QI or IQ reporting: What challenges do banks face with their US tax compliance? - Banking blog

Deloitte tax blog QI  IQ reporting

Deloitte recently hosted tax and compliance specialists representing 45 different financial institutions and banking solution providers for a dedicated training event, which addressed the technical and operational challenges associated with US tax reporting.

Via interactive sessions in Geneva and Zurich, participants were provided with an overview of the most common errors that Deloitte identified during the recent round of qualified intermediary (QI) periodic reviews and discussed the importance of Form 1042-S reporting and the associated reconciliation. Using real examples identified during the QI periodic review process, the session also provided participants with practical case studies and the expected Form 1042-S or Form 1099 output.

Although many of the participants could relate to the common documentation and withholding errors identified during the QI periodic reviews, most of the discussion focused on QI regulatory reporting and ensuring the correct Form 1042-S and Form 1099 output. This has been brought more into focus with the confirmation that the IRS are currently examining the US reportable amounts disclosed in the RO certification, against the amounts previously reported on Form 1042 for the review year.

So what were the key takeaways from our discussions?

Not all recipients can be reported via a withholding rate pool Form 1042-S…

One of the significant benefits available to QIs is the opportunity to report on a pooled basis. This permits the QI to report certain direct account holders subject to a common withholding treatment in a non-disclosed withholding rate pool Form 1042-S.

In certain instances, the QI must file a recipient specific Form 1042-S and disclose the account holder to the IRS. Although in general QIs are correctly preparing recipient specific Form 1042-S to fellow QIs and the beneficial owners of nonqualified intermediaries , notable omissions are still occurring, namely, under the following scenarios:

Payments to undocumented account holders. If the QI has treated the account as undocumented and the presumption rules have resulted in a non-US recipient subject to 30% withholding tax, a Form 1042-S should be prepared to reflect the ‘unknown recipient’ status of the account.

Flow-through entities to which the joint account treatment cannot apply. Not all flow-through entities are permitted to benefit from the widely used joint account treatment. In order for the entity to benefit from this simplified withholding and reporting status, the conditions outlined in section 4.05(A) of the QI agreement must be met. In the absence of these, recipient specific Form 1042-S reporting may be required.

Form 1099 reporting did not disappear when FATCA arrived…

With the advent of FATCA, many QIs took the opportunity to re-document their once disclosed Form W-9 reportable accounts. Via an updated withholding statement, these once reportable Form 1099 accounts became subject to Form 1042-S reporting as Chapter 4 US payee pools. Unfortunately, it seems that QIs have been placing the assets of all US beneficiaries in these Form 1042-S reportable accounts, without determining if they qualify to be placed in the Chapter 4 US payee pool.

Not all Form 1099 reporting has been absorbed by FATCA. QIs still have Form 1099 reporting obligations where the Chapter 4 US payee pool cannot be leveraged.

For example, where the account holder is a flow-through entity, Form 1099 reporting is required unless the flow-through entity meets certain conditions and is permitted to place the assets in a Chapter 4 US payee pool. Flow-through entities that are certified-deemed compliant FFIs, NFFEs or owner-documented FFIs cannot allocate payments to a Chapter 4 withholding rate pool of US payees and Form 1099 reporting is still required.

Form 1042-S reconciliation is for life and not just for Christmas…

Many Form 1042 and Form 1042-S year-end issues are preventable if the QI implements a regular and robust reconciliation exercise. QIs should be into the frequent habit of reconciling their incoming and outgoing Form 1042-S reportable amounts. Leaving this process until year-end can present the QI with challenges related to under and over withholding, incorrect and inconsistent Income, Exemption and Status Codes and discrepancies between the amounts deemed subject to withholding and reporting by the upstream withholding agents used by the QI.

It is also evident that many QIs have struggled with the challenges associated with section 871(m) and transactions that result in dividend equivalent payments. Regular reconciliations should minimize the year-end surprises associated with these types of payments.

Deloitte’s view

There are a number of steps that QIs can take to simplify the reporting challenges associated with QI compliance.

  • Take away the findings from the periodic review and use them to perform a gap analysis. Enhance the QI compliance program and ensure that the same mistakes will not be repeated in the future
  • Document any inconsistencies between the treatment of payments by the upstream custodian and the corresponding treatment by the QI
  • Document any specific approach taken concerning the documentation, withholding or reporting of an account and the payments made to it. For example, if an account type should be subject to recipient specific Form 1042-S reporting or if payments should be reported on Form 1099, ensure that this is clearly documented within the operational procedures and impacted staff are aware and trained
  • Perform a full assessment of the impact of section 871(m) and, if the bank issues products, determine whether the Qualified Derivatives Dealer (QDD) status is the appropriate choice for the bank
  • Document the treatment of payments that are in-scope of section 871(m)

Although the focus of the QI regime is on the documentation and identification of the beneficial owner, the associated penalties resulting from under-withholding or late and incorrect reporting, should not be underestimated. QI responsible officers should ensure that their compliance programs and the corresponding controls, fully consider the withholding and reporting elements of the QI regime.


By: Glen Lovelock & Olga Vasiliki Plousiou, Financial Services Tax

If you would like to discuss more on this topic, please do reach out to one of the key contacts below:

Sponsoring Partners


Brandi Caruso - Director, Financial Services Tax 

Brandi heads the Tax Transparency offering within the Financial Services Tax practice across Switzerland, responsible for services related to QI, FATCA, CRS, and 871(m). She is a technical advisor and a subject matter expert to a number of Swiss-based trust companies and banks and leads the Deloitte Trust Forum. She has more than 15 years of experience with Deloitte in the US, UK, and in Switzerland.


Key contacts

Karim Schubiger_110x110

Karim Schubiger – Director, Financial Services Tax & Legal

Karim leads the Tax Transparency team in the Suisse Romande and Ticino markets within the Financial Services Tax & Legal practice, responsible for services related to QI, FATCA, CRS, and 871(m). He is a technical advisor and subject matter expert to financial institutions in the banking, trust, and insurance sectors. Prior to joining Deloitte, Karim worked for eight years in support teams of Swiss banks, in particular in areas such as operations, project and change management as well as operational taxes.



Glen Lovelock - Senior Manager, Financial Services Tax

Glen is a Senior Manager in the Financial Services Tax practice. Prior to joining Deloitte, he was Head of Tax Operations at a multinational global private bank based in Switzerland. He has over 15 years relevant experience and has had direct exposure to the QI regime since inception in 2001. In addition to acting as QI, FATCA and CRS subject matter expert for various non-U.S. financial institutions, Glen also spent nine years working as a dedicated European tax resource on behalf of a U.S. financial institution.



Olga-Vasiliki Plousiou - Assistant Manager, Financial Services Tax

Olga-Vasiliki is an Assistant Manager in the Financial Services Tax team. She is a Greek attorney-at-law and holds an LL.M in International and European, Economic and Commercial Law from the University of Lausanne. She is advising banking institutions and fiduciaries as a QI, FATCA and CRS specialist. Prior to joining Deloitte Switzerland, she worked at a Greek law firm and as an external collaborator for the permanent mission of Greece, within the World Trade Organisation.



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