By Bethany Bouw, CPA
One is often directed to the tax treaties when beginning to consider the tax ramifications of foreign activities or related to foreign persons. When faced with a complicated question and hoping that the income is tax exempt, we are drawn towards the treaties and their wealth of information. However, there are serious problems that can arise if the treaty is accidentally misused or misunderstood.
Areas to look out for:
Make sure you access the most recent income tax treaty. Some countries have various iterations of the treaty. You could potentially come to the wrong conclusions if you inadvertently refer to an older tax treaty.
Consider Limitation of Benefits articles. It is important to look for the Limitation of Benefits (LOB) clauses in the treaties so you do not inadvertently conclude the taxpayer is allowed to utilize the treaty. These generally target third country residents attempting to obtain treaty benefits from the primary or secondary countries.
Consider the “savings clause”. Make sure to look for the “savings clause” in the treaty. These often allow the contracting states to tax their residents as if the treaty were not in effect. Also, make sure to check the rest of the article in which you find the “savings clause” as it may not apply to specific articles of the treaty.
Read carefully – “And”, “;”, “except”, etc. There may be specific requirements that end in “and” or another conjunction. If there are four items listed under requirements for an exemption from income tax and each requirement ends in “and,” all four requirements must be met in order to have an exemption. Also look out for use of the semi-colon at the end of the listed items with the second to last using the word “and.” The meaning is that all the listed items must be met for the requirement to be fulfilled.
Be mindful of the Totalization Agreements. Make sure that you look into the totalization agreements if you are dealing with a question that relates to self-employment and/or social security (or the equivalent in the country of question). Fewer countries have totalization agreements than income tax treaties.
Read the other articles referenced in the article you believe applies. Treaty articles often refer to other articles within the treaty. Make sure you read the referenced articles so you are informed if there is an exception that applies. This can be seen often between the articles about pensions/annuities and government remuneration.
Understand the difference between independent personal service and dependent personal service. Does the person performing the services have control over how, when, where, and what they do? If the person performing the services is not able to control those aspects of their performance, they are likely performing dependent personal services.
Finally, if using treaty benefits, make sure that you document your sources and conclusions. There is not much that is more frustrating than having to look up the answer again and figure out how you reached your conclusion. Save yourself the time and effort by documenting your findings and conclusions.
If you find yourself needing to use the tax treaty, please use caution and consider contacting your tax preparer. Ryan & Wetmore has assisted clients over the years with various treaties and the implications. Please let us know if you could use our assistance.
The International Tax Team at Ryan & Wetmore is well-versed in foreign informational filings. For questions or concerns regarding your international accounts and assets, click here to email our foreign tax team. Please be aware that tax issues are complicated and may vary based on the details of your situation. For this reason, an initial phone call is generally required to obtain the facts and address the questions.
Bethany Bouw CPA, is a manager at Ryan & Wetmore and has been with the firm for over eight years. She has experience with offshore voluntary compliance and assisting taxpayers with foreign asset and entity reporting requirements.
Traci Getz CPA, is a partner with Ryan & Wetmore, P.C. Traci has over fifteen years of experience providing accounting, tax, and consulting services to small and medium-sized business owners. She works with clients to understand their accounting and tax issues while specializing in international tax, healthcare, and construction.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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