be considering modifications to the proposals in response to concerns from the banking and wealth management industry, as they the stand the proposed rules would require QIs to report all account holders that are US persons. In addition, the existence of, and transfers to, offshore accounts will need to be reported on tax returns (as well as foreign account, or 'FBAR' forms) while all US financial intermediaries will be required to report transfers of more than USD10,000 to or from a foreign bank, brokerage or other financial account on behalf of a US person (or an entity in which a US person has more than 50% of the ownership interest).

US source interest, dividends, and other forms of income paid to a non-qualified intermediary would be subject to 30% reporting, although eligible holders would be entitled to refunds. Also, a refundable 20% withholding tax would be imposed on gross proceeds paid to non-qualified intermediaries located in jurisdictions that do not have a comprehensive income tax treaty with satisfactory exchange of information provisions.

The proposed changes to the QI program were put out to consultation by the IRS last October, but have yet to be incorporated into US tax law. However, foreign-based banks are already fearful that retaining US clients could be more trouble than it’s worth under the strengthened QI program, should it become law. Financial institutions in the UK, for example, have threatened to withdraw their services to American clients if the United States Congress approves proposed changes.

“The QI regime continues to be an administratively burdensome and costly regime to APCIMS member firms, particularly as they have very few, if any, US clients,” said Andy Thompson, Director of Operations of the Association of Private Client Investment Managers and Stockbrokers (APCIMS) in the UK, in response to the proposals, earlier this year.

APCIMS believes that amendments to the process which will require the involvement of American auditors will be “costly and unnecessary” and may also constitute a breach of the Data Protection Act in the UK.

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