Reporting treaty-based return positions.

• Author: Packard, Pamela

By now, most tax practitioners should be comfortable with the reporting requirements for payments subject to U.S. withholding tax, especially after the waves created by FormW-8BEN, Certificate of Foreign Status or Beneficial Owner for United States Tax Withholding, when it was first released. With the extended tax season on the horizon, practitioners should not forget about another change added last year that may affect some taxpayers. In fact, what may appear to be a minor problem could ultimately be a major one on closer examination of the rules.

Disclosing Treaty-Based Return Positions

Generally, under Regs. Sec. 301.6114-1(a)(2)(i), a taxpayer would take a treaty-based return position if there were a difference between the tax liability that the taxpayer intended to report on its return and the tax liability that it would have reported if the relevant treaty provision did not exist. Accordingly, if the taxpayer takes such a position, it must disclose it on Form 8833, Treaty-Based Return Position Disclosure, accompanying its return.

Regs. Sec. 301.6114-1(b) provides a list of specific positions for which disclosure would be necessary--even if a taxpayer is not otherwise required to file a return. Regs. Sec. 301.6114-1 (b)(4)(ii)(C) provides that, for post-2000 payments exceeding $500,000, a taxpayer would have to report a position taken under a tax treaty containing a limitation-on-benefits (LOB) provision, if the treaty exempts the tax (or reduces the tax rate) on fixed or determinable annual or periodic (FDAP) income subject to withholding under Secs. 1441 and 1442, received by a foreign person that is the income's beneficial owner and related to the payor within the meaning of Secs. 267(b) and 707(b).

Under Regs. Sec. 301.6114-1 (b)(4)(ii)(D), a taxpayer would also have to explicitly disclose any post-2000 payments under a treaty that imposes any other conditions for the entitlement of treaty benefits, if the taxapayer takes the position that the payments meet these conditions. This requirement can apply when a treaty has a two-tier withholding rate on dividends (e.g., owners of 10% or more of the payor's stock obtain a 5% withholding rate, while all other owners are entitled to only a 15% rate). In addition, if read literally, this regulation may imply that, even in the absence of a two-tier withholding system, any provision that imposes conditions on treaty benefits will subject FDAP income to disclosure. One such provision is the...