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IRS Releases Guide to Tax Treaties For Individuals

by Glen Shapiro,, New York

04 November 2008

The US Internal Revenue Service has released a guide to double taxation avoidance treaties as they apply to individuals as part of a series of updates on the International Tax Gap.

The United States has income tax treaties with a number of foreign countries. Under these treaties, residents of foreign countries are taxed at a reduced rate or are exempt from US income taxes on certain items of income received from sources within the US.

Because treaty provisions are generally reciprocal, a US citizen or resident who receives income from a treaty country may also be taxed at a reduced tax rate by that foreign country.

While tax treaties may reduce US tax for nonresidents and foreign tax for US residents and citizens, each treaty must be reviewed to determine eligibility for these provisions.

The IRS guide, the ninth in a series on international tax issues, highlights some important aspects of tax treaties and how to properly apply their provisions:

Saving Clause

Most tax treaties have a saving clause that preserves the right of each country to tax its own residents as if no tax treaty were in effect. Thus, once you become a resident alien of the US, you generally lose any tax treaty benefits that relate to your US income. However, many tax treaties have an exception to the saving clause that may allow you to claim certain treaty benefits even if you are a US citizen or resident.

Nonresident Aliens

For nonresident aliens, treaties limit or eliminate US taxes on various types of personal services and other income, such as pensions, interest, dividends, royalties, and capital gains. Many treaties limit the number of years you can claim a treaty exemption. For students, apprentices and trainees, the limit is usually four to five years. For teachers, professors and researchers, the limit is usually two to three years. Once you reach this limit, you may no longer claim the treaty exemption. In some cases, if you exceed the limit, the income is taxed retroactively for earlier years. Treaties may also have other requirements to be eligible for benefits. Publication 901, US Tax Treaties, provides a summary of these treaty provisions.

US Citizens and Residents

US citizens and residents generally will not be able to reduce their US tax based on treaty provisions due to the saving clause. However, those who are subject to taxes imposed by a treaty partner are entitled to certain credits, deductions, exemptions and reductions in the rate of taxes paid to that foreign country. These treaty benefits are generally only available to residents of the US. They generally are not available to US citizens and resident aliens who do not reside in the US. Foreign taxing authorities sometimes require certification from the US government that an applicant filed an income tax return as a US resident, as part of the proof of entitlement to the treaty benefits. Form 8802, Application for United States Residency Certification, must be filed to obtain this certification.

Disclosing Treaty Benefits Claimed

If you claim treaty benefits that override or modify any provision of the Internal Revenue Code, and by claiming these benefits your tax is or might be reduced, you must attach a fully completed Form 8833, Treaty-Based Return Position Disclosure, to your tax return. There are exceptions to this requirement for certain types of income that are outlined in Publication 519, US Tax Guide for Aliens, under the section on Reporting Treaty Benefits Claimed.

Competent Authority Assistance

If you are a US citizen or resident alien, you can request assistance from the US competent authority if you think that the actions of the US, a treaty country or both caused or will cause a tax situation not intended by the treaty between the two countries. You should read any treaty articles, including the mutual agreement procedure article, that apply in your situation. The US competent authority cannot consider requests involving countries with which the US does not have a treaty. See Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad, and Revenue Procedure 2006-54, Procedures for How to Make a Competent Authority Request.

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