2016 Version of Form 1042-S and Form Instructions

2016 Version of Form 1042-S and Form Instructions

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Withholding agents, including Qualified Intermediaries, that make U.S. sourced payments to foreign persons (including persons presumed to be foreign) or those included in a U.S. payee pool that are reportable under chapters 3 and 4 must file Form 1042-S regardless of whether tax was withheld.

The face of the 2016 version of Form 1042-S contains new fields and new codes; in addition, a significant number of the existing fields have been renumbered. In addition, the IRS removed dividend income code 21 (gross income-capital gain dividends), provided new guidance on substitute forms, implemented account-by-account reporting, and announced the permanent extension of Regulated Investment Companies (RICs) as qualified investment entities under FIRPTA.

New fields

  1. Box 13j (Limitation on Benefits (LOB codes))
    The 2016 Form 1042-S requires withholding agents that withhold using reduced treaty rates to include a LOB code for the recipient in Box 13j. LOB provisions contain specific tests that must be met in a particular country’s tax treaty in order to receive a reduced rate of withholding. These LOB codes are now aligned with the new check boxes that have been added to Part III (Claim of Tax Treaty Benefits) of the 2016 Form W-8BEN-E. Pooled Chapter 3 reporting for QIs however does not require an LOB code.
  2. Boxes 16d and 16e (Payer’s Chapter 3 & 4 status code)
    The 2016 Form 1042-S requires a payer’s chapter 3 and chapter 4 status codes in boxes 16d and 16e when an authorized agent is acting as a withholding agent on behalf of a payer.
  3. New Chapter 3 and Chapter 4 Withholding Agent status codes
    The 2016 version of Form 1042-S includes a new chapter 3 status code (code 34) and new chapter 4 status code (code 50) for payments made by a foreign branch of a U.S. financial institution.

    KPMG Observations
    For payments made by a foreign branch of a U.S. financial institution, the withholding agent should use chapter 3 status code 34 (U.S. Withholding Agent-Foreign branch of FI) instead of status code 01 (U.S. Withholding Agent-FI) and use chapter 4 status code 50 (U.S. Withholding Agent-Foreign branch of FI) instead of status code 01 (U.S. Withholding Agent-FI).

New/additional guidance

  1. Box 13k (Recipient’s Account Number)
    For recipients that do not have an assigned account number, the IRS offers financial institutions the option of assigning unique form identifying numbers for Forms 1042-S filed in 2016. This unique identifier must be exactly 10 digits in length and cannot be the recipient’s U.S. or foreign TIN.

    KPMG Observations
    Beginning in 2017, withholding agents will be required to assign unique identifying numbers to each Form 1042-S they file; however, it is not clear whether the IRS intends to create a new box for this unique identifying number. For tax year 2016, withholding agents may report unique identifying numbers in Box 13k for recipients that do not have an assigned account number.
  2. Substitute Forms 1042-S
    The 2016 Form 1042-S Instructions provides new guidance on substitute tax forms. A withholding agent may furnish a substitute Form 1042-S to a recipient as long as the substitute form conforms to the format and size of the official IRS form and contains the same information as the copy filed with the IRS. In addition, the IRS permits the adjustment of the size of a substitute Form 1042-S when presented on a landscape orientation. Nevertheless, withholding agents can no longer combine all income payments on a single substitute form 1042-S; rather, a withholding agent must issue separate substitute Form 1042-S for each type of payment of income.
  3. Account-by-account reporting by U.S. financial institutions
    The 2016 Instructions to the Form 1042-S no longer permit withholding agents that are U.S. financial institutions and U.S. branches to report on one Form 1042-S the same type of income paid to different financial accounts held by the same beneficial owner.
  4. Permanent Extension of RIC qualified investment entity treatment under FIRPTA
    The Instructions to the 2016 Form 1042-S provides that the treatment of regulated investment companies (RICs) as Qualified Investment Entities (QIEs) has been permanently extended under FIRPTA.

For Your Reference

For the 2016 versions of Form 1042-S and the form instructions click here:
https://www.irs.gov/pub/irs-pdf/f1042s.pdf and https://www.irs.gov/pub/irs-pdf/i1042s.pdf.
 

Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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