U.S. Tax Treaties – Tips on Reading & Interpreting International Tax Rules - Golding & Golding

U.S. Tax Treaties – Tips on Reading & Interpreting International Tax Rules – Golding & Golding

U.S. Tax Treaties – Tips on Reading & Interpreting International Tax Rules

Reading a Tax Treaty can be hard. This is especially true, when a person has a significant tax liability on the line, such as a foreign country taxing your U.S. retirement (401K, IRA, 403(b) and other vehicles) or the U.S. taxing your foreign retirement (CPF, EPF, Superannuation).

Millions of U.S. Taxpayers are impacted by the language found within International Tax Treaties.

Technically, the treaty is referred to as a “Bilateral Income Tax Treaty.” Generally, a U.S. Tax Treaty is signed between the U.S. and a foreign country in which the U.S. is (or was) on good terms at the time the treaty was entered into.

A list of the U.S. Tax treaties can be found here.

Common issues handled in a treaty, include:

  • General Taxation of Foreign Persons
  • Retirement
  • Double Taxation
  • Permanent Establishment
  • Catchall protection (aka Saving Clause)

How to Read a Tax Treaty

No two treaties are identical. Yes, there will be many similarities between tax treaties of different countries, but they are not identical. For example, some tax treaties allow for limited taxation of certain types of retirement; others expand the concept of double taxation, and some will provide significantly reduced tax on FDAP income.

That is why it is important to make sure to read the specific tax treaty carefully,

5 Important Facts about Tax Treaties

We have lost count of the number of people who contact us to let us know the reason they didn’t report their foreign income or assets was because... I thought there was a treaty?”

While this s a commonsense response and absolutely reasonable, more often than not it just doesn’t work that way – especially for U.S. Person Legal Permanent Residents (aka Green-Card Holders).

Foreign U.S. Person vs. Foreign Person (Non-U.S. Person)

Foreign U.S. Person

When the treaty refers to “Resident,” it simply refers to the country the person resides.

When the treaty refers to a foreign person it is generally not referring to a “U.S.” person who is from foreign country, such as a Legal Permanent Resident.

That is because when a foreign person is considered a U.S. person for tax purposes, that person is subject to tax on the worldwide income.

For example, Peter is originally from Peru, but is a legal permanent resident. Therefore, the U.S. will tax him on his worldwide income, including the reporting of foreign accounts, assets, investments, and income.

Foreign Person

A foreign person who is not considered a U.S. person may be able to avoid tax or pay reduced tax on US source income.

For example, if a non-U.S. Person receives dividends from a U.S. Source, it is considered FDAP, and tax is generally withheld at 30%.

If there is a treaty in place, the 30% may be reduced to 15%, 10%, 5% or 0.

Taxation of Foreign Retirement

This can get a bit tricky.

No Tax Treaty with the U.S.

For example is a CPF in Singapore.

A CPF is a Central Provident Fund retirement plan from Singapore. It is mandatory for people who work in Singapore to contribute. But, the U.S. does not have a Bilateral Tax Treaty with Singapore.

Since there is no U.S. Tax Treaty with Singapore (and the IRS has issued memoranda specifically on the CPF), there is no treaty to protect the earnings.

Thus, the growth within the fund is considered immediately taxable.

Treaty with the U.S.

To compare, the U.S. does have a treaty with the UK. Generally, any income accruing within the retirement fund is not going to be taxed during the growth/accumulation phase.

And, when it is distributed, there are specific, complex rules as to whether some or all of it is taxable, and who gets to collect tax.

*Growth within the fund is different than the taxation of salary contributions.

Public vs. Private Retirement/Pension

Generally (many exceptions, exclusions, and limitations apply), the country of residence of the person receiving a pension gets the chance to tax the distributions.

Still, depending on the specific tax treaty, a person’s public pension is oftentimes not taxable by the country of residence, even if a private pension would otherwise be taxable.

Example of common tax treaty language limiting taxation rights of the resident, provides:


Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

Double Tax/Foreign Tax Credit

Generally, in accordance with the Tax Treaty, a person is entitled to a Foreign Tax Credit and/or avoid Double Taxation on the same income.

Permanent Establishment (Business)

There are very specific rules as to whether a foreign business from one country will be taxed in the other country for business it conducts  in the other country (different than rules for individuals). Generally, in order for the country to tax the foreign business, it must have a “Permanent Establishment.”

Generally:

The term “permanent establishment” includes especially:


(a) a place of management;


(b) a branch;


(c) an office;


(d) a factory;


(e) a workshop; and


(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.


3. The term “permanent establishment” also includes:


(a) a building site, a construction, assembly or installation project, or supervisory activities in connection therewith, but only where such site, project or activities continue for a period of more than six months;


(b) an installation, drilling rig or ship used for the exploration or exploitation of natural resources, but only if so used for a period of more than three months; and


(c) the furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only where such activities continue (for the same or a connected project) within the country for a period or periods aggregating more than six months within any twelve month period.


4. Notwithstanding the provisions of paragraphs 1 through 3, the term “permanent establishment” shall be deemed not to include:


(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;


(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery;


(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;


(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise;


(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;


(f) the maintenance of a fixed place of business solely for any combination of the activities mentioned in subparagraphs (a) through (e), provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

Saving Clause

The good old Saving Clause.

The Saving Clause is use to protect the interest of the U.S., by allowing the U,S, to…tax you anyway. This helps resolve and ambiguities or conflicts in the treaty, and protect against modified, new or updated laws.

An example of a Saving Clause:


Notwithstanding any provision of the Convention except the provisions of paragraph 3, the United States may tax its residents, as determined under Article 4 (Resident), and its citizens as if the Convention had not come into effect.


For this purpose, the term citizen” shall include a former citizen whose loss of citizenship had as one of its principal purposes the avoidance of income tax, but only for a period of 10 years following such loss.


Out of Compliance for Unreported Foreign Money?

International Tax is hard. Oftentimes, individuals will learn after the fact that they have not properly reported their foreign income, assets, accounts or investments. If you are out compliance, there are various amnesty/voluntary disclosure programs.

We specialize in Offshore Disclosure.

Safely Get Into Compliance with an Experienced Dually Licensed Offshore Disclosure Attorney

Unlike other areas of International Tax, you need a law firm that practices exclusively in the area of IRS Offshore Disclosure, and your attorney should be a Board Certified Tax Law Specialist.

We’re here to help you.

What is the Board Certified Tax Law Specialist Credential?

Once an Attorney earns the prestigious Board Certified Tax Law Specialist credential, it proves to the general public that the attorney is dedicated to tax law, and has real tax law practice experience as an Attorney.

Few tax attorneys have passed the tax speciality exam (regarded as one of the most difficult tax exams in the country) — and met the additional education, experience, and recommendation requirements necessary for certification.

Once a person becomes “Board Certified in Tax,” it shows they have met the following requirements:

  • Advanced tax education 
  • Extensive tax law experience
  • Attorney & Judge recommendations for certification

In California for example, there are 200,000 active Attorneys, with tens of thousands of Attorneys practicing in some area of tax — and only 350 Tax Attorneys have successfully earned the designation.

Less than 1% of Attorneys nationwide have earned the credential.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

IRS Offshore Disclosure is ALL we do.

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Sean has 20 years legal experienced and leads his team on each and every case, from beginning-to-end.

Tax Law Specialty Firms are Best Prepared to Represent You in Specialized Tax Matters

Unless the firm has 50-100 attorneys, with a $25 million operating budget, a successful boutique tax-law firm will almost always have all of the attorneys in the firm devote the firms’s time, energy, and resources to one specific area of tax.

In other words, all the attorneys in the boutique tax firm practice the same, single area of tax law.

Some common niche areas of tax law include:

  • Tax Litigation
  • Employment Tax
  • Sales Tax
  • Offshore Voluntary Disclosure

For example, in employment tax, all tax attorneys in the firm handle employment tax related cases. In sales tax, all the tax attorneys in the firm handle sales tax. It may be “Sales Tax” in various different fields and industries — but the firm will limit the niche practice to sales tax.

The same is true for Offshore Voluntary Disclosure. If a firm handles Offshore Voluntary Disclosure, then all tax attorneys at the firm should be handling the same area of tax law.

This area of Offshore Disclosure law is constantly evolving, and becoming infinitely more complicated — including highly complex issues involving:

  • FBAR
  • FATCA
  • PFIC
  • CFC
  • International Cryptocurrency
  • J5
  • Increased Schedule B Enforcement (Paul Manafort)
  • Foreign Gifts
  • Foreign Inheritance
  • Foreign Business 
  • Foreign Trusts
  • OVDP
  • IRM
  • SDOP
  • SFOP

If a small firm has attorneys practicing 5-10 different areas of tax law (and even non-tax law related matters) – it can put your case at a severe disadvantage.

Why? Because it is impossible for these types of “general tax firms” to establish set protocols, policies and procedures sufficient to handle all the complexities and nuances for multiple different types of niche tax law areas.

At our tax specialty firm, we handle matters involving Offshore Voluntary Disclosure, and each case is led by one or more highly experienced attorneys.

This guarantees that your case gets the time and dedication it deserves.

Why Do We Care?

Because each month, like clockwork, we get calls from individuals in an utter state of panic, because the “Expert” or “Specialist” who made themselves out to be knowledgeable, has no real knowledge of Offshore Disclosure.

It turns out, the Attorney has never handled a complex Offshore Disclosure.

Oftentimes, Golding & Golding is called upon to fix these messes. Click Here to learn about some of the representative matters we have handled.

Serious Tax Matters; Serious Tax Consequences

Getting hit with an eggshell audit, reverse-eggshell audit, or IRS Special Investigation involving offshore money is serious business – it’s not like getting a traffic ticket or speeding ticket.

The ramifications of serious tax inquiries by the IRS (especially in the area of Offshore Disclosure and Compliance), can result in serious consequences such as monetary fines, penalties and even jail time.

Golding & Golding – IRS Offshore Disclosure Lawyers

We are the only attorneys worldwide that focuses exclusively in IRS Offshore Disclosure, and each and every case is led and managed by Mr. Golding and his team.

What Type of Attorney Should I Hire?

IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.

You should hire a Tax Attorney who has the following credentials:

  • ~20 Years of Private Practice experience representing his/her own clients
  • Experienced in Criminal and Civil Tax Litigation
  • Experienced representing clients in Eggshell and Reverse Eggshell Audits.
  • Advanced Tax Degree (LL.M.)
  • EA (Enrolled Agent) or CPA (Certified Public Accountant)
  • Preferably a Board Certified Tax Law Specialist

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.