The difference between Chapter 3 and Chapter 4 on Form 1042-S lies primarily in the types of withholding rules and reporting requirements that apply to different categories of foreign persons or entities. Both chapters are related to U.S. tax compliance for non-U.S. persons receiving U.S.-source income, but they govern different aspects of withholding and reporting.
Key Differences Between Chapter 3 and Chapter 4 on Form 1042-S
| Aspect | Chapter 3 | Chapter 4 (FATCA) |
|---|---|---|
| Purpose | Withholding on U.S.-source income paid to foreign persons | FATCA compliance to prevent tax evasion by foreign institutions and entities with U.S. account holders |
| Who Is Affected | Foreign individuals and entities receiving U.S.-source income | Foreign financial institutions (FFIs) and entities that do not comply with FATCA |
| Withholding Tax | 30% withholding on U.S.-source income (unless reduced by tax treaty) | 30% withholding on U.S.-source income if FATCA compliance is not met |
| Tax Treaty Benefits | Foreign recipients may claim tax treaty benefits to reduce withholding | FATCA does not involve tax treaties; it enforces compliance with FATCA reporting requirements |
| Compliance Requirements | Foreign recipients and U.S. withholding agents must comply with withholding tax rules | FFIs and certain foreign entities must comply with FATCA reporting and due diligence rules |
| Income Reported | U.S.-source income like interest, dividends, royalties, and wages | U.S.-source income to foreign institutions/entities failing FATCA compliance |
| Form 1042-S Reporting | Reports income paid and tax withheld on foreign persons or entities | Reports income paid to non-compliant foreign entities and the tax withheld |
