Amounts That Are Not Subject to Reporting on Form 1042-S
Interest on Deposits
Generally, no withholding (or reporting) is required on interest paid to foreign persons on deposits if such interest is not effectively connected with the conduct of a trade or business in the United States. For this purpose, the term "deposits" means amounts that are on deposit with a U.S. bank, savings and loan association, credit union, or similar institution, and from certain deposits with an insurance company.
Exception for Interest Payments to Canadian Residents Who Are Not U.S. Citizens
If you pay $10 or more of U.S. source interest on deposits as defined above to a nonresident alien who is a resident of Canada, you generally must report the interest on Form 1042-S (PDF). This reporting requirement applies to interest on a deposit maintained at a bank's office in the United States. However, it does not include interest on certain bearer certificates of deposit if paid outside the United States. Although you only have to report payments you make to residents of Canada, you can comply by reporting interest on deposits to all foreign persons if that is easier. When completing Form 1042-S, use income code 29 in box 1 and exemption code 02 in box 6.
On the statements furnished to the Canadian recipients, you must include an information contact phone number in addition to the name and address in box 10 on Form 1042-S. You must also include a statement that the information on the form is being furnished to the United States Internal Revenue Service and may be provided to the government of Canada.
Interest and Original Issue Discount (OID) from short-term obligations
Interest and OID from any obligation payable 183 days or less from the date of original issue should not be reported on Form 1042-S.
Registered Obligations Targeted to Foreign Markets
Interest on a registered obligation that is targeted to foreign markets and qualifies as portfolio interest is not subject to reporting if it is paid to a registered owner that is a financial institution or member of a clearing organization and you have received the required certifications.
Bearer Obligations Targeted to Foreign Markets
Do not file Form 1042-S to report interest not subject to withholding on bearer obligations if a Form W-8 is not required.
Notional Principal Contract Payments That Are Not ECI
Amounts paid on a notional principal contract that are not effectively connected with the conduct of a trade or business in the United States should not be reported on Form 1042-S.
Accrued Interest and OID
Interest paid on obligations sold between interest payment dates and the portion of the purchase price of an OID obligation that is sold or exchanged in a transaction other than a redemption is not subject to reporting unless the sale or exchange is part of a plan, the principal purpose of which is to avoid tax, and the withholding agent has actual knowledge or reason to know of such plan.
Exception for Amounts Previously Withheld Upon
A withholding agent should report on Form 1042-S any amounts, whether or not subject to withholding, that are paid to a foreign payee and that have been withheld upon, including backup withholding, by another withholding agent under the presumption rules.
Example: A withholding agent (WA) makes a payment of bank deposit interest to a foreign intermediary that is a nonqualified intermediary (NQI-B). NQI-B failed to provide any information regarding the beneficial owners to whom the payment was attributable. Under the presumption rules, WA must presume that the amounts are paid to a U.S. non-exempt recipient. WA withholds 28% of the payment under the backup withholding provisions of the IRC and files a Form 1099-INT (PDF) reporting the interest as paid to an unknown recipient. A copy of Form 1099-INT is sent to NQI-B. The beneficial owners of the bank deposit interest are two customers of NQI-B, X and Y. Both X and Y have provided NQI-B with documentary evidence establishing that they are foreign persons and therefore not subject to backup withholding. NQI-B must file a Form 1042-S reporting the amount of bank deposit interest paid to each of X and Y and the proportionate amount of withholding that occurred.
