Tax Treaty Lawyers
Tax Treaty Lawyers: International Tax is complex. That is because there are two (oftentimes ‘competing’) bodies of law. There is the U.S. or Domestic Taxation Laws, and foreign country jurisdiction’s tax laws. With some countries, the United States has entered into a tax treaty.
There are various different types of international tax treaties available to taxpayers.
These treaties will impact everything from income tax, estate tax, income re-characterization, social security and foreign account compliance (FATCA).
The study of tax treaties can go on indefinitely – there is just that much information to digest.
Our Treaty Tax Lawyers will summarize the four (4) main types of tax treaties that impact the U.S. tax liability of individuals:
- Income Tax Treaty
- Estate Tax Treaty
- Totalization Agreement
- FATCA Agreement (IGA)
We will also provide some insight on how to get into compliance with the IRS if you have failed to comply with requisite tax or reporting requirements.
Income Tax Treaty
An income tax treaty is used to determine which country has the right to tax a certain type of income, at what rate, and if any reductions, exceptions, exclusions or limitations apply. It may include real estate income, pension income, permanent establishment requirements, and much more.
As provided by the IRS:
The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income.
Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a “saving clause” which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.
If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return.
Many of the individual states of the United States tax income which is sourced in their states. Therefore, you should consult the tax authorities of the state from which you derive income to find out whether any state tax applies to any of your income. Some states of the United States do not honor the provisions of tax treaties.
This page provides links to tax treaties between the United States and particular countries. For further information on tax treaties refer also to the Treasury Department’s Tax Treaty Documents page.
Estate Tax Treaty
While the U.S. has entered into 50+ income tax treaties, the United States has entered into significantly less Estate Tax Treaties. The Estate Tax Treaty.
While each estate tax treaty is different, the goal is the same, as illustrated in the U.S. & France Estate Tax Treaty:
“Convention between the government of the United States of America and the government of the French Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on estates, inheritances, and gifts signed at Washington on November 24, 1978, amended by the Protocol signed at Washington on December 8, 2004.
The President of the United States of America and the President of the French Republic, desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on estates, inheritances, and gifts, have appointed for that purpose as their respective plenipotentiaries:
The President of the United States of America: The Honorable George S. Vest, Assistant Secretary of State for European Affairs, The President of the French Republic: His Excellency Francois de Laboulaye, Ambassador of France, who having communicated to each other their full powers, found in good and due form, have agreed upon the following provisions…”
The Totalization Agreements are a bit different. The sole purpose of the Totalization Agreement is to avoid double-taxation of social security. For example, if a U.S. person work in a foreign country for a foreign employer, it avoid them from having social security withheld on the same income, for both countries.
As provided by the IRS:
The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country.
Totalization Agreements, also referred to as bilateral agreements, eliminate dual social security coverage (the situation that occurs when a person from one country works in another country and is required to pay social security taxes to both countries on the same earnings). Each Totalization Agreement includes rules intended to assign a worker’s coverage to the country where the worker has the greater economic attachment. The agreements generally ensure that the worker pays social security taxes to only one country, provided the worker and the employer meet the procedural requirements under the agreement for obtaining an exemption from the other country’s social security taxes.
If a worker is temporarily transferred to work for the same employer in another country, the worker remains covered only by the country from which he/she has been sent. This is known as the “Detached Worker” Rule.
If an American employer sends an American citizen or resident alien to work in a foreign country that does not have a Totalization Agreement with the United States, the American employer and the employee are generally liable to pay social security taxes to both countries. However, when an American employer sends an American citizen or resident alien to work in a foreign country with which the United States has a Totalization Agreement, relief from dual social security taxes is provided. “
FATCA Agreement (IGA)
FATCA is the Foreign Account Tax Compliance Act. The goal of the act is to avoid offshore tax evasion and the hiding of assets and income overseas, and away from proper tax liability in the U.S. (and vice versa).
As provided by the IRS:
“The Foreign Account Tax Compliance Act (FATCA), which was passed as part of the HIRE Act, generally requires that foreign financial Institutions and certain other non-financial foreign entities report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The HIRE Act also contained legislation requiring U.S. persons to report, depending on the value, their foreign financial accounts and foreign assets.
FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. FFIs are encouraged to either directly register with the IRS to comply with the FATCA regulations (and FFI agreement, if applicable) or comply with the FATCA Intergovernmental Agreements (IGA) treated as in effect in their jurisdictions.
Claiming Tax Treaty Benefits
A Taxpayer claims benefits on a Form 8833.
Claiming treaty benefits can sometimes put the taxpayer at risk, especially if the IRS believes the position is frivolous.
Therefore, it is important for Taxpayers to speak with experienced counsel before taking a treaty position.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.