International Tax Gap Series
The United States has income tax treaties with a number of foreign countries. Under these treaties, residents of foreign countries may be:
taxed at a reduced rate or
exempt from U.S. income taxes on certain items of income received from sources within the U.S.
Because treaty provisions are generally reciprocal (apply to both treaty countries), a U.S. 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 U.S. tax for nonresidents and foreign tax for U.S. residents and citizens, each treaty must be reviewed to determine eligibility for these provisions. This article provides some highlights about tax treaties and how to properly apply their provisions.
Most tax treaties have a saving clause that preserves the right of each country to tax its own citizens and treaty residents as if no tax treaty were in effect. However, the saving clause generally excepts specified income types from its application, which may allow you to claim certain treaty benefits even if you are a U.S. citizen or resident.
For nonresident aliens, treaties can limit or eliminate U.S. 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 some types of income (e.g., see provisions applicable to students/apprentices/trainees and teachers/professors/researchers). 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, U.S. Tax Treaties, provides a summary of these treaty provisions.
U.S. Citizens and U.S. Treaty Residents
In many cases, U.S. citizens and U.S. treaty residents will not be able to reduce their U.S. 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 United States. Foreign taxing authorities sometimes require certification from the United States that an applicant filed an income tax return as a U.S. 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, U.S. Tax Guide for Aliens, under the section on Reporting Treaty Benefits Claimed.
Competent Authority Assistance
If you are a U.S. citizen or U.S. resident for purposes of a treaty, you can request assistance from the U.S. competent authority if you think that the actions of the U.S., the applicable treaty country or both caused or will cause double taxation or taxation otherwise inconsistent with the treaty. You should read any treaty articles, including the mutual agreement procedure article, that apply in your situation. The U.S. competent authority cannot consider requests involving countries with which the U.S. does not have a treaty. Refer to Competent Authority Agreements and Competent Authority Assistance for information on existing competent authority agreements and how to make a competent authority request.
Obtaining Copies of Tax Treaties
To view the text of a specific tax treaty, go United States Income Tax Treaties - A to Z. You will find the text of each treaty, and in most cases, the Technical Explanation for the treaty. The Technical Explanation provides more detail on the intent of the treaty language.
Remember that tax treaties are updated periodically and amended by protocols, so be sure to check for the latest information on specific treaties when claiming treaty benefits.
References and Links
- Tax Treaties
- Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad
- Publication 515, Withholding of Tax on Nonresidents and Foreign Entities
- Publication 519, U.S. Tax Guide for Aliens
- Publication 901, U.S. Tax Treaties
- Form 8833, Treaty-Based Return Position Disclosure
- Form 8802, Application for United States Residency Certification
The International Tax Gap Series