Non-Qualified Intermediary – NQI

Payors of U.S. source income to a NQI can treat the payment as reasonably associated with valid documentation from a specific payee, if prior to making the payment;

1. The payor can allocate the payment to a valid Form W8 IMY;

2. The payor can determine how much of the payment relates to valid documentation provided by a payee;

3. The payor has sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required;

The NQI must give the payor a withholding statement associated with the Form W-8 IMY which includes:

1. The name, address and TIN of each person for whom documentation is provided;

2. The type of documentation (i.e. Form W-8;, or W-9) for every person for whom documentation has been provided;

3. The status of the person for whom the documentation is provided:

U.S. Exempt Recipient (Exempt from Form 1099 reporting);

U.S. Non-Exempt Recipient (subject to Form 1099 reporting);

Foreign Person (a beneficial owner), either a foreign intermediary, a flow-through entity, or a U.S. branch.

4. The type of recipient based on the recipient code used in Form 1042-S;

5. Information allocating each payment by income type, for each payee;

6. The foreign person’s rate of withholding for whom a payment is allocated;

7. A foreign payee’s country of residence;

8. The basis for any reduced rate of withholding (e.g. treaty).

Alternative Procedure

Under the alternative procedure, the NQI can give the payor information that allocates each payment to each foreign and U.S. exempt recipient by January 31, following the calendar year of payment, rather than prior to the payment being made, as otherwise required.

The NQI must advise the U.S. payor that it is using the alternative procedure and obtain the payor’s consent. The U.S. payor must receive the withholding statement with all the required information prior to making payment.

The alternative procedure cannot be used for payments to U.S. non-exempt recipients. A NQI must provide the U.S. payor with allocation information for all U.S. non-exempt recipients prior to a payment being made.

Pooled Withholding Information

If a NQI uses the alternative procedure, it must provide the U.S. payor with withholding rate pool information (as opposed to individual allocation information) prior to the payment of a reportable amount.

A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding.

For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 20% rate (2013), must provide information for two withholding rate pools (one for royalties and one for dividends).

The NQI must provide the payor with payee specific allocation information (information allocating each payment to each payee) by January 31, following the calendar year of payment.

NQI Failure to Provide Allocation Information

If the NQI fails to provide the payor with the payee specific allocation information for a withholding rate pool by January 31, the payor must apply the payee presumption rules.

A NQI is deemed to have failed to provide specific allocation information if it does not give the payor such information for more than 10% of any one withholding rate pool, if so, the payor must file a Form 1042-S for each account holder in the pool on a pro-rata basis.

For example, if there are four account holders in a withholding rate pool that receive a $100 payment, and the NQI fails to allocate more than $10 of the payment, the payor must file four Forms 1042-S, one for each account holder in the pool, showing $25 of income to each, and check the “Pro-Rata Basis Reporting” box at the top of each form.

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