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Definition of a Withholding Agent Under Chapter 4 FATCA Reporting Requirements

October 1st, 2014 No comments

The expansion of the use of Form 1042-S has created a very broad definition of those who may be required to file the form.  This stems from the inclusion of Chapter 4 payments on the form as required under the Foreign Account Tax Compliance Act (FATCA).  As discussed, the purpose of FATCA is to locate and track foreign accounts held by US residents and taxpayers, to ensure that they are not evading taxes by holding assets offshore.

The Form 1042-S instructions provided by the IRS offer some guidance on how a withholding agent will be defined for Chapter 4 purposes, since that is the party that must file the form and make the withholding.  The definition is worth examining since it is so broad, many payers may unknowingly fall under the new classification.  The only clear exclusion to the 1042-S requirements are payments strictly confined to US borders or territories, in which case Form 1099 would be used.

Definition of Withholding Agent For Chapter 4

The definition begins with:  “…any person, US or foreign…who can disburse or make payments of an amount subject to withholding…under Chapter 4.”

The next part states:  “The withholding agent may be an individual, corporation, partnership, trust, association, or any other entity.”

This definition includes virtually anyone who can make a payment to a foreign account, even if no payment has yet been made.  This clearly includes typical financial institutions but also could be an individual or business making foreign payments.

Further, the definition continues to broaden:   “A person may be a withholding agent even if there is no requirement to withhold from a payment or if another person has already withheld the required amount from a payment.”  (emphasis added)

Under this definition, Form 1042-S has to be filed even if another agent withheld already, or if no withholding is required.  This is designed to capture payments made through intermediaries en route to the recipient, or if the payment falls under some exception to the withholding requirement.

Required Information and Data for All Agents and Intermediaries

Obviously, the definition is geared to tracking payments rather than simply reporting withholding amounts, and a review of the form shows that the changes for 2014 reflect this intention.  Box 8 requires reporting of total tax withheld by other agents, which seems nearly impossible to obtain unless all agents and payers are in close communication and sharing all withholding data with one another.

The form also requires all the identification numbers and location information for the primary withholding agent, as well as intermediary or flow through entities that may have been involved in payment or withholding (Boxes 12a to 13f and 14 through 16f).

Given the range of information required to complete the form accurately, anyone who has made any kind of payment from a US source to a foreign account should keep detailed records of payments, intermediaries and amounts withheld.  Due to the fact these are new requirements, the IRS will be lenient through 2016 with reporting as long as ‘good faith efforts’ are being made to comply.

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Withholding Income of Foreigners

July 3rd, 2014 No comments

Congress is serious about collecting information about, and taxes from, non-U.S. persons who earn U.S. income. The applicable law is the Foreign Account Tax Compliance Act, or FATCA, which has new provisions as of 2014. The purpose of FATCA is to ensure that withholding agents –foreign financial institutions and non-financial foreign entities — collect and report identifying information on withholdable payments to foreigners– nonresident aliens, foreign entities, foreign estates, publicly traded partnerships with foreign partners, and any other non-U.S. person or their agents. The IRS collects the information on Form 1042-S and imposes penalties for non-compliance.

FATCA Casts a Wide Net

FATCA affects just about every non-U.S. entity receiving most types of U.S. source income, including:

  • Dividends
  • Interest
  • Rents
  • Annuities
  • Wages, salaries and other compensations
  • Remunerations
  • Gambling winnings
  • Cancellation of indebtedness
  • Emoluments
  • Premiums
  • Capital gains

Foreign students attending classes in the U.S. do not have to report scholarship funds.

The Act requires agents to withhold a 30 percent tax on the U.S.-source income of foreigners unless the agent and/or payee provide the required information, including a Taxpayer Identification Number, or TIN. To escape the 30 percent withholding requirement, a foreign financial institution (FFI) can enter into an agreement with the U.S. Treasury that requires the FFI to specify:

  • Account numbers
  • Account-holder information
  • Account balance or value at year-end
  • Income paid or credited to the account

Account holders typically report identifying information using Form 8233 or Form W-8 BEN. Withholding agents provide this information using Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. Alternatively, agents can go all-in and fill out a Form 1099 for each account holder.

A New Chapter

The original provisions of FACTA, known as Chapter 3, went into effect in 2010. Chapter 4 is new for 2014 and is primarily aimed at individuals with offshore accounts. It extends the requirements of FFIs and certain non-financial foreign entities (NFFEs) to provide account-holder information to withholding agents. The kicker in Chapter 4 is that an FFI that fails to report withholding information won’t receive any credit or refund on the withholding it collects.

Form 1042-S

The IRS changed Form 1042-S in 2014 to accommodate Chapter 4 withholding. The form itself gathers copious information about:

  • Identity of the foreign person
  • Identity of the withholding agent
  • Exemption codes and tax rates
  • Net income
  • Amount withheld and repaid
  • The identity of any intermediate entities

The form references several types of identification codes, including taxpayer, employer, global intermediary and foreign tax. The form requires much fact-finding and reporting, and the IRS has issued alerts about significant error rates because of incorrect or missing information.

Form 1042-S must be filed with IRS by March 15. A copy of the form must be sent to the foreign person by that same date. The filer must also fill out Form 1042-T, Annual Summary and Transmittal of Forms 1042-S

Support

Withholding agents and others who must file Form1042-S can simplify the job by outsourcing the work to a service bureau or by buying software the uses data files (in Excel or CSV formats) to populate the forms and then file them electronically. Agents must file the form even if it doesn’t withhold tax because of the nature of the income or because of a tax treaty. By the way, legitimate residents of U.S. territories and possessions do not require Form 1042-S reporting if they are a U.S. citizen, resident alien or national. If you must fill out Form 1042-S, you must also file Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.

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