Discussion:1042S for Non-U.S Sourced Income

I'm working with on filing requirement for a foreign subsidiary that is paying a nonresident alien for contract services performed outside the US. This is non-US sourced income to him. But now comes the filing requirement.

The NRA will file a W-8 BEN to establish that he is not a U.S. person. The corp doesn't need to file a 1099 or a 1042S since this is not U.S. sourced income. 0% withholding.

But if you look at the form 1042S >> Box 6 "Authority for Exemption" >> Code 03 "Income is not from U.S. sources"

Then there's a footnote for this exemption Footnote 4 "Non-U.S. source income paid to a nonresident alien is not subject to U.S. tax. Use Exemption code 03 when entering an amount for information reporting purposes only."

Now, the question is... Does the corp need to file a 1042S with exemption code 03 to report the amount paid to this NRA? Form 1042S instructions clearly say the form is only to report "amounts subject to withholding" (which this is not) and consistently says to report "compensation for services performed in the United States" (which this is not).

Has anyone ever seen this exemption code 03 "Income is not from U.S. sources" used before and why you would use this code? Would the corp here still need to file a 1042S?

Thanks for your feedback.

I am not sure, but I think exemption code 03 would be used only where a U.S. college is a withholding agent for foreign source scholarships to students in the U.S. that are treated as nonresident aliens.

Your example sounds plausable regarding the use of code 03. The only other thing I could think of is if you incorrectly withheld and were to file an amended 1042S. Now you use code 03 to say that this amount is actually foreign sourced and not subject to US tax. Looks like the 1042S won't be required. I may have to call the IRS just for fun on this one.

Let me know if any of you have experiences of filing a 1042S for a foreign persons who received foreign sourced income on services overseas.