Compliance Strategies: Form 1042-S and Foreign Vendor ... · Compliance Strategies: Form 1042-S and...

Compliance Strategies: Form 1042-S and Foreign Vendor Reporting

Marianne Couch, J.D.

COKALA Tax Information Reporting, LLC

www.cokala.com

May, 2016

http://www.cokala.com/

U.S. v Non U.S. • U.S.

• Citizens • Residents

• Green Card • Substantial Presence Test

(SPT)

• Entities organized under U.S. law.

• Taxed by U.S. on worldwide income. • As a result, payers potentially have

worldwide Form 1099 reporting obligations.

• To avoid having to report reportable payments on a 1099, you must establish that your vendor is non-U.S. using: • Presumption rules, or

• Forms W-8/8233

• Sourcing income for payments to U.S. persons is unnecessary, as all income is subject to U.S. taxation regardless of the income’s source.

• Non U.S.

• Chapter 3 • Non-resident aliens

• Individuals who are neither citizens nor residents of the U.S.

• They may be within or without the United States; can include short-term visitors, individuals who are never in the U.S., individuals who can be in the U.S. for quite some time but will remain non-residents per certain rules.

• Entities not organized under U.S. law.

• Chapter 4 • FFIs/NFFEs

• Are, by definition, also non-U.S. persons

• Individuals, from the perspective of a payer/withholding agent that is not an FFI or NFFE, are not subject to FATCA.

• Taxed by U.S. on U.S. source income.

• 30% withholding on U.S. source FDAP income unless vendor has claimed that income is effectively connected with the conduct of a U.S. trade or business (Form W-8ECI) or

• 30% withholding on FATCA withholdable payments unless beneficial owner provides required certifications on Form W-8BEN-E, or

• 30% withholding on U.S. source income unless vendor has claimed treaty benefit.

• Non-U.S. source income paid to non-U.S. persons is not subject to withholding or reporting, but you need to establish that:

• Your vendor is non-U.S. using

• Presumption rules or

• Forms W-8/8233

• And that the income is non-U.S. source income

• No IRS form for this

• Use paperwork underlying transaction

• Invoices, POs, contracts, correspondence, etc.

© 2007-2016 COKALA Tax Information Reporting Solutions, LLC 2

U.S. v Non U.S. • U.S.

• W-9/1099

• 28% backup w/h

• Some corporate exemptions

• Tax-exempt and govt exemptions

• $600 threshold for most reporting

• No treaty benefits (some exceptions)

• Filing Deadlines

• Payees: 1/31

• IRS: 2/28-4/30

• Form 1099-MISC reporting NEC is due to IRS 1/31

• Goods purchases exempt from reporting

• Excludes discussion of employees and wages

• Non U.S.

• W-8s/8233/1042-S

• 30% withholding (14% on certain scholarships)

• No corporate exemption

• No general tax-exempt or government exemption

• No minimum dollar threshold for reporting

• Filing Deadlines

• Payees: 3/15

• IRS: 3/15-4/14

• Goods purchases exempt from reporting (except for proceeds from the sale of items that can generate interest or dividend income; these kinds of gross proceeds payments become subject to FATCA 1/1/19).

• See IRS Pub. 515 for these rules.

• Excludes discussion of employees and wages


Form W-9 v Form W-8 • Forms W-9 and W-8 are withholding certificates • Form W-9

• Establishes that vendor is U.S. person • Solicits vendor information for Form 1099 Reporting

• Name; address; payee/entity type; U.S. TIN (EIN, SSN, ITIN); various certifications (if required)

• One form • Form W-8

• Establishes that vendor is non-U.S. person • Solicits information for Form 1042-S reporting

• Name; address; payee/entity type (unlike with the Form W-9, entity type can drive which Form W-8 is used; e.g., BEN for individuals, BEN-E for entities, IMY for intermediary, etc.); treaty claims, if any; U.S. or foreign TIN (if required)

• Seven forms


Review – Non-U.S. Person

• Person = entity or individual

• Non-U.S. individuals are non-resident aliens (NRAs) • Neither citizens nor residents of the U.S.

• Residents = lawful permanent residents (“green” card holders) or those who have passed the substantial presence test (SPT)

• Entities that are incorporated or organized under the laws of a country other than the U.S. are non-U.S. persons

• Non-U.S. persons are subject to Form 1042-S reporting rules • No corporate exemption; extremely limited government and tax-exempt

exemptions; no minimum dollar threshold to trigger withholding and reporting requirements


Review – Income Sourcing

• U.S. source income paid to non-U.S. persons is subject to 30% withholding and is reportable on Form 1042-S.

• To source income, identify type of income and then look to its corresponding sourcing rule • Examples

• Services income is sourced based on where services are performed • Interest and scholarship income is sourced based on residence of payer • Dividend income is sourced based on where the payer is incorporated • Royalty income is sourced based on where item is used or located • Rental income is sourced based on where property is located

• IRS presumes all income is from U.S. sources unless established otherwise • No IRS form for this; use paperwork underlying transaction, such as invoice, PO, contracts, etc.

• Income sourcing is not required for reportable payments to U.S. vendors as U.S. persons are subject to U.S. tax on worldwide income (this means potential worldwide Form 1099 reporting for payers).


Reportable Payments • Form 1042-S reportable payments are, generally, the same kinds of payments

reported on Forms 1099-DIV; -INT; -MISC; -OID; W-2G: • Dividends, interest, royalties, rents, services, transportation, original issue discount, gambling

winnings, others • There are many Form 1099 reportable payments that are not Form 1042-S reportable

• Gross proceeds paid to attorneys • Gross broker proceeds (Form 1099-B) (until 2019) • ACA documentation (Forms 1095) • Credit card payments (Form 1099-K) • Etc.

• Chapter 3 v Chapter 4 (FATCA) • Chapter 4 (FATCA) payments are a subset of Chapter 3 payments • These payments are U.S. source income payments related to investment, lending, and

insurance activities • These payments are also Chapter 3 payments, except for insurance premiums

• FATCA payments require payees to certify their FATCA status on Form W-8BEN-E • Form W-8BEN-E is also used for Chapter 3 purposes


Chapter 3 Payments

Chapter 4 Payments

Insurance Premiums

Forms W-8BEN-E; IMY

Forms W-8BEN; ECI; EXP; 8233


Examples of Payments That Are Not FATCA Payments (These payments are still subject to a Chapter 3 Analysis)

• Effectively connected income (ECI). Need W-8ECI.

• Form W-8ECI requires the payee to be meeting U.S. income tax obligations.

• As such, Form W-8ECI requires a U.S. TIN (inclusion of a foreign, but not a U.S.,

TIN, on the Form W-8ECI = invalid Form W-8ECI; you cannot rely on it.

• If you have a valid Form W-8ECI, no 30% withholding is required per Chapter 3

(and the payments are exempt from FATCA withholding); payments are still

reportable on Form 1042-S.

• Note: one of the bigger issues IRS has processing Forms 1042-S are payments

exempted from withholding with an exemption code for “ECI” but with no U.S. TIN

on the form.


Examples of Payments That Are Not FATCA Payments (These payments are still subject to a Chapter 3 Analysis)

•Non-financial payments made in the ordinary course of

business: non-financial service fees; rentals on office and

equipment leases; payments for the use of other

property; software license fees; transportation; awards;

prizes; scholarships; compensation for services.

• Exempt from FATCA but subject to Chapter 3.


Examples Non-withholdable payments per FATCA (These payments are still subject to a Chapter 3 Analysis)

• Interest on accounts payable if from acquisition of “goods” or services.

• Exempt from FATCA but subject to Chapter 3.

• FATCA withholding on gross proceeds from the sale of property that can produce interest or dividend income starts in 2019.


Summary of Sourcing Rules (Sourcing doesn’t matter for payments to U.S. persons because of worldwide income

taxation, but it’s critical for payments to Non-U.S. Persons under both Chapters 3 and 4)

Personal services Where performed. If in U.S. and outside, must prorate on

time basis: fee X # of days in the U.S./ total # of days.

IRS may find other ways.

Dividends Where incorporated

Interest Tax residence of payer

Rentals Where property is located.

Royalties – patents, copyrights Where property is used.

Royalties – natural resources Where property is located

Prizes & Awards (that are not

compensation)

Residence of the payer

Transportation Truck and rail: If start and or stop in U.S. may need to

prorate based on mileage logs or other means.

Boat and air: start and stop in U.S. = U.S. source; start or

stop in U.S. 50% U.S. source, unless treated as USGTI.

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Summary of Sourcing Rules

Software Some say license fees sourced where the server or hard

drive is located in which the software is mounted (street

practice). Real question: whether software is leased for

rentals, or licensed for royalties, or purchased.

Subscription fees to electronically

maintained information, databases, etc.

No direct authority on point, most think U.S. source if data

are accessed through a U.S. server, whether applying the

royalty sourcing rule where the property is used or rental

sourcing rule where the property is located.

Sponsorships Source to the U.S. when the event is held in the U.S. if

analogous to services. But, is a sponsorship really a

service, or is a better sourcing application where the

advertising benefit is derived? If the market is a U.S.

market, does the location really matter? These are the

types of struggles where clear answers are hard to come

by and seeking counsel advice may be helpful. Retainer

fees can be services and can be royalties (e.g., logo on

hat of prof. golfer.. pay for image not services).

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Reporting & Withholding

• To avoid reporting a reportable payment to a non-US. person, you must establish that: • Vendor is non-U.S. (Forms W-8 or presumption rules) • Income is not from U.S. sources

• If vendor is a non-U.S. person to whom/which you are making a reportable U.S. source income payment, you must withhold 30% unless vendor establishes an exception:

• ECI (effectively connected income)

• FATCA certification (for FATCA payments)

• Treaty claim (may still require some amount of withholding; depends on treaty)

• Exceptions to withholding require appropriate documentation completed correctly; you cannot exempt

a reportable U.S. source income payment from withholding without the documentation

• Even if you have not had to withhold taxes from a reportable U.S. source income payment, you must

still report it on the Form 1042-S


Forms W-8

• Form W-8BEN (beneficial owner; individual)

• Form W-8BEN-E (beneficial owner; entity)

• Form W-8ECI (effectively connected income)

• Form W-8IMY (intermediary, including agent)

• Form W-8EXP (exempt; foreign government; very limited application)

• Form W-8CE (covered expatriate; mostly deferred compensation payments to expats; beyond scope of discussion)

• Form 8233 (individual claiming treaty benefits on U.S. source services income)

• Forms are valid for the year in which obtained plus an additional 3 calendar years, except for Form 8233, which is an annual form

• Faxes, emails, copies are ok except for Form 8233, which must be an original


Forms W-8

• Purposes: • Establish payee’s status as beneficial owner (unless IMY; establishes that

intermediary or agent is NOT the beneficial owner)

• Establish that beneficial owner is non-U.S. person

• Provide FATCA status (for FATCA payments)

• Provide Chapter 3 status (entity type; for U.S. sourced fixed and determinable, annual or periodical, income [FDAP])

• Make treaty claim(s)

• Make ECI claims


Do You Need A Form W-8 From All Foreign Vendors?


No

• Do not need Form W-8 for non-reportable payments to vendors (e.g., goods suppliers)

• Do not need a Form W-8 if presumption rules allow you to treat vendor as foreign based on other information (e.g., per se foreign corporate indicator such as PLC, Ag, SA – these vendors MUST be treated as foreign corporations; foreign corporate indicator establishes foreign corporate status)

• If you are going to withhold 30% from FATCA or FDAP presumed or actual U.S. source income payments to presumed or actual foreign vendors

• Your may have a policy to solicit Forms W-8 from all foreign vendors; this is acceptable (though not always easy to administer; difficult, for example, to obtain a Form W-8 from a foreign goods supplier or from a foreign vendor to which you are not making U.S. source income payments)


When MUST You Have A Form W-8 (or 8233) from a Foreign Vendor?

• To avoid 30% FATCA withholding on FATCA income payments to foreign entities (foreign financial institutions or non-financial foreign entities) • Form W-8BEN-E must have appropriate FATCA and other sections completed

• To avoid 30% Chapter 3 withholding on U.S. source FDAP or effectively connected income payments • Treaty claims

• Form W-8BEN-E (entities) • Form W-8BEN (individuals) • Form 8233 (individuals making treaty claims on U.S. source services income)

• Effectively connected income • Form W-8ECI (usually U.S. source services income paid to non-individuals)

• Investment income payments to foreign governments; reportable payments to foreign tax-exempts • Form W-8BEN-E from foreign governments for FATCA payments; W-8EXP from foreign governments

for non-FATCA payments or from foreign tax exempts (with necessary attachments for tax exempts)

• To avoid 30% withholding and reporting to an “unknown recipient” if dealing with an intermediary or agent • Form W-8IMY and necessary attachments


Form W-8BEN (individuals)

• If using the form simply to document a payee’s status as a non-U.S. person (i.e., there are no treaty claims or payment is documented as non-U.S. source income), beneficial owner needs to complete only: • Line 1 (name) • Line 2 (country of citizenship) • Line 3 (permanent residence address; cannot be U.S.; may not be same as

country of citizenship) • Signature, printed name, date

• Date of birth is required for financial accounts at U.S. offices of financial institutions (though it becomes required on all forms beginning 2017 if no foreign TIN is provided on the form)


Form W-8BEN (individuals) - Treaty Claims

• Treaty claims on U.S. source FDAP income (e.g., interest, dividends, royalties, non-qualified scholarships, etc.) • Treaty claims on U.S. source services income are made on Form 8233

• Treaty claims are made in Part II of the form

• Treaty must exist and must apply • You will need to read treaty to make sure it applies

• If treaty applies, withhold at treaty rate (might be zero or some other amount less than 30%)

• Form must include U.S. or foreign TIN for treaty claim


Treaty Claims Form W-8BEN – Line 10

• Line 10 must be used only if the beneficial owner is claiming treaty benefits that require the beneficial owner to meet conditions not covered by the representations made on line 9 and Part III. • For example, persons claiming treaty benefits on royalties must complete this line

if the treaty contains different withholding rates for different types of royalties.

• However, this line should always be completed by foreign students and researchers claiming treaty benefits.

• This line is generally not applicable to treaty benefits under an interest or dividends (other than dividends subject to a preferential rate based on ownership) article of a treaty.


Form 8233 • Used by individuals to make treaty claims on U.S. source services income (i.e., for

services performed in the U.S.)

• This form requires a U.S. TIN; foreign TINs are insufficient for treaty claims on Form 8233

• This form must be an original; faxed, emailed, photocopied, etc. forms are not acceptable

• This form must be signed by both beneficial owner and payer

• This form must be sent to the IRS for verification of treaty claims within 5 days of payer’s acceptance of it (usually counted from the day the payer signs the form)

• IRS has 10 days to respond to the claim; if they do not respond, payer can assume treaty claim is valid and release funds without withholding


Form W-8BEN-E

• Entities, only

• Includes sections regarding FATCA payments and sections regarding Chapter 3 payments.

• If making a U.S. source FATCA income payment (payments arising out of lending, investing and insurance activities) to a non-U.S. entity, the entity must provide you with the necessary FATCA certifications on the form. • If payee does not provide necessary FATCA certifications, 30% FATCA

withholding is required; payment(s) is/are reported on Form 1042-S. • No Chapter 3 analysis is conducted


Form W-8BEN-E

• If making a FATCA payment and entity has provided necessary certifications, or when making a Chapter 3 payment that is not a FATCA payment, you must conduct a Chapter 3 analysis.

• Payments reportable under Chapter 3 are subject to 30% withholding absent a treaty claim. • (ECI, claimed on Form W-8ECI, is not subject to FATCA or Chapter 3

withholding; payment is still reported on Form 1042-S)


Form W-8BEN-E • If using form just to document vendor’s status as a non-U.S. entity, it needs to

complete only: • Line 1 (name) • Line 2 (country of incorporation or organization) • Line 4 (type of entity for Chapter 3 purposes) • Line 6 (permanent residence address) • Signature, printed name, date, capacity check box

• If the vendor is making a treaty claim on the payment, it must complete the above lines plus • Line 8 (U.S. TIN) or 9b (foreign TIN) • Part III (treaty section)

• 14a • 14b – revised Limitation on Benefits section; now beneficial owner must check a box indicating the type of

entity it is if there’s an LOB article in the treaty under which benefits are claimed • Line 15


Form W-8BEN-E Treaty Claim, cont

• Line 15 (comparable to Line 10 on Form W-8BEN) must be used only if the vendor is claiming treaty benefits that require that it to meet conditions not covered by the representations made in line 14.

• This line is generally not applicable to claiming treaty benefits under an interest or dividends (other than dividends subject to a preferential rate based on ownership) article of a treaty.

• The following are examples of persons who should complete this line. • Exempt organizations claiming treaty benefits under the exempt organization articles of the treaties

with Canada, Mexico, Germany, and the Netherlands. • Foreign corporations that are claiming a preferential rate applicable to dividends based on ownership

of a specific percentage of stock in the entity paying the dividend. • Persons claiming treaty benefits on royalties if the treaty contains different withholding rates for

different types of royalties. • Persons claiming treaty benefits under an “other income” treaty article.


Treaty Claims

• Income tax treaties can be found at: • https://www.irs.gov/Businesses/International-Businesses/United-States-

Income-Tax-Treaties---A-to-Z

• IRS Treaty Publication 901 includes treaty information • https://www.irs.gov/pub/irs-pdf/p901.pdf

• The summary treaty tables have been removed from Publication 515 (but you can still find them in older versions of the publication); they are also in the back of Pub 901 (latest version is April, 2013; the tables may be removed if/when the IRS updates the pub)

• Treaty summary tables can be good place to start the analysis but don’t apply a treaty benefit without reading the treaty.


https://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z

















https://www.irs.gov/pub/irs-pdf/p901.pdf




Some Treaty Issues

• Individuals making treaty claims on U.S. source services income do so on Form 8233 • Must be original; annual form; requires U.S. TIN; signed by payer and payee; sent to IRS for

verification • If treaty applies, withholding rate is 0 (but payment is still reported on Form 1042-S) • Watch for dollar limitations in treaties

• If on non-employee compensation (independent personal services), may not be safe to apply treaty benefit since you have no way of knowing whether recipient is receiving payments from other sources

• Be alert for retroactive loss dollar limitations (e.g., $10,000 retroactive loss means once payment reaches 10,000.01, treaty coverage is lost back to first cent; mostly applies to artists, athletes and entertainers)

• Dollar limitations on wages (dependent personal services) are generally ok; recipient should not be receiving wage payments from (i.e., working for) anyone else

• Note: anytime a non-U.S. citizen or non-”Green-” card holder is performing services in the U.S., the payer must determine whether work authorization is required • Not a tax issue • If services = work, then work authorization will be required • No such thing as an “independent contractor” “visa”


Treaty Claims

• If not an individual claiming treaty benefits on U.S. source services income, treaty claims are made on Form W-8BEN (individuals; non-services [e.g., royalties]) or Form W-8BEN-E (entities).

• TIN required (U.S. or foreign)

• For claims under a Business Profits Article (generally, replaces older “independent personal services” articles), Claimant must not have permanent establishment in the United States • If claimant has a PE, it should be filing U.S. income tax returns and providing

payers with Form W-8ECI • Forms W-8BEN and –BEN-E require an express statement that the claimant

has no permanent establishment in the United States


Business Profits, Withholding and Reporting

• With a valid Business Profits treaty claim, no federal tax withholding is required, but the payments are still reportable on the Form 1042-S.

• There is no income code for "business profits." • use income code 54 (other income)


States the do not Recognize Tax Treaties • Alabama

• Arkansas

• California

• Connecticut

• Hawaii

• Kansas

• Kentucky

• Maryland

• Mississippi

• Montana*

• New Jersey

• North Dakota*

• Pennsylvania

• * may recognize treaty benefits on a tax return, but does not recognize treaty for withholding tax purposes.

• Means you may be in a position to avoid federal income tax withholding but not state income tax withholding.


Points in Reviewing W-8BEN-E

• Country of incorporation or organization, fully written out and not abbreviated? If omitted, form invalid. • If abbreviated, need other documentary evidence that supports place of incorporation or organization.

• Foreign tax ID may be required if you are a financial institution.

• Must indicate type of Chapter 3 status (check one box only) in line 4. • Form invalid if not checked.

• Review to ensure status is correct based on what you know about the payee.

• If partnership is checked, W-8BEN-E may not be the correct form unless the partnership is a hybrid entity, and the form has a treaty claim. Otherwise W-8IMY required.


Points in Reviewing Form W-8BEN-E

• For disregarded entity (DE), the entity must be a hybrid and W-8BEN-E contain a treaty claim to be a valid form. • Otherwise the DE owner must submit the form; set up DE owner as the tax payee.

• If paying FATCA withholdable income, make sure the FATCA status is provided.

• Make sure the capacity to sign box is checked.


Points in Reviewing W-8BEN and W-8BEN-E • Full legal name needs to be on W-8 and equate

to your contract, master or other file records. Where the name varies, explore your records and contracts, then contact the payee to resolve. Make sure you know who your contract is with and who has earned the right to be paid.

─ If multiple address screens can be carried for the same master payee, you may have more than one legal payee, requiring W-8 from and 1042-S report to each separate payee.

• Have you received the right form for the business relationship? ─ If the contractor is an individual, a W-8BEN. ─ If an entity, a W-8BEN-E form. ─Other acceptable forms include a W-8ECI if

the entity has a U.S. EIN and files and pays taxes in the U.S.

─ If the entity acts as an agent or intermediary, or is a foreign partnership or Limited Liability Company or other flow-through entity, then a W-8IMY is required.


Points in Reviewing W-8BEN and W-8BEN-E • Track validity period to make sure it has not expired.

• Make sure signed under penalties of perjury by the beneficial owner.

• Every payee needs to provide their permanent address in the country in which resident in all cases. • “In-care-of” or “hold mail” invalidates the form.

• Mailing address may be blank if the mailing address is also the permanent address, but where a separate address is entered and treaty benefits are claimed the address should be in the same country through which the benefits are claimed in the treaty section of the form.

• U.S. addresses are disallowed for permanent and mailing addresses.

• Curing actions are necessary to rebut a reason to doubt the validity of the form where U.S. addresses or conflicting treaty addresses are entered.


Reasons to Know Claim of Foreign Status Unreliable (applies to both FATCA and Chapter 3)

• Current U.S. permanent or mailing address on certification or in records even if comes in anytime after account is opened.

• Classified as a U.S. person in customer files.

• U.S. telephone number if no other number outside of the U.S.

• U.S. place of birth. • Must be an unambiguous indication of a place of birth for the individual in the U.S.

• Special curing provisions.

• Standing instructions to pay amounts to an address or account inside the U.S. now only applies to offshore obligations (accounts).

• Specific requirements also attach to documentary evidence when required.


Curing Reasons to Doubt

• Get new Form W-8, or:

• To cure a U.S. address: For entities if no knowledge or reason to know the entity is a flow-through entity (partnership, simple or grantor trust), obtain documentation establishing foreign status that substantiates that the entity is actually organized or created under the laws of a foreign country. Special rules apply if PFFI or RDC FFI acts as intermediary or when a flow-through entity.

• For individuals, obtain documentary evidence establishing foreign status that does not contain a U.S. address and a reasonable explanation, in writing, supporting the claim of foreign status (can use a check list).

• If involving U.S. place of birth must also obtain a copy of Certificate of Loss of Nationality or a reasonable written explanation of renunciation of U.S. citizenship or reason the individual did not obtain U.S. citizenship at birth.

• For individuals, if reason to doubt only triggered by classification as U.S. in account information, must only obtain documentary evidence establishing citizenship in foreign country.

• Other more complex curing required if treaty claim involved.


Curing Reasons to Doubt

• Inconsequential errors allowed if evidence in files, e.g., copy of a government-issued ID that clarifies country of residence if abbreviated on W-8BEN-E or where fail to print name on W-8BEN.

• W-8 received after payment: need signed affidavit stating certifications were accurate as of first payment unless W-8 received within 30 days of payment.

• If more than a year has passed, need both affidavit and documentary evidence of foreign and FATCA statuses.

• Documentary evidence must establish identity of person; have a permanent residence address unless already in your files, and have an individual’s country of residence or citizenship, or an entity’s country of permanent residence or place of incorporation or organization.

• Must also be government issued, such as a certificate of residence from tax official, individual’s government issued identification, or entity’s government documentation.


If You Can’t Cure the Reason to Doubt

• You must follow the “presumption rules” to determine what your payee is.


Presumption Rules • Income sourcing

• Withholding certificates do not document an income’s source; source is documented using other documentation

• Presumption always works against you • IRS presumes all income is from U.S. sources unless proven otherwise • To establish an income’s source as non-U.S., you need documentation (invoice, PO,

contract, etc.)

• WHO your vendor is: U.S. or non-U.S. • These presumption rules address whether you should presume your payee to be U.S.

(1099) or non-U.S. (1042-S). • They come into play when you don’t have a withholding certificate (W-9; W-8s; 8233)

from a vendor/beneficial owner, or when you must question a claim on a withholding certificate that you are unable to resolve.


Presumption Rules About WHO and WHAT Your Payee/Vendor/Beneficial Owner Is

• Individual or estate? If account title or in information in customer file indicates individual or estate.

• Trust? if entity title or account information indicates a trust, presume grantor trust only if U.S. settlor and have settlor’s TIN and U.S. address (1099 report); all others treat as complex trust.

• If exempt recipient for 1099 purposes: • For FATCA withholdable income, presume foreign even if no foreign indicators for following exempt

recipients: corporation, foreign government, international organization, foreign central bank of issue, financial institution, nominee or custodian, broker or swap dealer. [Under Reg.§1.6049-4(c)(1)(ii)]

• Must get W-9 forms (or other allowable documentation) for new accounts on and after December 31, 2014, if paying FATCA withholdable income or presume foreign defaulting to 30% FATCA withholding as a NPFFI. • This presumption can work against you, and is why you want to get Forms W-9 from your U.S. vendors.

• There are also other reasons, besides this FATCA presumption, you may need a Form W-9 from your U.S. vendors.


Presumption Rules • When paying FATCA and Chapter 3 withholdable income to other exempt recipients not in the

special list on the previous slide, and when paying only Chapter 3 withholdable income to the special list of exempt recipients, presume the payee is foreign only if there is:

• EIN beginning with “98”,

• Communications mailed to foreign address,

• Name that indicates an entity on the per se list of foreign corporations in Reg. §301.7701-2(b)(8)(i) (other than a name which contains the designation “corporation” or “company”), • SA, PLC, Ag, others, or

• After June 30, 2014, the only telephone number provided is outside of the U.S.

• Where you cannot treat a payee as an exempt recipient, then the payee is presumed to be a partnership or, if applicable under the trust rules above, a complex trust.


New Form W-8BEN-E

• One change is to obtain the reason a treaty benefit claimant believes it satisfies the Limitation on Benefits requirement of the tax treaty under which the entity claims a reduced rate of U.S. tax withholding.

• Limitation on Benefits provisions in income tax treaties are intended to prevent a foreign entity with U.S.-source income, resident in a country that doesn’t have an attractive income tax treaty with the United States, from claiming a U.S. tax reduction under a third country’s treaty through a shell entity the foreign entity sets up in the third country.


Limitation on Benefits

• There are fact-based tests of whether a foreign entity meets the Limitation on Benefits provisions of a particular treaty, and they vary among treaties. • The payer doesn’t have knowledge of whether an entity meets the requirements,

so for years there has been a simple checkbox on the W-8 form that says the foreign beneficial owner meets the Limitation on Benefits provision “if applicable.”

• Now that is changing and your entity payee with a treaty claim will have to check one of 11 new boxes in Part III to specify which Limitation on Benefits provision it meets.


New Entity Type for FATCA • In line 5, Chapter 4 Status, the new form has 32 checkboxes from which an

entity that will be receiving income subject to the FATCA rules must select the one which correctly discloses its FATCA status.

• This is one more checkbox than the 2014 W-8BEN-E provided. • The new checkbox is for an “Account that is not a financial account.”

• Under Reg. sec. 1.1471-5(b)(2), this could mean certain savings accounts and retirement or pension accounts, certain term life insurance contracts, certain escrow accounts and accounts held by estates, or a type of account that is not treated as a “financial account” under special terms of an intergovernmental agreement (IGA) between the U.S. and another jurisdiction.

• The new Instructions don’t provide much explanation of “account that is not a financial account” so the entity completing the W-8BEN-E will need to be informed about the 1.1471-5(b)(2) regulations.


More Space for GIINs and U.S. Owners of Passive NFFEs

• The new form provides a more adequate amount of space to accommodate an entity’s GIIN, which will be appreciated by anyone who fills out the form on paper.

• The form is still eight pages long and in fact has been extended the full length of the eighth page by the addition of Part XXIX with spaces for listing Substantial U.S. Owners of Passive NFFE – the name, address and tax ID number of up to 10 owners (a separate statement can be attached if there are more than 10).


Form W-8EXP

• Form W-8EXP has very limited application • In general, payments to a foreign government (including a foreign central

bank of issue wholly-owned by a foreign sovereign) from investments in the United States in stocks, bonds, other domestic securities, financial instruments held in the execution of governmental financial or monetary policy, and interest on deposits in banks in the United States are exempt from withholding.

• Other foreign tax-exempt organizations must be exempt under 501(c). • Attach IRS exemption letter or opinion of counsel that would be if applied.

• If a Form W-8EXP crosses your desk, if it very likely the wrong form. • Assume it’s incorrect until established otherwise.


Form W-8ECI – Income Effectively Connected to the Conduct of a Trade or Business in the U.S. (“ECI”)

• Form W-8ECI is used by a foreign person: • to claim that the income is effectively connected with the conduct of a

trade or business in the U.S.

• to claim beneficial ownership of the income

• to state that the income is includible in the payee’s U.S. gross income (to be included in a U.S. tax return)

• to establish foreign status (remember a foreign company cannot sign a W-9)


What Is “Effectively Connected Income” or “ECI”?

• Usually all non-passive income from U.S. sources when the party is engaged in the conduct of a trade or business in the U.S. (but can include passive income like royalties if trade or business related)

• ECI is income that is effectively connected with a U.S. trade or business (“ECI”) • Involves business activity in the U.S., e.g., construction, transportation,

engineering, consulting, retail store owner

• Subject to much the same rules as U.S. taxpayers Taxed at marginal rates just like a U.S. taxpayer

Requires filing U.S. tax returns, i.e., 1040NR, 1120F

• ECI is exempt from FATCA


Processing Form W-8ECI

• All ECI listed on the W-8ECI regardless of type is subject to special Form 1042-S reporting

even though not subject to 30% withholding.

• 1042-S even includes passive income like bank deposit interest as long as listed on the W-8ECI.

• W-8ECI must have a U.S. TIN to be valid.

• W-8ECI requires payees to be registered as U.S. taxpayers, and to certify that they are

meeting U.S. tax obligations as to the income received on their own U.S. tax returns.

• No need to withhold, but still need to report on Form 1042-S so IRS can match ECI against

the payee’s U.S. tax return to verify obligations are being met.


Form W-8IMY

• Intermediaries and agents

• A note on agents


Payments to Literary Agents • A U.S. publisher who makes royalty payments to a U.S. literary agent for the rights

to a U.S. author’s book or other literary composition must file a Form 1099-MISC with respect to the payments to the literary agent unless the literary agent is a corporation.

• In addition, the literary agent (whether or not a corporation) who receives such payments and forwards all or part of such payments to the author must file a Form 1099-MISC reporting the gross amount of royalty payments to the author.

• The author must file a Form 1099-MISC to his/her agent for the amount of withheld commissions, unless the agent is incorporated.

• But 1042 rules vary from this result!

• See Rev. Rul. 2004-46


Payments to a U.S. Agent of a Foreign Person

• If actual knowledge that U.S. person receives payment as an agent for a foreign person and the agent is not a U.S. financial institution.

• Then you must treat the payment as made to a foreign person, even if involving a literary agent.

• Get W-8BEN from beneficial owner and treat payment as made to beneficial foreign owner on 1042-S.

• Special rules for agents that are financial institutions or insurance companies, or with the appropriate power of attorney – Form 2848.


Payments to a Foreign Agent of a Foreign Person – Form W-8IMY

• You are required to receive a Form W-8IMY from: • A foreign agent of a foreign person who performs independent services for you in the U.S.

• From IRS perspective, the Form W-8IMY is the vehicle that allows an intermediary to let the payer/withholding agent know that it is not the beneficial owner.

• In practice, intermediaries, outside of the financial area, don’t like to let payers/withholding agents know that they are intermediaries.

• For purposes of Form W-8IMY, an intermediary “is any person that acts . . . as an agent for another person. . .” (See IMY instructions).


When Attachments Are Required – W-8IMY

• A foreign agent, foreign non-qualified intermediary, or foreign non-

withholding partnership, trust or estate submitting a Form W-8IMY

must include:

• A statement that allows the withholding agent to correctly allocate the payment

to the actual beneficial owners and enough information to complete the 1042-S

as to the beneficial owners.

• Copies of Forms W-8BEN and W-9 from the beneficial owners.

• Required to look at attachments and forms and to apply “reason to doubt” rules


Chapter 3 v Chapter 4 • Chapter 3 governs the income tax obligations of non-U.S. persons

who are earning or receiving U.S. source income. • Since it is expected that most non-U.S. persons earning or receiving U.S. source

income will not be filing U.S. income tax returns, the onus is on the payer (withholding agent) to withhold the tax at the time of the payment (30%).

• Chapter 4’s focus is on ensuring that U.S. persons fulfill their income tax obligations. • Requires FFIs and certain NFFEs to certify that they are sharing information on their

U.S. account holders with the U.S. tax authorities; if they don’t certify this, FATCA payments you make to these payees will be subject to 30% withholding (practical effect is that these payees will not be able to participate in U.S. stock market).

• Purpose is to make it difficult for U.S. taxpayers to hide income from U.S. tax authorities by offshoring it and not divulging it on their tax returns (e.g., the Cayman Islands financial institution will divulge it to the U.S. tax authorities for them).


Fact Pattern

• Your organization has hired a Canadian corporation to conduct an on-site compliance review to determine whether you are meeting your Canadian tax reporting obligations.

• This compliance review will be conducted in your U.S. offices.

• The Canadian corporation has provided you with a Form W-8BEN-E that includes a U.S. TIN but that does not make any treaty claims. Which of the following choices is correct?

a) The payment is not reportable as the payee is a corporation.

b) The payment is reportable on Form 1042-S but is not subject to 30% withholding.

c) The payment is subject to 30% withholding and is reportable on Form 1042-S.

d) None of the above.


Fact Pattern

• Your organization has hired a Canadian corporation to conduct an on-site compliance review to determine whether you are meeting your Canadian tax reporting obligations.

• This compliance review will be conducted in your U.S. offices.

• The Canadian corporation has provided you with a Form W-8ECI that includes a U.S. TIN and the form is otherwise reliable. Which of the following choices is correct?

a) The payment is not reportable as the payee is a corporation.

b) The payment is reportable on Form 1042-S but is not subject to 30% withholding.

c) The payment is subject to 30% withholding and is reportable on Form 1042-S.

d) None of the above.


Let’s Jump in with Some More Examples

• You have arranged for Prince Albert of Monaco to come and share his experiences and will pay him a $120,000 honorarium for his efforts.

• You have arranged for the use of software from a German developer for $75,000 a year which you plan to integrate in your research hardware and will use in the U.S. and around the world.

• What are the issues?


Some Issues • Prince Albert

• No FATCA analysis is required as he is an individual. • Is work authorization necessary? • Resident or non-resident alien? • What type of payment is he receiving? • What is the source of the income? • Income tax treaty? • Withholding required? • Reporting required? • What documentation is required?

• Software • Is the company U.S. or non U.S.? • What type of payment is this? • Is this a FATCA payment? • What is the source of the income? • Income tax treaty? • Withholding required? • Reporting required? • What documentation is required?


Determining Who’s Who Individuals

• Citizenship does not matter, unless your payee is a U.S. citizen. • If a U.S. citizen, standard W-2 and 1099 reporting rules apply regardless of

where in the world your payee is located or where in the world the income is earned or generated.

• Why? • U.S. taxes its citizens (and RESIDENTS) on their worldwide income


Tax Residency for Individuals

• For non U.S. citizens, you need to know their country of tax residency, which may or may not be their country of citizenship.


Example

• French citizen residing in Germany • Citizenship is France, but residency is Germany

• This determination will affect whether an income tax treaty is available or can be applied.

• If a treaty is available, which one?

• Probably the U.S.-Germany treaty – not the U.S.-France treaty.


Categories of Income

• Payments for services • Compensation

o Wages o Nonemployee comp

• What we call these payments doesn’t matter • Honoraria • Stipends • Scholarships • Fellowships • Prizes • Awards, etc.

• Subject to income and employment taxes.

• No services • Rent

• Royalties

• Interest

• Dividends

• Scholarships/fellowships

• Prizes and awards

• Others, etc.

• Subject to income or capital gains taxes; not subject to employment taxes.


Services • If services are required in order for the recipient to obtain the payment (includes

waivers of payment), then you must treat the payment as compensation.

• Watch mis-classification of employees! Wages go on W-2, W-4 is also different.

• You will have to determine whether the recipient is, according to IRS rules, an

employee or nonemployee.

• Payments made to students, teachers, and researchers in exchange for the performance of

services (e.g., teaching, research, others, etc.) and most others you sponsor for services, such as

employees present in H1B status, will generally be treated as wages.

• Remember that anytime you have a non-U.S. citizen/non-“Green-”card holder, you must

address whether work authorization is required.

• If services = work, work authorization is required.


Two Tests To Determine Residency

• Citizenship includes naturalized citizen.

• Residents fall under 2 tests:

• “Green card” test o Relatively easy to apply

o People who have green cards will know and tell you

• Substantial Presence Test o The trickier test


Substantial Presence Test

• Yearly test – two parts: • Be physically present in the U.S. for 31 days in the current

year, and

• Be physically present in the U.S. for a total of 183 days during a 3-year period counting: • All the days present in the current year,

• 1/3 of days present in the immediately previous year, and

• 1/6 of days present in the next previous year.



• Some individuals are exempt and some days do not count.

• If an individual is only present in the U.S. each year 123 days or fewer, he or she will never meet the Substantial Presence test.



• For example: John is physically present in the U.S. for a total of 120 days in each of 2014, 2015, and 2016. If you were testing residency for tax year 2016, you would count:

• 120 days in 2016,

• 40 days in 2015, and

• 20 days in 2014.

• Since the 3 year total is only 180 days (less than 183 days), John would not be considered a tax resident for 2016.

• If John is expected to pass the SPT in 2016, treat him as a resident alien (1099) from January 1st. • Status as U.S. resident is retroactive to the beginning of the year when the SPT is

passed. © 2007-2016 COKALA Tax Information Reporting Solutions, LLC 70

Individuals Exempt from Substantial Presence Test

• If an individual has an exempt status, time spent in U.S. does not count toward the 183 days.

• Result: • Not considered a U.S. resident even though in the U.S. for more

than 183 days during the exempt period and

• Only subject to taxation on U.S. source income.


Individuals Exempt from Substantial Presence Test

• Foreign government-related individual (and immediate

family):

• Professional athlete but only to compete in a charitable

sports event. Individual must file Form 8843 to claim

exemption.

• Foreign students, teachers, researchers if F, J, M or Q

non-immigrant status.

• Time limitation on exemption from SPT


Days Exempt from SPT

• Do not count toward the substantial presence test: • Regular daily commute to work in U.S. from residence in

Canada or Mexico (more than 75% of the work days during working period and can be seasonal)

• Less than 24 hour period in transit between two places outside the U.S. (e.g., stuck in an airport, but business meeting will reclassify)

• Days in U.S. as a crew member of foreign vessel

• Days unable to leave because of a medical condition that developed while in the U.S. (requires Form 8843)


Information Gathering

• You will have to ask your payees the right questions to determine their status.

• Means much information gathering, followed by analysis of the information. • You are responsible for making the determination based on

information provided by your payees.


Outcome

• What the exempt days issue means for SPT purposes is that you may be paying someone who has been physically present in the U.S. for years, but is still treated as if they were a non resident.

• This doesn’t mean they are exempt from U.S. tax. • It means they are not taxed on worldwide income, but are taxed

on U.S. source income.

• It means they are subject to special W-4/W-2 (employee) rules and/or to the 8233/W-8/1042-S rules.

• It means they can still claim treaty benefits, if the treaty allows.


What if your payee is not an individual?

• What if you are paying an entity (company, trust, estate, LLC, corporation, etc.)?

• Then you must determine under the law of which country that entity is formed/organized.

• If your beneficial owner has in its name a per se foreign corporate indicator, you MUST treat it as non-U.S.

• SA, Ag, PLC, others listed in I.R.C. 7701 (in your materials).

• If organized under U.S. law (50 states plus DC), treat as U.S. payee

• Standard 1099 rules

• Worldwide income

• If organized under the law of a country other than the U.S., treat the payee as a non U.S. person.

• 1042-S reporting

• U.S. source income

• Apply FATCA and Chapter 3 withholding rules


Puerto Rico

• Treat PR as a foreign country for tax reporting determinations,

except when dealing with individuals born in PR.

• Individuals born in PR are U.S. citizens.

• But companies formed under Puerto Rican laws are foreign

persons (Form W-8BEN and Form 1042/1042-S with

application of NRA withholding.)

• In addition, there can be branches of foreign corporations

located in Puerto Rico.

• Reminder: A domestic corporation is created under the laws of the

U.S., any of its states and DC (does not include possessions).


Guam, Northern Mariana Islands, U.S. Virgin Islands, and American Samoa • Corporations formed under laws of Guam, Northern Mariana

Islands, U.S. Virgin Islands, and American Samoa are subject to special ownership and effectively connected income tests. See Pub. 515.

• Can be a considered a foreign or a domestic corporation for purposes of withholding.

• Documentation (W-8 or W-9) is critical to the determination.


Sourcing Rules

• Basic Rules • Source is immaterial for payments to U.S. persons, as they are

taxed on worldwide income.

• Source is important for non U.S. persons, because they are subject to U.S. tax only on U.S. source income.


Source for Services

• You issue a check from your Chicago IL office to an individual who is writing a book for you in Canada.

• What are the issues?


Issues

• Is your payee U.S. or non U.S.? • If U.S., standard W-9, 1099 rules apply.

• If non U.S.? o What is source of income?


Issues • Canada

• Source of payment is U.S.; source of income is Canada.

• Reporting or withholding?

• No – non U.S. source income paid to non U.S. person is not subject to reporting or withholding.

• But how do you explain to the IRS auditor why you didn’t report payment on the 1099? • Have the W-8BEN on file from the payee or be able to explain why you were

permitted to presume the payee is non-U.S. using the presumption rules.

• This example assumes that you will own the work once completed, and will not be paying for any rights to reprint it, etc. • If you do not own the finished work, but are only paying for the right to use it, you

will have a royalty situation.


What if it’s a royalty payment?

• What’s the source of income?


Royalty

• Where the item is used.

• So if you are paying to re-print or otherwise use the material in the U.S., you would be making a payment of U.S. source income to a non U.S. person. • Form 1042-S reporting and 30% withholding.

o 30% withholding can be reduced or eliminated through tax treaty.

o Payee claims benefit on Form W-8BEN or BEN-E


Purchase Invoices

• Payments for parts, materials, merchandise, and similar charges that are part of the material pricing are not subject to NRA withholding. • Review invoice to insure that a portion was not for personal

services, i.e. training of your employees, installation of equipment.

• If these are a large part of your business, you might think about a prototype invoice, or online invoicing input and require it of your vendors.


Purchase Invoices

• Trouble zones:

• Subject to 1042 withholding if purchase is incidental to payments for

services unless invoice breaks out (same as 1099-MISC rule)

• Watch out for interest charges in installments: interest is subject to 1042

withholding rules.

• Interest payments are sourced based on residence of the payer, so if it’s your

organization in the U.S. making these interest payments, the amounts are subject

to 30% withholding unless payee is claiming ECI or a treaty benefit.

• This type of interest is not a FATCA payment.

• Warranty payments = services and are subject to 1042 withholding

• Services income is sourced based on where services are performed.

• If the services are performed in the U.S., the amounts are subject to 30%

withholding unless payee is claiming ECI or a treaty benefit.


New Technologies Make Classifying Income Harder

• Income must be classified in order to source: • Hard process for transactions involving digitized information, such

as computer programs, books, music, or images?

• The distinction gets blurred between:

o Royalty income,

o Rental income,

o Service fees, or

o Proceeds from sales of goods


Purchase v. Royalties: Digital Books

• For example, someone wanting ten copies of a bound book will buy ten copies from a publisher, but someone wanting ten copies of an electronic book may simply purchase one copy and acquire the right to make nine additional copies.

• Right to make reproductions is a right reserved to the copyright holder and by allowing a third party to make reproductions, the payment is, at least in part, in consideration for the use of the copyright. (Royalties)


Services v. Royalties: Musical Works

• Right to copy and distribute musical works is royalty income and not services or purchase where:

• U.S. publisher had a limited right to author's future works, not the worldwide copyright and all of the rights associated with it. (Not a purchase.)

• The contract did not dictate to the author specific writing requirements. (No employment relationship)

• The IRS believed that the arrangement was not an employment contract or contract for the rendition of personal services, but rather the transfer of the right to use the music in exchange for a royalty payment.

• CCA 003745, March 7, 1995


Sourcing Personal Services within and without the U.S.

• All compensation for services performed in the U.S. are considered to be from sources in the United States.

• If personal services are performed both inside and outside the United States, you must figure the amount of income that is for services performed in the U.S.

• You usually do this on a time basis by multiplying the total amount of compensation by the fraction:

Number of days performed services in the U.S. Total number of days of service for which paid


Sourcing Personal Services

• Example from IRS: Jean Blanc, a nonresident alien, is a professional hockey player with a U.S. hockey club. Under Jean's contract, he received $98,500 for 242 days of play during the year. This includes days spent at pre-season training camp, days during the regular season, and playoff game days. Of the 242 days, Jean spent 194 days performing services in the United States and 48 days playing hockey in Canada. Jean's U.S. source income is $78,963, figured as follows:

• 194 divided by 242 times $98,500 equals $78,963


Software Purchases

Goods, licenses, royalties, rent? I. Transfer of a copyright right

A.Transferee acquires substantially all rights = sale B.Transferee acquires at least one of the rights = license = royalty payment C. Copyright Rights

A. The right to make copies of the computer program for purposes of distribution to the public by sale or other transfer of ownership, or by rental, lease or lending;

B. The right to prepare derivative computer programs based upon the copyrighted computer program;

C. The right to make a public performance of the computer program; or

D. The right to publicly display the computer program.


Software Purchases II. Transfer of a copyrighted article

A. No copyright rights are transferred B. If benefits and burdens of ownership transfer, transaction is the sale of a

copyrighted article = goods purchase 1. No requirement to renew the license to continue using the program 2. Most “canned” software purchases with shrink-wrapped license agreements will fall into

this category

C. If there is a time limitation on use of the program, transaction is generally a lease, not a goods purchase, and = rental income.

A. Rental income is sourced based on where the property is located. A. Where is the software located? Your server, someone else’s server, a network of servers, etc. B. Organizations that can definitively document that the software is on a server outside of the U.S.

will treat the payment as non-U.S. source income.

B. If location of software can’t be definitively documented as outside of the U.S., organizations will source the income to where the software is used; and if used in the U.S. = U.S. source income.


Transportation Income Aircraft and Ships v Trucks and Trains

• Aircraft and Ships • U.S. source transportation income derived from the international use of

aircraft and ships is often treated as U.S. gross transportation income (“USGTI”), which is subject to a 4% excise tax.

• Most take the position that USGTI subjected to 4% excise tax is not subject to the 30% withholding per Chapter 3, though IRS guidance on this issue is unclear.

• USGTI does not include income from the use of trucks and trains.


Transportation Income Aircraft and Ships v Trucks and Trains

• Trucks and Trains • Income from the use of trucks and trains is subject to the Chapter 3

requirements, including 30% withholding from the U.S. source portion of the income, and is reportable on Form 1042-S.

• Income from these cross-border activities must be allocated between the U.S. and non-U.S. portion.

• This approach often requires a detailed analysis of the underlying road and container logs, shipping schedules, maps, etc.

• Such an approach is extremely difficult and onerous for accounts payable departments to undertake.


© 2007-2016 COKALA Tax Information Reporting Solutions, LLC

96

At a Minimum, Complete These Boxes • 1 (income code)

• 2 (gross income)

• Box 3 OR 4 (chapter 3 or chapter 4 check boxes) • 3a (exemption code); 3b (tax rate)

• 4a (exemption code); 4b (tax rate)

• 7 (federal tax withheld)

• 12a-d • 12a: Withholding agent’s EIN • 12b: Chapter 3 status code (if making a Chapter 3 payment); if a FATCA payment • 12c: Chapter 4 status code (if making a Chapter 4 payment); if a Chapter 3 payment • 12d: Withholding Agent’s name • 12e: Withholding Agent’s Global Intermediary Identification Number (GIIN)

• GIIN is required if the withholding agent is an FFI • If a withholding agent is not an FFI and is filing Forms 1042-S electronically, it must “blank fill” this field.

• A blank-filled space is accomplished by using the space bar or its equivalent on a keyboard.

• 12f (Withholding agent’s country code) • Required if the WA is foreign

• Do not use US as a country (unless the intermediary identified in line 15 is a U.S. branch that is not treated as a U.S. person)

• 12h-i • 12h: Withholding agent’s address (number and street) • 12i: Withholding agent’s city or town, state or province, country, ZIP or foreign postal code

• 13d (recipient’s name)

• Other boxes must be completed if the nature of the payment requires it.


Complete These Boxes If . . . • The amount reported in box 2 is a withholdable payment (i.e., FATCA Payment), you must enter

information in boxes 4a (exemption code), 4b (tax rate), 12c (withholding agent’s Chapter 4 status code), and 13g (recipient’s Chapter 4 status code).

• The amount reported in box 2 is an amount subject to chapter 3 withholding, you must enter information in boxes 12b (withholding agent’s Chapter 3 status code) and 13f (recipient’s Chapter 3 status code).

• You use chapter 4 exemption code 15 (payee not subject to Chapter 4 withholding), 17 (foreign entity that assumes primary withholding responsibility), 18 (U.S. Payees—of participating FFI or registered deemed-compliant FFI), 19 (exempt from withholding under IGA), or 20 (dormant account), you must provide a chapter 4 status code for the recipient (box 13g).

• The amount reported in box 2 is a withholdable payment (i.e., FATCA payment) and an amount subject to chapter 3 withholding and the tax rate in box 4b is 00.00, you must enter information in boxes 3a (Chapter 3 exemption code) and 3b (Chapter 3 tax rate). If the rate entered in box 4b is 30.00, you may enter information in boxes 3a and 3b.


• File only one Form 1042 per EIN so consolidate all Form 1042-S information regardless of the number of different clients, branches, divisions, business units or types of income being paid.

• Make sure you use the same company name and EIN to file 1042 and 1042-S as well as make deposits. IRS does a name/EIN match against payers before accepting the 1042.

• If name and EIN do not match, they can’t enter the return in their records. So it is critical to provide correct information.

Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons


Determining Your Deposit Schedule

• Rule 1. If at the end of any quarter-monthly period the total amount of undeposited taxes is $2,000 or more, you must deposit the taxes within 3 business days after the end of the quarter-monthly period. • A quarter-monthly period ends on the 7th, 15th, 22nd, and last day of the month. • A business day is any day other than a Saturday, Sunday, or legal holiday in the District of

Columbia.

• Rule 2. If at the end of any month the total amount of undeposited taxes is at least $200 but less than $2,000, you must deposit the taxes within 15 days after the end of the month. • If you make a deposit of $2,000 or more during any month except December under rule 1,

carry over any end-of-the-month balance of less than $2,000 to the next month.

• If you make a deposit of $2,000 or more during December, any end-of-December balance of less than $2,000 should be remitted with your Form 1042 by March 15, 2017.


Determining Your Deposit Schedule

• 3. If at the end of a calendar year the total amount of undeposited taxes is less than $200, you may either pay the taxes with your Form 1042 or deposit the entire amount by March 15, 2017.


Timely Deposits

• For deposits made by EFTPS to be on time, you must initiate the deposit by 8 p.m. Eastern time the day before the date the deposit is due.

• If you fail to initiate a deposit transaction on EFTPS by 8 p.m. Eastern time the day before the date a deposit is due, you still can make your deposit on time by using the Federal Tax Application.

• If you ever need the same-day wire payment method, you will need to make arrangements with your financial institution ahead of time.


Due Dates • Form 1042

• March 15 • Can be extended with request.

• Form 7004

• Form 1042-S • Statements to payees and returns to IRS are due March 15 • Unlike with Forms 1099, IRS does not offer varying due dates based on whether payer is filing

to the IRS paper forms or electronically. • Specifications for electronic filing of Form 1042-S are found in Pub. 1187. • Paper forms require transmittal Form 1042-T.

• Deadline for filing with IRS can be extended 30 days • Form 8809 (same as for Forms 1099) • Will extend IRS filing deadline to 4/14

• If request extension, request for both Form 1042 and 1042-S.

• (Extension to mail or post payee statements is not automatic; requires letter explaining need for extension and is not always granted.)


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