Guide to Global Payroll Management - 2020 - D-68

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Guide to Global Payroll Management

calendar year in which the amount was
overwithheld).
Set-off procedure. Under the set-off
procedure, you repay the beneficial owner
or payee the amount overwithheld by
reducing the amount you would have been
required to withhold on later payments you
make to that person but only if made
before the earlier of:
* The date you actually file Form 1042-S
for the calendar year in which the amount
was overwithheld, or
* The due date for filing Form 1042-S for
the calendar year (generally, March 15 of
the year after the calendar year in which
the amount is overwithheld).
The reductions that you applied
pursuant to the set-off procedure during
the calendar year must be reflected on the
line for the period you reduced your
liability. The amount reported on line 59 for
the calendar year for which you
overwithheld tax must reflect reductions
that you applied pursuant to the set-off
procedure during the subsequent calendar
year, if applicable. Amounts reported on
line 63c(1) should be limited to amounts
repaid to the beneficial owner or payee (by
reducing the withholding on a later
payment) in the subsequent calendar year
(before the earlier of the filing of the
associated Form 1042-S or the due date
for such form). On line 71, indicate that
you are claiming a credit to be applied to
the 2020 calendar year for amounts you
set off in the subsequent calendar year
(note, you may not claim a refund for such
an amount).
For 2019, a withholding agent may rely
on proposed regulations (83 FR 64757),
which allow adjustments to
overwithholding using the reimbursement
or set-off procedures until the extended
due date for filing Form 1042-S (unless a
Form 1042-S has already been filed with
the IRS or furnished to the recipient). A
withholding agent may also use the
extended due date for filing Form 1042 to
claim a credit for any adjustments to
overwithholding.

Overwithholding discovered at a later
date. If you discover after March 15 of the
following calendar year that you
overwithheld tax for the prior year, do not
adjust the amount of tax liability reported
on Form 1042 or on any deposit or
payment for that prior year. Do not repay
the beneficial owner or payee the amount
overwithheld unless you are a QI, WP,
WT, participating FFI, or reporting Model 1
FFI making a claim for a collective refund
under your respective agreement with the
IRS. See Regulations section 1.1471-1(b)
(114) for the definition of a reporting Model
1 FFI.
In this situation, the recipient will have
to file a U.S. income tax return (Form
1040NR, Form 1040NR-EZ, or Form

Instructions for Form 1042 (2019)

D-68

1120-F) or, if a tax return has already been
filed, a claim for refund (Form 1040X or
amended Form 1120-F) to recover the
amount overwithheld.

Adjustment for
Underwithholding

Under the procedures for adjusting
underwithholding (see Regulations
sections 1.1461-2(b) and 1.1474-2(b)),
you may withhold from future payments
made to a beneficial owner the tax that
should have been withheld, or satisfy the
tax from property or additional
contributions of the beneficial owner that
you hold in custody or otherwise control,
before the date (without extensions) that
the Form 1042 is required to be filed. You
should report the liability related to such
withholding on lines 1 through 60 for the
period during the year in which you
adjusted underwithholding by withholding
additional tax. If you adjust
underwithholding by withholding in the
year following the calendar year of
underwithholding, you should report the
increased liability on line 59 for the year in
which the underwithholding occurred.
Amounts reported on line 63c(2) should
be limited to amounts withheld in the year
following the calendar year of
underwithholding (before the date that the
Form 1042 is required to be filed without
extensions). You should report deposits of
amounts withheld in the year following the
calendar year of underwithholding
pursuant to these procedures on line 65b.
See Deposits made during subsequent
year, earlier, for how to designate such
deposits as attributable to the year of
underwithholding.

Section 2. Reconciliation
of U.S. Source FDAP
Income

This section is used by the withholding
agent to reconcile the amount of U.S.
source FDAP income reportable under
chapter 4 and paid by the withholding
agent during the calendar year with the
total amount of U.S. source FDAP income
reported on all Forms 1042-S filed by the
withholding agent for the calendar year
(including amounts reported under both
chapter 3 and chapter 4). You must
complete this section even if you did not
make any payments subject to chapter 4
withholding during the calendar year. This
section also allows reporting of the
amounts of U.S. source FDAP income for
which chapter 4 withholding is required
and reporting of the amounts for which
withholding is not required according to
the exemption from chapter 4 withholding
applicable to each such amount.
Note. The amounts of U.S. source FDAP
income reportable for chapter 4 are:
-9-

* Payments of U.S. source FDAP income
for which withholding under chapter 4 was
applied to the payment, plus
* Payments of U.S. source FDAP income
for which withholding under chapter 4 was
not required but that are subject to
reporting for chapter 3 purposes on Forms
1042-S.
Line 1. Enter the amounts of U.S. source
FDAP income required to be withheld
upon under chapter 4, including amounts
withheld upon but for which no deposit
has been made under an escrow
procedure.

Line 2. Enter amounts of U.S. source
FDAP income not required to be withheld
upon under chapter 4 on lines 2a through
2d according to the exception to
withholding that applied to each payment
reportable on Form 1042-S. The amount
on line 2e should equal the sum of lines 2a
through 2d.
Line 2a. Enter the amounts of U.S.
source FDAP income that are
withholdable payments, but for which the
withholding agent has obtained
documentation that establishes a
chapter 4 status that does not require
withholding under chapter 4 (for example,
participating FFI). The amount reported on
this line should generally equal the
aggregate amount reported in box 2 on all
of the Forms 1042-S you filed for the
calendar year for which exemption code
15, Payee not subject to chapter 4
withholding, was included in box 4a.
Line 2b. Enter the amounts of U.S.
source FDAP income that are not
withholdable payments because they are
nonfinancial type payments (for example,
royalties, services, rents). The amount
reported on this line should generally
equal the aggregate amount reported in
box 2 on all of the Forms 1042-S you filed
for the calendar year for which the
exemption code 16, Excluded nonfinancial
payment, was included in box 4a.
Line 2c. Enter the amounts of U.S.
source FDAP income that are not
withholdable payments because they are
payments related to grandfathered
obligations (for example, obligations
outstanding on July 1, 2014). See
Regulations section 1.1471-2(b). The
amount reported on this line should
generally equal the aggregate amount
reported in box 2 on all of the
Forms 1042-S you filed for the calendar
year for which the exemption code 13,
Grandfathered payment, was included in
box 4a.
Line 2d. Enter the amounts of U.S.
source FDAP income that are not
withholdable payments because they are
payments of effectively connected
income. The amount reported on this line

Guide to Global Payroll Management - 2020

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