(a) Adjustments of overwithheld tax--(1) In general. Except as otherwise provided by this section, a withholding agent that has overwithheld tax under chapter 4 and made a deposit of the tax as provided in Sec. 1.6302-2(a) may adjust the amount of overwithheld tax either pursuant to the reimbursement procedure described in paragraph (a)(3) of this section or pursuant to the set-off procedure described in paragraph (a)(4) of this section. Adjustments under this paragraph (a) may only be made within the time prescribed under paragraph (a)(3) or (a)(4) of this section. After such time, a refund of the amount of overwithheld tax can only be claimed pursuant to the procedures described in Sec. 1.1474-5 and chapter 65 of the Code and the regulations thereunder.
(1) In general. Except as otherwise provided by this section, a withholding agent that has overwithheld tax under chapter 4 and made a deposit of the tax as provided in Sec. 1.6302-2(a) may adjust the amount of overwithheld tax either pursuant to the reimbursement procedure described in paragraph (a)(3) of this section or pursuant to the set-off procedure described in paragraph (a)(4) of this section. Adjustments under this paragraph (a) may only be made within the time prescribed under paragraph (a)(3) or (a)(4) of this section. After such time, a refund of the amount of overwithheld tax can only be claimed pursuant to the procedures described in Sec. 1.1474-5 and chapter 65 of the Code and the regulations thereunder.
(2) Overwithholding. For purposes of this section, the term overwithholding means an amount actually withheld (determined before application of the adjustment procedures under this section and regardless of whether such overwithholding was in error or appeared correct at the time it occurred) from an item of income or other payment pursuant to chapter 4 that is in excess of the greater of--
(i) The amount required to be withheld with respect to such item of income or other payment under chapter 4; and
(ii) The actual tax liability of the beneficial owner that is attributable to the income or payment from which the amount was withheld.
(3) Reimbursement of tax--(i) General rule. Under the reimbursement procedure, the withholding agent may repay the beneficial owner or payee for an amount of overwithheld tax. In such case, the withholding agent may reimburse itself by reducing, by the amount actually repaid to the beneficial owner or payee, the amount of any deposit of tax made by the withholding agent under Sec. 1.6302-2(a)(1)(iii) for any subsequent payment period occurring before the end of the calendar year following the calendar year of overwithholding. A withholding agent must obtain valid documentation as described under Sec. 1.1471-3(c)(6) with respect to the beneficial owner or payee supporting a reduced rate of withholding before reducing the amount of any deposit of tax under this paragraph (a)(3)(i). Any such reduction that occurs for a payment period in the calendar year following the calendar year of overwithholding shall be allowed only if--
(i) General rule. Under the reimbursement procedure, the withholding agent may repay the beneficial owner or payee for an amount of overwithheld tax. In such case, the withholding agent may reimburse itself by reducing, by the amount actually repaid to the beneficial owner or payee, the amount of any deposit of tax made by the withholding agent under Sec. 1.6302-2(a)(1)(iii) for any subsequent payment period occurring before the end of the calendar year following the calendar year of overwithholding. A withholding agent must obtain valid documentation as described under Sec. 1.1471-3(c)(6) with respect to the beneficial owner or payee supporting a reduced rate of withholding before reducing the amount of any deposit of tax under this paragraph (a)(3)(i). Any such reduction that occurs for a payment period in the calendar year following the calendar year of overwithholding shall be allowed only if--
(A) The repayment of the beneficial owner or payee occurs before the earlier of the due date (without regard to extensions) for filing the Form 1042-S for the calendar year of overwithholding or the date that the Form 1042-S is actually filed with the IRS;
(B) The withholding agent states on a timely filed (not including extensions) Form 1042-S the amount of tax withheld and the amount of any actual repayment; and
(C) The withholding agent states on a timely filed (not including extensions) Form 1042 for the calendar year of overwithholding that the filing of the Form 1042 constitutes a claim for credit in accordance with Sec. 1.6414-1.
(ii) Record maintenance. If the beneficial owner or payee is repaid an amount of overwithheld tax under the provisions of this paragraph (a)(3), the withholding agent shall keep as part of its records a receipt showing the date and amount of repayment, and the withholding agent must provide a copy of such receipt to the beneficial owner or payee. For this purpose, a canceled check or an entry in a statement is sufficient, provided that the check or statement contains a specific notation that it is a refund of tax overwithheld.
(4) Set-offs. Under the set-off procedure, the withholding agent may repay the beneficial owner or payee for an amount of overwithheld tax by applying the amount overwithheld against any amount which otherwise would be required under chapter 3 or 4 to be withheld from the amount paid by the withholding agent to such person before the earlier of the due date (without regard to extensions) for filing the Form 1042-S for the calendar year of overwithholding or the date that the Form 1042-S is actually filed with the IRS. For purposes of making a return on Form 1042 or 1042-S (or an amended form) for the calendar year of overwithholding and for purposes of making a deposit of the amount withheld, the reduced amount shall be considered the amount required to be withheld from such payment under chapter 3 or 4, respectively.
(5) Examples. The principles of this paragraph (a) are illustrated by the following examples:
(i) Fund A is a unit investment trust that is an FFI and a resident of Country X. Fund A also qualifies for the benefits of the income tax treaty between the United States and Country X. On December 1, 2016, domestic corporation C pays a dividend of $100 to Fund A, at which time C withholds $30 of tax pursuant to Sec. 1.1471-2(a) and remits the balance of $70 to Fund A, because it does not hold valid documentation that Fund A is a participating FFI or deemed-compliant FFI. On February 10, 2017, prior to the time that C is obligated to file its Form 1042, Fund A furnishes a valid Form W-8BEN described in Secs. 1.1441-1(e)(2)(i) and 1.1471-3(c)(3)(ii) upon which C may rely to treat Fund A as the beneficial owner of the income and as a participating FFI so that C may reduce the rate of withholding to 15% under the provisions of the United States-Country X income tax treaty with respect to the payment. C repays the excess tax withheld of $15 to Fund A.
(ii) During the 2016 calendar year, C makes no other payments upon which tax is required to be withheld under chapter 3 or 4; accordingly, its Form 1042 for such year, filed on March 15, 2017, shows total tax withheld of $30, an adjusted total tax withheld of $15, and tax deposited of $30 for such year. Pursuant to Sec. 1.6414-1, C claims a credit for the overpayment of $15 shown on the Form 1042 for 2016. Accordingly, C is permitted to reduce by $15 any deposit required by Sec. 1.6302-2 to be made of tax withheld during the 2017 calendar year with respect to taxes due under chapter 3 or 4. The Form 1042-S required to be filed by C with respect to the dividend of $100 paid to Fund A in 2016 is required to show tax withheld of $30 and tax repaid of $15 to Fund A.
(i) In November 2016, Bank A, a foreign bank organized in Country X that is an NQI, receives on behalf of one of its account holders, Z, an individual, a $100 dividend payment from C, a domestic corporation. At the time of payment, C withholds $30 pursuant to Sec. 1.1471-2(a) and remits the balance of $70 to Bank A, because it does not hold valid documentation that it may rely on to treat Bank A as a participating FFI or deemed-compliant FFI. In December 2016, prior to the time that C files its Forms 1042 and 1042-S, Bank A furnishes a valid Form W-8IMY and FFI withholding statement described in Sec. 1.1471-3(c)(3)(iii) that establishes Bank A's status as a participating FFI that is an NQI, as well as a valid Form W-8BEN that has been completed by Z as described in Sec. 1.1471-3(c)(3)(ii) and Sec. 1.1441-1(e)(2)(i) upon which C may rely to treat the payment as made to Z, a nonresident alien individual who is a resident of Country X eligible for a reduced rate of withholding of 15% under the income tax treaty between the United States and Country X. Although C has already deposited the $30 that was withheld, as required by Sec. 1.6302-2(a)(1)(iv), C remits the amount of $15 to Bank A for the benefit of Z.
(ii) During the 2016 calendar year, C makes no other payments upon which tax is required to be withheld under chapter 3 or 4; accordingly, its return on Form 1042 for such year, which is filed on March 15, 2017, shows total tax withheld of $30, an adjusted total tax withheld of $15, and tax deposited of $30. Pursuant to Sec. 1.6414-1(b), C claims a credit for the overpayment of $15 shown on the Form 1042 for 2014. Accordingly, it is permitted to reduce by $15 any deposit required by Sec. 1.6302-2 to be made of tax withheld during the 2017 calendar year. The Form 1042-S required to be filed by C for 2016 with respect to the dividend of $100 beneficially owned by Z is required to show tax withheld of $30 and tax repaid of $15 to Z.
(b) Withholding of additional tax when underwithholding occurs. A withholding agent that has underwithheld under chapter 4 may apply the procedures described in Sec. 1.1461-2(b) (by substituting the term ``chapter 4'' for ``chapter 3'') to satisfy its withholding obligations under chapter 4 with respect to a payee or beneficial owner.
(c) Effective/applicability date. This section applies January 28, 2013. [T.D. 9610, 78 FR 5991, Jan. 28, 2013]