- Mark as New
- Bookmark
- Subscribe
- Permalink
- Report Inappropriate Content
@freshy70 wrote:
This doesn't make sense because there is no income reported on 1042-S and not tax was withheld from his profits.
Why doesn't it make sense? The fact that you are preparing the return to claim treaty exemption on the income is exactly because your client had US-ECI, most likely by virtue of having been present in the US conducting business (albeit without a PE).
Question is whether your client's business activities in the US were conducted in the capacity of an employee of his/her foreign entity or as an independent contractor. Since you are invoking Article 7, the presumption is that it is an independent contractor because Article 14 would otherwise be triggered instead.
The service provider, whether an entity or an individual, is required by law to furnish a certificate of foreign status (W8-BEN-E or W8-ECI) to the payor, as the withholding agent, in order to establish the withholding requirements or eligibility for treaty exemption. The withholding agent, in turn, is legally required to withhold (where applicable), remit, and report by issuing 1042 and 1042-S. This is analogous to how the process works for 1099 and W-2; penalties are levied similarly for failure to fulfill these fiduciary duties. The 1042-S is your client's equivalence of a W-2. It makes perfect sense - there is nothing special about it.
In the event 1042-S was not issued, your client would still be required to report the ECI on the US return and, in order to claim claim treaty exemption, make the necessary disclosures on the return as you are doing now. Without a 1042-S reporting the corresponding amount being claimed for treaty exemption, the return has failed rules that the IRS has set up to validate these returns. It does look like the return will need to be filed on paper. Your client would be well-advised to ensure the proper process is followed going forward to avoid unnecessary complications.
Still an AllStar