1 US Income Tax Withheld From Mexican Roads May 8, 2014 George A. Jones - CSXT

Law  Any person having the control, receipt, custody, disposal, or payment of specific items of income (a “withholding agent”) must deduct and withhold U.S. income tax from those items, to the extent they are gross income from U.S. sources of foreigners subject to withholding. (IRC §1441(a)) The withholding agent is liable for the tax. (IRC § 1461)  U.S. Roads are withholding agents for Mexican Roads on Payable Car Hire.

Form 1042 – Reporting to IRS Form 1042 is used to annually report tax withheld on certain income of foreign persons, corporations, etc. to IRS The 1042 form is an aggregate form for the year and later we will discuss the form 1042-S is a payee by payee form

Form 1042-S  Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, (Copy A) is filed with the Form 1042, for each recipient from whom tax was withheld. Copies of Form 1042-S (Copy B, C & D) are also mailed to the recipients from whom tax was withheld. A copy of each Form 1042-S (Copy E) is retained for our records.  Mexican Roads are informed of the amount of U.S. Tax that has been withheld for them for each reporting Year.

Form 1042-T  Form 1042-T, Annual Summary and Transmittal of Form 1042-S, is used to transmit paper Forms 1042-S to the Internal Revenue Service.  Form 1042-T is a summary of all U.S. Tax withheld for companies and roads.

Who Must File Every withholding agent, person required to withhold tax, who receives, controls, has custody of, disposes of, or pays any fixed or determinable annual or periodic income must file an annual return for the preceding calendar year.

When and Where to File  March 15th of current year for preceding calendar year  Ogden Service Center, PO Box , Ogden, UT  Form 1042, Form 1042-S and Form 1042-T and the associated instructions can be downloaded from the Internal Revenue Service’s website -

Supporting Information  Information from CSXT is supplied by Edward L. (Eddie) Weaver, II, Car Accounting Analyst, in the Controller’s Department – Car Accounting  Eddie provides a summary of Mexican Tax withheld from Appendix H as well as a summary of U.S. Tax due on Car Hire paid to Mexican Roads.

Accounting Process  Appendix H Reports are available on ShipCSX website  The Gross Car Hire amount is automatically booked from the Car Accounting file  The tax amount withheld from Mexican roads for the IRS is deducted from the Gross Car Hire and applied to the Foreign Mexican Tax Account  Car Accounting authorizes Accounts Payable to make tax deposit to the IRS via wire

Understanding the process  CSX settles Car Hire on a regular basis with six Mexican Railroads  Both United States and Mexican Governments require tax withholding when settling Car Hire over International borders  Tax withholding on Car Hire payments is 10% in the U.S. payable to IRS and 5% in Mexico payable to the Mexican equivalent of the IRS  Net settlement for Car Hire between Railroads is an automated process handled via RCH (Railroad Clearinghouse).

Positive payable report to Mexican Road from CSX Transportation calculated correctly - Note 10% withholding payable to the United States IRS APPENDIX H CSXT CSXT TRANSPORTATION SUMMARY OF AMOUNTS DUE FOR CAR HIRE FREIGHT CARS, TRAILERS AND RELATED COSTS PAYABLE TO: MEXICAN MAIN RAILROAD CSX TRANSPORTATION JACKSONVILLE FL FOR EQUIPMENT OF MEXICAN MAIN RAILROAD MONTH OF Oct, 2013 CSXT ITEM NAME ACCOUNT*(A)(B)(A)-(B) TYPEDESCPAYMENTDEDUCTIONNET CAR HIRE RULES 1/11- 1T/11T 010 CURRENT01$1,500.00$0.00$1, FIRST ADJ.02 PRIOR03 PENALTY01,02,03 CAR HIRE OTHER CAR HIRE MISCELLANEOUS024ANY RULE ,08,09 RULE ,08,09 RULE ,08,09 RULE ,08,09 RULE 21 ELIMINATED ,02,03 RULE ,08,09$500.00($500.00) RULE ,08,09 MISCELLANEOUS SPECIAL40007,08,09 CONTRACTS45007,08,09 RESERVED ,08 ORIGIN DETENTION820 DESTINATION DETENTION825 OT ,08,09 GROSS TOTALS$1,500.00$500.00$1, TAX860$0.00$100.00($100.00) NET GRAND TOTAL$1,500.00$600.00$ % tax withheld

Positive payable report to CSX from Mexican Main Railroad calculated correctly - Note 5% withholding payable to the Mexican IRS APPENDIX H MMRD MEXICAN MAIN RAILROAD SUMMARY OF AMOUNTS DUE FOR CAR HIRE FREIGHT CARS, TRAILERS AND RELATED COSTS PAYABLE TO: CSX TRANSPORTATION INC. MEXICAN MAIN RAILROAD MEXICO CITY FOR EQUIPMENT OF CSX TRANSPORTATION MONTH OF Oct, 2013 CSXT ITEM NAME ACCOUNT*(A)(B)(A)-(B) TYPEDESCPAYMENTDEDUCTIONNET CAR HIRE RULES 1/11-1T/11T010 CURRENT01$1,000.00$0.00$1, FIRST ADJ.02 PRIOR03 PENALTY01,02,03 CAR HIRE OTHER CAR HIRE MISCELLANEOUS024ANY RULE ,08,09 RULE ,08,09 RULE ,08,09 RULE ,08,09 RULE 21 ELIMINATED ,02,03 RULE ,08,09 RULE ,08,09 MISCELLANEOUS SPECIAL40007,08,09 CONTRACTS45007,08,09 RESERVED ,08 ORIGIN DETENTION820 DESTINATION DETENTION825 OT ,08,09 GROSS TOTALS$1,000.00$0.00$1, TAX860$0.00$50.00($50.00) NET GRAND TOTAL$1,000.00$50.00$ % tax withheld

Settlement of Car Hire between CSXT and MMRD in this scenario…  Payment would settle on a net basis between both Appendix H reports through the automated RCH process and CSX would receive a net payment of $50.00  Receivables are available on the 18 th of each month and RCH payment is due a few days later accordingly.

Negative Payable Reports “Negative Payable” reports between U.S. and Mexican Railroads are a common occurrence when reclaims are greater than liable Car Hire. A Payable report to any particular road would effectively become a Receivable for the issuing Road. When calculated correctly, Roads should report the tax accordingly to allow for the paying Railroad to withhold tax. Payment settles regularly in a reverse fashion through RCH payment process.

Example of a Negative Payable Report with Tax Withholding APPENDIX H CSXT CSXT TRANSPORTATION SUMMARY OF AMOUNTS DUE FOR CAR HIRE FREIGHT CARS, TRAILERS AND RELATED COSTS PAYABLE TO: MEXICAN MAIN RAILROAD CSX TRANSPORTATION JACKSONVILLE FL FOR EQUIPMENT OF MEXICAN MAIN RAILROAD MONTH OF Oct, 2013 CSXT ITEM NAME ACCOUNT*(A)(B)(A)-(B) TYPEDESCPAYMENTDEDUCTIONNET CAR HIRE RULES 1/11-1T/11T010 CURRENT01$7,000.00$0.00$7, FIRST ADJ.02 PRIOR03 PENALTY01,02,03 CAR HIRE OTHER CAR HIRE MISCELLANEOUS024ANY RULE ,08,09 RULE ,08,09 RULE ,08,09 RULE ,08,09 RULE 21 ELIMINATED ,02,03 RULE ,08,09$8,000.00($8,000.00) RULE ,08,09 MISCELLANEOUS SPECIAL40007,08,09 CONTRACTS45007,08,09 RESERVED ,08 ORIGIN DETENTION820 DESTINATION DETENTION825 OT ,08,09 GROSS TOTALS$7,000.00$8,000.00($1,000.00) TAX860$50.00$0.00$50.00 NET GRAND TOTAL$7,050.00$8,000.00($950.00) 5% tax withheld

Incorrect calculation of tax from Mexican Roads on negative payable Appendix H reports  A small number of Mexican Railroads currently fail to include tax withholding on negative payable Appendix H reports to American Roads.  Net payment settles through the RCH process and tax is not calculated or withheld by the American Road given the timeline and nature of RCH payment settlement.  The Mexican Road claims the full Gross amount detailed on Appendix H report and is then responsible for settling taxes owed to the U.S. IRS in this scenario.

Mexican Negative Payable report without tax withholding APPENDIX H MXXX MEXICAN NATIONAL RAILROAD SUMMARY OF AMOUNTS DUE FOR CAR HIRE FREIGHT CARS, TRAILERS AND RELATED COSTS PAYABLE TO: CSX TRANSPORTATION MEXCIAN NATIONAL RAILROAD MEXICO CITY FOR EQUIPMENT OF CSX TRANSPORTATION MONTH OF Oct, 2013 CSXT ITEM NAME ACCOUNT*(A)(B)(A)-(B) TYPEDESCPAYMENTDEDUCTIONNET CAR HIRE RULES 1/11-1T/11T010 CURRENT01$5,000$0.00$5,000 FIRST ADJ.02 PRIOR03 PENALTY01,02,03 CAR HIRE OTHER CAR HIRE MISCELLANEOUS024ANY RULE ,08,09 RULE ,08,09 RULE ,08,09 RULE ,08,09 RULE 21 ELIMINATED ,02,03 RULE ,08,09$15,000($15,000) RULE ,08,09 MISCELLANEOUS SPECIAL40007,08,09 CONTRACTS45007,08,09 RESERVED ,08 ORIGIN DETENTION820 DESTINATION DETENTION825 OT ,08,09 GROSS TOTALS$5,000$15,000($10,000) TAX860$0.00 NET GRAND TOTAL$5,000$15,000($10,000) No tax withheld

Foreign Tax Credit If certain criteria are met, most U.S. taxpayers who pay income taxes to foreign governments may deduct those taxes for U.S. income tax purposes, or the taxpayer may elect to credit the foreign tax payments against their U.S. income tax liability dollar-for-dollar as a foreign tax credit. (IRC § 901; Reg § (a)). (IRC § 27, IRC § 164). If a tax credit is claimed for any foreign income taxes, deductions may not be claimed for other foreign income taxes (Reg § (c)).

Questions?  The intent was not to make you a tax expert, but to give a high level view of the U.S. Tax requirement.  Please consult your Tax Advisor for your specific tax requirements.