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IRS issues 2016 foreign person withholding Form 1042-S and its instructions

2016 Form 1042-S, Foreign Persons’ U.S. Source Income Subject to Withholding. 2016 Instructions to Form 1042-S, Foreign Persons’ U.S. Source Income Subject to Withholding.

IRS has issued the 2016 version of Form 1042-S, Foreign Persons’ U.S. Source Income Subject to Withholding, and the instructions for that form. The form requests additional information as compared to the 2015 form.

Background. In general, a withholding agent must file an information return on Form 1042-S to report amounts paid to foreign persons that are reportable under Chapter 3 and Chapter 4 of Subtitle A of the Code.

Chapter 3, entitled “Withholding of Tax on Nonresident Aliens and Foreign Corporations,” also applies to foreign exempt organizations, withholding on “effectively connected income” of partnerships, and Foreign Investment in Real Property Tax Act (FIRPTA) withholding. (See Code Sec. 1441 to Code Sec. 1446.)

Chapter 4, commonly known as the Foreign Account Tax Compliance Act (FATCA), essentially represents an international tax reporting regime, the object of which is to thwart efforts by U.S. persons to hide unreported income and assets offshore. (Code Sec. 1471 to Code Sec. 1474 .) It generally requires withholding agents to withhold tax on certain payments to a foreign financial institution (FFI), unless it has entered into a FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts. In addition, it also imposes withholding, documentation, and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities.

2016 Form 1042-S. 2016 Form 1042-S is to be used to report the items described above that are paid during 2016. Here are some of the ways that the 2016 form and instructions differ from their 2015 counterparts:

Changes in the format of the form. The form has two columns for both years, but the use of the columns, and thus the placement of particular boxes, has changed. Also, whereas for 2015, the boxes that provided identifying information for the recipient were boxes 13a-i, 16 and 17, for 2016, those boxes are boxes 13a-l.

New boxes on the form. The 2016 form contains the following new boxes:

  • Box 13j, LOB Code. Limitation on benefits (LOB) clauses in treaties are intended to prevent treaty shopping. LOB provisions apply a series of objective tests, and a resident of one of the countries that satisfies one of the tests will receive the treaty’s benefits.

A payor making a payment for which a beneficial owner that is an entity has claimed a reduced rate of withholding under an income tax treaty, and has provided documentation that establishes the LOB article under which the beneficial owner qualifies, should enter the applicable LOB code here. The instructions to Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), provide a description of each of the LOB codes.

Withholding agents are not, however, required to obtain new documentation unless they are otherwise required to renew such documentation.

  • Box 13k, Recipient’s Account Number. A payor that is a financial institution reporting amounts paid to its direct account holder with respect to an account the payor maintained at its U.S. office or U.S. branch, must report the recipient’s account number in box 13k. If the amount is paid through a nonqualified intermediary or flow-through entity, the payor is are not required to use this box.

As noted at “Account-by-account reporting by U.S. financial institutions,” below, a U.S. financial institution or a U.S. branch of a foreign financial institution maintaining an account within the U.S. is required to report payments on Form 1042-S. Those entities should report the identifying number assigned to such account (or its functional equivalent in the absence of an account number for the recipient) here.

In addition, withholding agents may choose to assign a unique identifying number for Forms 1042-S filed for recipients that do not have an assigned account number (such as an indirect account holder). This identifying number can be used, for example, to identify which information return is being corrected or amended when multiple information returns are filed by a withholding agent with respect to the same recipient. Requirements. The unique identifying number cannot be the recipient’s U.S. or foreign TIN. The unique identifying number must be numeric. The length of a given identifying number must be exactly 10 digits. For 2016, withholding agents may choose to provide a unique identifying number in box 13k, for Forms 1042-S filed for recipients that do not have an assigned account number (such as an indirect account holder).

  • Boxes 16d, Payer Ch. 3 status code, and 16e, Payer Ch. 4 status code. In 2016, as in past years, withholding agents must indicate which type (status) of agent they are, based on various codes that correspond to rules under Chapter 3 and Chapter 4. A payer is the person for whom the withholding agent acts as an authorized agent pursuant to an agreement whereby the withholding agent agrees to withhold and report a payment. In past years, payers did not have to indicate their Chapter 3 and Chapter 4 status codes on Form 1042-S. They must indicate those codes for 2016.

Substitute forms. A substitute form furnished to a recipient must conform in format and size to the official IRS form and contain the exact same information as the copy filed with IRS. However, the size of the form may be adjusted if the substitute form is presented on a landscape oriented page instead of portrait. Only one Form 1042-S may be submitted per page, regardless of orientation.

Account-by-account reporting by U.S. financial institutions. For amounts paid on or after Jan. 1, 2016, a U.S. financial institution or a U.S. branch of a foreign financial institution is required to report payments of the same type of income (as determined by the income code in box 1) made to multiple financial accounts held by the same beneficial owner at a U.S. office of such institution on a separate Form 1042-S for each account. For this purpose, a financial account is an account described in Reg. § 1.1471-5(b)(1).

Permanent extension of Regulated Investment Company (RIC) qualified investment entity treatment under FIRPTA. The form’s instructions for withholding on dispositions of U.S. real property interests by publicly traded trusts and qualified investment entities (QIEs)” has been amended to reflect changes made by the Protecting Americans from Tax Hikes (PATH) Act of 2015 (P.L. 114-113), which permanently extends the treatment of RICs as qualified investment entities.

Withholding agent status codes. As noted above, withholding agents must indicate which type (status) of agent they are, based on various codes that correspond to rules under Chapter 3 and Chapter 4. Beginning in 2016, withholding agents must enter both a Chapter 3 and Chapter 4 status code, in Boxes 12b and 12c, Withholding Agent’s Chapter 3 and Chapter 4 Status Code, regardless of the type of payment being made. Also, new status codes have been added under Chapter 3 (code 34) and Chapter 4 (code 50) for payments made by a foreign branch of a U.S. financial institution.

Recipient status codes. The 2016 instructions clarify which recipient code (Boxes 13f and 13g) to use (if any) in certain cases, including when a withholding agent reports a pooled reporting code or makes a payment to a U.S. branch or to a limited branch treated as a nonparticipating FFI.

Identification number truncation. A Taxpayer Identification Number (SSN or ITIN) must be truncated in the XXX-XX-nnnn format, if applicable. An Employer Identification Number must be truncated in the XX-XXXnnnn format, if applicable.

Hybrid and reverse hybrid entities. A hybrid entity means an entity that isn’t taxed as an association for U.S. tax purposes, but is subject to an income tax of a foreign country as a corporation (or otherwise at the entity level) either on its worldwide income or on a residence basis. (Code Sec. 894(c)(1)) A domestic reverse hybrid entity is a domestic entity that is treated as not fiscally transparent for U.S. tax purposes and as fiscally transparent under the laws of the interest holder’s jurisdiction, with respect to the item of income received by the domestic entity. (Reg. § 1.894-1(d)(2)(i))

The 2016 Form 1042-S instructions provide new guidance on how to report payments that are made to hybrid and reverse hybrid entities in cases in which treaty claims are being made.

References: For withholding under Chapter 3, see FTC 2d/FIN ¶  O-11900; United States Tax Reporter ¶  14,414. For withholding under FATCA, see Federal Tax Coordinator 2d ¶  O-13070  et seq.; United States Tax Reporter ¶  14,714  et seq.

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