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Draft 2014 Form 1042-S reflects FATCA rules

November 8, 2013

IRS issued a draft of Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, this past April and has now issued draft instructions for that form. The form and instructions contain numerous changes and additions, most of which reflect the fact that, effective for payments made after June 30, 2014, the Foreign Account Tax Compliance Act (FATCA) rules require withholding from foreign persons that wasn’t required in earlier years.

Background. Chapter 3 of the Code (Code Sec. 1441 through Code Sec. 1465) provides rules under which tax must be withheld from various types of payments made to nonresident aliens and foreign corporations

For 2013 and earlier tax years, Form 1042-S was used to report income subject to the Chapter 3 rules, and amounts withheld pursuant to those rules, to IRS and to the income recipients, much in the same way that forms in the Form 1099 series are used.

The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) added Chapter 4 (Code Sec. 1471 through Code Sec. 1474; FATCA) to the Code. Chapter 4 requires withholding agents to withhold 30% of certain payments to a foreign financial institution (FFI) unless the FFI has entered into an agreement with IRS to, among other things, report certain information with respect to U.S. accounts. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities. These rules apply to withholdable payments made after June 30, 2014. (See Weekly Alert ¶  6  07/18/2013)

Any foreign person that receives a “specified federal procurement payment” is subject to a tax equal to 2% of the amount of that payment. A “specified federal procurement payment” is any payment made under a contract with the U.S. for: (1) the provision of goods, if the goods are manufactured or produced in any country which is not a party to an international procurement agreement with the U.S.; or (2) the provision of services, if the services are provided in any country which is not a party to an international procurement agreement with the U.S. (Code Sec. 5000C)

In April, 2013, IRS issued a draft of 2014 Form 1042-S but did not issue draft instructions for that form at that time.

New draft 2014 Form 1042-S instructions clarify changes to the form. IRS has now issued draft instructions for 2014 Form 1042-S, which explain changes to the form, including:

 

…Additional boxes have been added to the form to accommodate reporting of payments and amounts withheld under FATCA and the reporting of an applicable exemption to the extent withholding under FATCA doesn’t apply;
…Beginning Jan. 1, 2014, U.S. and FFIs (but not other payors) that are required to report payments made under FATCA must electronically file Forms 1042-S, regardless of the number of 1042-S forms they are required to file;
…Specified federal procurement payments paid to foreign persons that are subject to withholding under Code Sec. 5000C must be reported on Form 1042-S.
…For payments of U.S. source income paid before July, 1, 2014, the withholding agent is not required to include on Form 1042-S the information required to report the payment for FATCA purposes. For example, if a withholding agent makes a U.S. source dividend payment before July 1, 2014, to a qualified intermediary (i.e., a FFI or similar entity that has entered into a withholding agreement with IRS), the withholding agent is not required to determine the FATCA status of such intermediary and is not required to complete the new FATCA boxes on Form 1042-S. If, however, the withholding agent makes another U.S. dividend payment after June 30, 2014, the withholding agent is required to complete a separate Form 1042-S for all such payments made after that date that includes the information required for reporting the payment for FATCA purposes.