Form 1042-S Compliance: Mastering Filing Challenges and Avoiding Steep Penalties

Transcription

1 Form 1042-S Compliance: Mastering Filing Challenges and Avoiding Steep Penalties Navigating Rules on Reporting and Withholding on U.S.-Source Income for Foreign Persons TUESDAY, DECEMBER 17, 2013, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection and phone line (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Respond to verification codes presented throughout the seminar. If you have not printed out the Official Record of Attendance, please print it now. (see Handouts tab in Conference Materials box on left-hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. Complete and submit the Official Record of Attendance for Continuing Education Credits, which is available on the program page along with the presentation materials. Instructions on how to return it are included on the form. To earn full credit, you must remain on the line for the entire program. WHOM TO CONTACT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Program: - On the web, use the chat box at the bottom left of the screen - On the phone, press *0 ( star zero) If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.

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4 Form 1042-S Compliance: Mastering Filing Challenges and Avoiding Steep Penalties Dec. 17, 2013 Adam Konrad, Reinhart Boerner Van Deuren Jill Dymtrow, Compliance Technologies International

5 Today s Program Compliance and Audit Strategies [Adam Konrad] Mechanics of 1042-S [Jill Dymtrow] Changes to 1042-S [Jill Dymtrow] Slide 6 Slide 23 Slide 24 Slide 39 Slide 40 Slide 46

6 Form 1042 Compliance and Audit Strategies: Withholding and Documentation Adam R. Konrad Reinhart Boerner Van Deuren s.c

7 Overview Withholding generally Exemptions from withholding Withholding agent responsibilities and documentation Presumptions Step-by-step analysis Draft forms W-8BEN and W-8BEN-E All rights reserved. Reinhart Boerner Van Deuren s.c.

8 No Withholding Unless Tax Due Bridgerock is a large Japanese tire maker, with a U.S. subsidiary, Windrock, that has gross revenues of $10 billion. When Bridgerock sells all of its Windrock shares, the sale should not be subject to any tax in the United States. Accordingly, no withholding is required All rights reserved. Reinhart Boerner Van Deuren s.c.

9 U.S. Source Income Interest paid by U.S. persons Dividends paid by U.S. corporations Services performed in the U.S. Rents where the property is used in the U.S. Royalties where the IP is used in the U.S. Sales of U.S. real property interests All rights reserved. Reinhart Boerner Van Deuren s.c.

10 Withholding on FDAP USCo pays a royalty to Hong Kong Company for intellectual property used in the United States. USCo must withhold 30% of the royalty. If USCo does not withhold on the royalty, USCo will be liable for the tax on that payment to the IRS All rights reserved. Reinhart Boerner Van Deuren s.c.

11 Exemptions from Withholding Effectively connected income Portfolio interest Bank deposit interest Treaty-based reductions All rights reserved. Reinhart Boerner Van Deuren s.c.

12 Additional Considerations Withholding on foreign partners Passive investments in U.S. real property (FIRPTA) All rights reserved. Reinhart Boerner Van Deuren s.c.

13 Proof of Residency U.S. payees provide a W-9 Non-U.S. payees provide: W-8BEN W-8ECI W-8IMY W-8EXP All rights reserved. Reinhart Boerner Van Deuren s.c.

14 Presumptions Classification Individual/trust/estate Corporation/"exempt recipient" Partnership U.S. or foreign (generally presume U.S.) All rights reserved. Reinhart Boerner Van Deuren s.c.

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16 Step-by-Step Analysis: Direct Payment ForCo AB (foreign corporation) USCo Inc. (U.S. corporation) On June 24, USCo Inc., a U.S. corporation, pays a $1,000,000 dividend to its sole shareholder, ForCo AB, a foreign corporation organized under the laws of Foronia. The applicable withholding rate is 5%, as provided in Article 10 of the tax treaty between the U.S. and Foronia All rights reserved. Reinhart Boerner Van Deuren s.c.

17 Direct Payment 1. ForCo provides a Form W-8BEN to USCo, certifying its status as a foreign corporation and eligibility for the 5% treaty withholding rate. 2. USCo withholds $50,000 (5% of the $1,000,000) and pays $950,000 to ForCo. 3. USCo files a Form 1042-S with the IRS and provides a copy to ForCo. 4. USCo files a Form 1042 with the IRS All rights reserved. Reinhart Boerner Van Deuren s.c.

18 ForCo AB (foreign corporation) Intermediaries: NQI NQI Same facts as Example I, except now USCo pays the dividend to an NQI, which remits the payment to ForCo AB. USCo Inc. (U.S. corporation) All rights reserved. Reinhart Boerner Van Deuren s.c.

19 Intermediaries: NQI 1. ForCo provides a Form W-8BEN to the NQI, certifying its status as a foreign corporation and eligibility for the 5% treaty withholding rate. 2. The NQI provides ForCo's Form W-8BEN, as well as a Form W-8IMY and a withholding statement to USCo. 3. USCo withholds $50,000 and pays $950,000 to the NQI. 4. The NQI remits the $950,000 to ForCo. 5. USCo files a Form 1042-S with the IRS and provides a copy to ForCo. The NQI, however, does not need to file a Form 1042-S, assuming it has provided USCo with all necessary information and has no reason to believe that USCo did not properly withhold (this is the "Multiple Withholding Agent Rule"). 6. USCo files a Form 1042 with the IRS; the NQI does not file a Form 1042 as it did not file a Form 1042-S All rights reserved. Reinhart Boerner Van Deuren s.c.

20 ForCo AB (foreign corporation) Intermediaries: QI QI Same facts as Example II, except the payment is made to a QI. USCo Inc. (U.S. corporation) All rights reserved. Reinhart Boerner Van Deuren s.c.

21 Intermediaries: QI 1. ForCo provides a Form W-8BEN to the QI, certifying its status as a foreign corporation and eligibility for the 5% treaty withholding rate. 2. The QI provides a Form W-8IMY and a withholding statement to USCo. 3. If the QI assumes primary responsibility for withholding, USCo pays $1,000,000 to the QI. 4. The QI withholds $50,000 and remits $950,000 to ForCo. 5. USCo files a Form 1042-S with the IRS naming the QI as the recipient, and provides a copy to the QI. 6. The QI files a Form 1042-S with the IRS naming ForCo as the recipient, and provides a copy to ForCo. 7. USCo and the QI each file a Form 1042 with the IRS All rights reserved. Reinhart Boerner Van Deuren s.c.

22 Draft Forms W-8BEN and W-8BEN-E Current form dates back to Draft form W-8BEN (individuals only) released without instructions in July Draft form W-8BEN-E (entities only) released without instructions in July Intent of changes appears to be to collect FATCA-related information All rights reserved. Reinhart Boerner Van Deuren s.c.

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24 2010 Compliance Technologies International, LLP. All rights reserved. This document is the property of Compliance Technologies International, LLP. The information contained herein is confidential. Unauthorized use and copying of this document are strictly forbidden.

25 Form 1042-S

26 Know WHAT You are Paying 26 It is essential to know the exact character and type of income that you are paying in order to report it correctly on a Form 1042-S. If you miss this, you are at risk for applying treaty rates that don t exist for the true type of income that you are paying. This could mean more than just a reporting error, and can leave you at risk for under-withholding exposure. 26

27 Know WHO You are Paying 27 You will need to apply the correct recipient code. You will also need to put the name of the beneficial owner on Line 13. In certain situations, the beneficial owner is not the actual name of the person you are paying, for example, when making payments to a foreign non-withholding partnership or trust. In this case, you are not paying the partnership or trust, you are paying the underlying owners. The name and status of the underlying owners belong in Line 13, and the name and address information of the trust/pship will go in Lines 17 through 20. If you don t know the name/identity of the underlying owner, then you report Unknown recipient in Line 13 (Recipient Code 20), and withholding should be done according to presumption rules (never less than 30% for unknown recipient). 27

28 Audit Alert: Do Your Docs Agree with Your Forms 1042-S? 28 Make sure that the documentation you have collected for your recipient agrees with the tax status you are listing on the Form 1042-S. Does the W-8BEN that your payee has provided claim the treaty that is awarded on the Form 1042-S? Is the BEN that has been provided valid? Is the W-8ECI or EXP completed correctly? This is an easy audit item for the IRS, and they WILL check. It s in the IRM. 28

29 Income Code is Key 29 Make sure that an income code is completed in Box 1. This must be a two digit number, and cannot be 00. Certain income codes can only be paid to certain entity types. Income codes that should only be used for individuals (recip code 01 or 09): Scholarship or fellowship grants- 15 Compensation for independent personal services- 16 Compensation for dependent personal services- 17 Compensation for teaching- 18 Compensation during studying and training- 19 Earnings as an artist or an athlete- 20 If you make a payment that seems as though it would fall under one of these descriptions to a non-individual, the income code used will generally be Other income (50). 29

30 Tax Rate versus Exemption Code 30 One of them must always be 00. If you have paid a reduced rate of withholding (less than 30%), the exemption code is still 00, unless the tax rate is 0%. A 15% withholding rate must show a 00 exemption code, not 04 (treaty). 30

31 The Tax Rate is a 4-digit Code 31 And not just any 4-digit Code Your only options for 2013 filing are: 00.00, 04.00, 04.90, 04.95, 05.00, 07.00, 08.00, 10.00, 12.00, 12.50, 14.00, 15.00, 17.50, 20.00, 25.00, 27.50, 28.00, 30.00, and Although many filers will only use three: 00.00, 15.00, and

32 Boxes 7 and 9 Must Always be Completed 32 The filer must complete the amount of Federal Tax Withheld and Total Withholding Credit even if they are zero. They cannot be left blank. Box 7 should be the amount of tax that was actually withheld. Sometimes this will not equal Box 2 (Gross Income) x Box 5 (Tax Rate). This is the payee s receipt for the amount of tax that was actually withheld from their payment. 32

33 Tax Rate versus Income Code versus Recipient s U.S. TIN 33 There are certain tax rates that only apply to certain income codes, according to the treaty rates found on page 38 of the IRS Publication 515. There are many income types that require a U.S. TIN to claim a reduced rate of withholding under a tax treaty. Unless you are paying one of the exceptions (generally dividends and interest from publicly traded securities, mutual fund divs, etc ) you are raising a red flag if you have provided a reduced rate of withholding but not a U.S. TIN. Side note: Payments of ECI (exemption code 01) will always require a TIN. However, according to the presumption rules there are certain times where you will be required to presume income to be ECI, and you will report as such without a TIN. 33

34 Exemption Code versus Recipient Code 34 There are certain exemption codes that can only be used with certain recipient codes. The QI exemption codes (06 and 09), only apply to recipient code 12 (Qualified Intermediary). The Withholding Foreign Partnership/Withholding Foreign Trust exemption code (07) only applies to recipient code 04 (WFP or WFT). Both of these entity types/exemption codes require a U.S. TIN to be used. Further, the TIN must be in a certain range that signifies a QI or WFT/WFP. Sidenote: Don t use exemption code 04 (tax treaty) unless the recipient s country code is a country that has a tax treaty with the U.S. 34

35 What if You Can t File On Time? 35 File (automatic) Extensions: Form Extends the Form 1042-S filing deadline by 30 days Does not require a reason for the extension unless the filer is requesting a second 30 day extension. Must be signed by the filer. You can file Form 8809 electronically using the FIRE system If you are requesting an extension for more than one filer, you can attach a list of names and TINs of the additional filers. A written request is required to extend the time to file the Form 1042-S recipient copies There is no IRS form for extending the time to file recipient copies of Form 1042-S. Requests must be sent to: IRS Enterprise Computer Center Martinsburg, Information Reporting Program, Attn: Extension of Time Coordinator, 240 Murall Drive, Kearneysville, WV Must include the requestor s Name TIN and address. 35

36 Correcting Forms 1042-S 36 If you realize you have filed a Form 1042-S with an error, you must correct the Form as soon as possible. For certain types of corrections you must file 2 Forms 1042-S, one to zero-out your original file one to correct the original. For others, you just file one amended form. The instructions for correcting the forms 1042-S are in Pub

37 Correcting Forms 1042-S (continued) 37 If you have a type 1 error, you prepare the return correctly, and mark the amended box and file the form. If the form was submitted in error, produce the same exact form except the payment amount will be zero. You will file only one form 1042-S to correct a type 1error. A type 1 error is defined as one or any combination of the following: incorrect money amount; incorrect codes or check boxes; incorrect payor address; or a form was submitted in error. 37

38 Correcting Forms 1042-S (continued, again) 38 If you have a type 2 error, you prepare the file as you originally prepare it, except enter zeros in all payment amounts, and mark it amended. Then prepare a new file with the correct information. You will not mark this file "amended." A type 2 error is defined as one or any combination of the following: no recipient TIN; incorrect recipient TIN; incorrect recipient name; incorrect recipient address. 38

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41 Good news: There are no changes to the form 1042-S for Bad news: This is the calm before the storm. 41

42 is when the FATCA reporting requirement on Forms S begins. These Forms will be filed in the Spring of Forms 1042-S will be vastly different from the 2012/2013 version. In order to comply, you will need to being collecting new data elements. Many of the new data elements will be phased in through the period that you still have valid 2006 version Forms W-8 in your files. In order to collect these data elements new FATCA forms W-8 will be finalized (early 2014) and required to be used after the official IRS sunset period of six months (unless we get additional guidance on this). 42

43 Form 1042-S Changes for FATCA 43 IRS has published draft Form 1042-S for 2014 which includes updates for FATCA reporting. Key highlights include: Requirement to provide Chapter 3 and Chapter 4 status for recipient, withholding agent, and intermediary (if applicable). Requirement to indicate whether Form is being provided for Chapter 3 or Chapter 4 purposes and indicate exemption code (if applicable). Requirement for recipient foreign taxpayer identification number or date of birth. Tick box to indicate if withheld tax not paid under escrow procedure (e.g., dormant account or unknown character or source of payment). 43

44 44 Draft Form 1042-S

45 What Does All This Mean? 45 The next several years will be full of significant changes in information reporting. To prepare, consider the following: Stay on top of most up to date guidance - conferences, training sessions, webinars, etc. Make sure you have documented policies and procedures and keep them up to date. Leverage technology to the extent possible systemic data storage, update reports to eliminate manual data manipulation, etc.

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