US UK Tax Treaty - Cross-Border Tax Summary & IRS Double Taxation - Golding & Golding

US UK Tax Treaty – Cross-Border Tax Summary & IRS Double Taxation – Golding & Golding

US UK Tax Treaty – Cross-Border Tax Summary & IRS Double Taxation

The tax treaty between the United States (US) and United Kingdom (UK) provides tax guidance and clarification on issues involving the taxation of certain types of personal, business and retirement income.

We represent a diverse range of clients from the United Kingdom (UK) in all aspects of IRS offshore tax and reporting — pensions, QROPS, mutual funds, ISAs, real estate, stocks and securities, etc.

Common questions we receive, include:

  • US UK Tax Treaty Introduction?
  • What is a Tax Treaty?
  • Who is Covered?
  • What is Worldwide Taxation?
  • What is Residency?
  • What Taxes are Covered?
  • What is a Permanent Establishment?
  • How are Pensions and Retirement Taxed?
  • What is the Saving Clause?

Unfortunately, there is a lot of misinformation online regarding the application of the US-UK Tax Treaty, and we want to try to help.

US UK Tax Treaty 

Any attorney who tells you a tax treaty is “easy” once you “know how to read it” has no idea how to really read a tax treaty.

It would take too long (read: bore you to sleep) to try to delve into each issue involving the tax treaty, so instead, we are providing you a concise explanation of some of the more common issues you may have to deal with involving the tax treaty (with an emphasis from the U.S. tax perspective).

-On issues involving UK pensions specifically, we have a separate article that you can find that here.

-On issues involving UK General tax liability and Reporting on UK income/Assets, you can find that here.

-If you are interested in reading a full copy of the treaty, you can find that here.

What is a Tax Treaty?

To best understand what a Tax Treaty is meant to do, it is important to understand the purpose behind the Treaty.

The main purpose of the bilateral income tax treaty is to provide some relief and clarifications on tax issues involving the two specific countries that have entered into a “Tax Agreement.”

While today’s focus is on the actual treaty and the language of the Income Tax Treaty itself, there are various different types of bilateral tax agreements, such as:

  • Estate Tax Treaties (Gift and Estate Tax)
  • Totalization Agreements (Social Security/Self-Employment Tax)
  • FATCA Agreements (Foreign Account Tax Compliance Act)

Who is Covered?

It is first important to determine whether the person trying to apply the treaty is a US person or not.

Worldwide Taxation – U.S.

The Treaty does not modify the general proposition that when a person is a U.S. Person, the U.S. has the right to tax them on their worldwide income. Likewise, the UK has the right to tax UK citizens/residents in accordance with HMRC rules.

Rather, the treaty is generally used to:

  • Limit or restrict taxation Rules for certain residents
  • Minimize certain FDAP income
  • Avoid certain business taxation unless a Permanent Establishment is met
  • Define who gets to tax retirement income

In other words, just because there is a tax treaty, does not mean the U.S. loses the right to tax U.S. persons.

Residency

This is very important and one of the key impacts of any tax treaty.

If for example, a person is from the UK, and resides in the U.S. then portions of the tax treaty will impact certain taxes (such as retirement) but not others. This is is the same as if a person is a U.S. person, but resides in the UK.

What Taxes are Covered?

The Treaty applies to taxes as they relate to income and capital gains.

More specifically:

In the case of the United States:

– The Federal income taxes imposed by the Internal Revenue Code (but excluding social security taxes); and


– The Federal excise taxes imposed on insurance policies issued by foreign insurers and with respect to private foundations.


 In the case of the United Kingdom:


– The income tax the capital gains tax the corporation tax the petroleum revenue tax.


More generally:


– “This Convention shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of this Convention in addition to, or in place of, the existing taxes.


– The competent authorities of the Contracting States shall notify each other of any changes that have been made in their respective taxation or other laws that significantly affect their obligations under this Convention.”


Who is Considered a Resident?

Generally, a “Resident” is defined as:


For the purposes of this Convention, any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.


It is important to note, that the term excludes any person who is receiving income and its source and the contracting stay stemming specifically from a permanent establishment (discussed below)

Permanent Establishment

There are various specific laws involving when a person is taxed with respect to business related income. This section is very comprehensive, but the main take away is that unless there is a permanent establishment in the contracting country, generally that country does not have the right to tax the person on income generated from that country come of that source.

For example, if a company from one contracting state conducts business in the other contracting state, but that company does not have a permanent establishment in the contracting country, then the other contracting Country cannot tax the income.

A most basic example (noting that several exceptions, exclusions, and limitations will apply): If a company from the UK is conducting business in the United States but does not have a permanent establishment in the United States, in the US cannot tax that income.

Exceptions

As you can imagine, both countries wanted to cover themselves and article 5 of the treaty includes a laundry list are situations in which the permanent establishment requirement is not met.

Retirement, Pension, Social Security and Annuities

This is usually the most talked about section of treaty.  And rightfully so — you’ve worked hard for your money, right?

Why give away one penny more than you have.  As you can imagine, this is a very complex and complicated topic that people contact us for all the time. 

Generally, Pensions and other similar remuneration is taxed in the country in which the person resides. There are exceptions, exceptions to the exceptions, and even more exceptions that kick-in, the deeper you go.

3 Basics Tenets of Retirement Law and Taxes

  • The resident country taxes the retirement.
  • But if the retirement would be exempt in the other country, is exempt in the resident country.
  • Lump Sum payments are only taxable in the country which issued the pension.

Pension Schemes (Specifically)

Generally, if a person resides in one country (U.S. for example) and is a member/participant of a pension scheme in the other country (U.K.), the income is only taxable (exceptions apply) when it is paid, and in the country of residence.

Why is this Important?

Because without the treaty, the U.S. can decide to tax an otherwise non-U.S. 401K-type equivalent pension before the income is paid (when it is accrued).  See CPF Taxation Rules.

Saving Clause

Notwithstanding the treaty, (unless the Saving Clause does not apply to a specific section), you can still be taxed on income, despite what the treaty says, because the treaty allows for it, under the “Saving Clause.”

Are You Out of IRS Compliance?

If you have unreported income, accounts, assets, or investments from the UK or multiple countries – we can help.

Experienced IRS Offshore Disclosure Counsel

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.

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.