§ 8.6 Income Tax Conventions (treaties)

• Library: Rights of Foreign Nationals (OSBar) (2020 Ed.)

§ 8.6 INCOME TAX CONVENTIONS (TREATIES)

Treaties are a complex area. They exist to prevent double taxation between a country of residency and a country of nonresidency, under their respective domestic tax laws. Provisions that individuals commonly use include the following:

(1) Savings Clause—Found in paragraph 4 of article 1 of the Model Treaty, this common provision in U.S. treaties reserves the right of the United States to tax its citizens as if the treaty did not exist. Paragraph 5 of article 1 does allow certain treaty benefits to its citizens, including "Relief From Double Taxation," "Non-Discrimination," and some others (e.g., pensions, Social Security, annuities, alimony, and child support).

(2) Employees—Found in paragraph 2 of article 14 (Income From Employment) of the Model Treaty, this generally allows a resident of a treaty country to travel to the United States on business and to be physically present in the United States for up to 183 days during any 12-month period beginning or ending in the tax year and have these wages exempted from U.S. federal taxation. In addition, the cost of the wages cannot be borne by a U.S. permanent establishment. The 183 days includes weekends and vacations (e.g., a two-week vacation in Hawaii would count toward the 183 days). The 184th day is often referred to as "falling off a cliff," as the taxpayer will now likely need to file a U.S. income tax return and report income retroactive to the first U.S. business trip in that rolling 12-month testing period.

(3) Independent Contractors/Sole Proprietors—Found in article 7 of the Model Treaty, this allows a business owner from a treaty country to conduct sales and purchases in the United States and be exempt from U.S. taxation provided the taxpayer does not open an office or "permanent establishment" in the United States. Article 5 is entirely devoted to the definition of a permanent establishment, and this is often a complex area requiring a close analysis of the facts and circumstances surrounding the business activities in the United States.

(4) Pensions—Article 18, paragraph 2, in the Model Treaty provides that if the taxpayer continues to participate in a 401(k)-type pension arrangement in the taxpayer's home country while working in the United States, a portion of these contributions can be deducted in computing taxable income on the taxpayer's U.S. return. Each individual treaty should be consulted, as typically only treaties that have been updated since...