Tax Treaty Benefits

Topics

This chapter discusses:

• Some common tax treaty benefits,
• How to get help in certain situations, and
• How to get copies of tax treaties.

Useful Items You may want to see:

Publication

• 597   Information on the United States-Canada Income Tax Treaty
• 901   U.S. Tax Treaties

See chapter 7 for information about getting these publications.

Purpose of Tax Treaties

The United States has tax treaties or conventions with many countries. See Table 6-1 at the end of this chapter for a list of these countries.

Under these treaties and conventions, citizens and residents of the United States who are subject to taxes imposed by the foreign countries are entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. If a foreign country with which the United States has a treaty imposes a tax on you, you may be entitled to benefits under the treaty.

Treaty benefits generally are available to residents of the United States. They generally are not available to U.S. citizens who do not reside in the United States. However, certain treaty benefits and safeguards, such as the nondiscrimination provisions, are available to U.S. citizens residing in the treaty countries. U.S. citizens residing in a foreign country may also be entitled to benefits under that country's tax treaties with third countries.

You should carefully examine the specific treaty articles that may apply to find if you are entitled to a tax credit, tax exemption, reduced rate of tax, or other treaty benefit or safeguard.

Common Benefits

Some common tax treaty benefits are explained below. The credits, deductions, exemptions, reductions in rate, and other benefits provided by tax treaties are subject to conditions and various restrictions. Benefits provided by certain treaties are not provided by others.

1. Personal service income. If you are a U.S. resident who is in a treaty country for a limited number of days in the tax year and you meet certain other requirements, pay you receive for personal services performed in that country may be exempt from that country's income tax.

2. Professors and teachers. If you are a U.S. resident, pay you receive for the first 2 or 3 years that you are teaching or doing research in a treaty country may be exempt from that country's income tax.

3. Students, trainees, and apprentices. If you are a U.S. resident, amounts you receive from the United States for study, research, or business, professional and technical training may be exempt from a treaty country's income tax.

Some treaties exempt grants, allowances, and awards received from governmental and certain nonprofit organizations. Also, under certain circumstances, a limited amount of pay received by students, trainees, and apprentices may be exempt from the income tax of many treaty countries.

4. Pensions and annuities. If you are a U.S. resident, nongovernment pensions and annuities you receive may be exempt from the income tax of treaty countries.

Most treaties contain separate provisions for exempting government pensions and annuities from treaty country income tax, and some treaties provide exemption from the treaty country's income tax for social security payments.

5. Investment income. If you are a U.S. resident, investment income, such as interest and dividends, that you receive from sources in a treaty country may be exempt from that country's income tax or taxed at a reduced rate.

Several treaties provide exemption for capital gains (other than from sales of real property in most cases) if specified requirements are met.

6. Tax credit provisions. If you are a U.S. resident who receives income from or owns capital in a foreign country, you may be taxed on that income or capital by both the United States and the treaty country.

Most treaties allow you to take a credit against or deduction from the treaty country's taxes based on the U.S. tax on the income.

7. Nondiscrimination provisions. Most U.S. tax treaties provide that the treaty country cannot discriminate by imposing more burdensome taxes on U.S. citizens who are residents of the treaty country than it imposes on its own citizens in the same circumstances.

8. Saving clauses. U.S. treaties contain saving clauses that provide that the treaties do not affect the U.S. taxation of its own citizens and residents. As a result, U.S. citizens and residents generally cannot use the treaty to reduce their U.S. tax liability.

However, most treaties provide exceptions to saving clauses that allow certain provisions of the treaty to be claimed by U.S. citizens or residents. It is important that you examine the applicable saving clause to determine if an exception applies.

Competent Authority Assistance

If you are a U.S. citizen or resident, you can request assistance from the U.S. competent authority if you think that the actions of the United States, a treaty country, or both, cause or will cause a tax situation not intended by the treaty between the two countries. You should read any specific treaty articles, including the mutual agreement procedure article, that apply in your situation.

If your request provides a basis for competent authority assistance, the U.S. competent authority generally will consult with the treaty country competent authority on how to resolve the situation.

The U.S. competent authority cannot consider requests involving countries with which the United States does not have an applicable tax treaty.

It is important that you make your request for competent authority consideration as soon as either of the following occurs.

• You are denied treaty benefits.
• Actions taken by both the United States and the foreign country result in double taxation or will result in taxation not intended by the treaty.

In addition to making a request for assistance, you should take steps so that any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Some of the steps you should consider taking include the following.

1. Filing a protective claim for credit or refund of U.S. taxes.
2. Delaying the expiration of any period of limitations on the making of a refund or other tax adjustment.
3. Avoiding the lapse or termination of your right to appeal any tax determination.
4. Complying with all applicable procedures for invoking competent authority consideration.
5. Contesting an adjustment or seeking an appropriate correlative adjustment with respect to the U.S. or treaty country tax.

Taxpayers can consult with the U.S. competent authority to determine whether they need to take protective steps and when any required steps need to be taken.

Your request for competent authority consideration should be addressed to:

Director, International
Attn: Office of Tax Treaty
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224.

The request should contain all essential items of information, including the following items.

• The facts from which the issue arises.
• The years and amounts of income and tax involved.
• A description of the issue and identification of the relevant treaty provisions.
• The respective positions taken by you and the foreign country.
• Copies of any protests, briefs, or other pertinent documents.

Additional details on the procedures for requesting competent authority assistance are included in Revenue Procedure 2002-52, which is in Internal Revenue Bulletin 2002-31.

More information on treaties and problems.   Publication 901 contains an explanation of treaty provisions that apply to amounts received by teachers, students, workers, and government employees and pensioners who are alien nonresidents or residents of the United States. Since treaty provisions generally are reciprocal, you can usually substitute United States for the name of the treaty country whenever it appears, and vice versa when U.S. appears in the treaty exemption discussions in Publication 901.

Publication 597 contains an explanation of a number of frequently-used provisions of the United States-Canada income tax treaty.

Obtaining Copies of Tax Treaties

Table 6-1 lists those countries with which the United States has income tax treaties. This table is updated through September 30, 2002.

You can get complete information about treaty provisions from the taxing authority in the country from which you receive income or from the treaty itself. You can obtain the text of most U.S. treaties at www.irs.gov. You can also request the text of treaties from the Department of Treasury. Call (202) 622-2970, or write to:

Department of Treasury
Office of Public Liaison
Rm. 3127
1500 Pennsylvania Avenue, NW
Washington, DC 20220.

If you have specific questions about a treaty and you are in the United States, Puerto Rico, or the U.S. Virgin Islands, you can call the IRS at 1-800-829-1040. From anywhere in the world, you can send your questions to:

Internal Revenue Service
International Section
P.O. Box 920
Bensalem, PA 19020-8518.

Table 6-1. Table of Tax Treaties (Updated through September 30, 2002)

Country	Official Text Symbol 1	General Effective Date	Citation	Applicable Treasury Explanations or Treasury Decision (T.D.)
Australia	TIAS 10773	Dec. 1, 1983	1986-2 C.B. 220	1986-2 C.B. 246
Austria	TIAS	Jan. 1, 1999
Barbados	TIAS 11090	Jan. 1, 1984	1991-2 C.B. 436	1991-2 C.B. 466
Protocol	TIAS	Jan. 1, 1994
Belgium	TIAS 7463	Jan. 1, 1971	1973-1 C.B. 619
Protocol	TIAS 11254	Jan. 1, 1988
Canada 2	TIAS 11087	Jan. 1, 1985	1986-2 C.B. 258	1987-2 C.B. 298
Protocol	TIAS	Jan. 1, 1996
China, People's Republic of	TIAS 12065	Jan. 1, 1987	1988-1 C.B. 414	1988-1 C.B. 447
Commonwealth of Independent States 3	TIAS 8225	Jan. 1, 1976	1976-2 C.B. 463	1976-2 C.B. 475
Cyprus	TIAS 10965	Jan. 1, 1986	1989-2 C.B. 280	1989-2 C.B. 314
Czech Republic	TIAS	Jan. 1, 1993
Denmark	TIAS	Jan. 1, 2001
Egypt	TIAS 10149	Jan. 1, 1982	1982-1 C.B. 219	1982-1 C.B. 243
Estonia	TIAS	Jan. 1, 2000
Finland	TIAS 12101	Jan. 1, 1991
France	TIAS	Jan. 1, 1996
Germany	TIAS	Jan. 1, 1990 4
Greece	TIAS 2902	Jan. 1, 1953	1958-2 C.B. 1054	T.D. 6109, 1954-2 C.B. 638
Hungary	TIAS 9560	Jan. 1, 1980	1980-1 C.B. 333	1980-1 C.B. 354
Iceland	TIAS 8151	Jan. 1, 1976	1976-1 C.B. 442	1976-1 C.B. 456
India	TIAS	Jan. 1, 1991
Indonesia	TIAS 11593	Jan. 1, 1990
Ireland	TIAS	Jan. 1, 1998
Israel	TIAS	Jan. 1, 1995
Italy	TIAS 11064	Jan. 1, 1985	1992-1 C.B. 442	1992-1 C.B. 473
Jamaica	TIAS 10207	Jan. 1, 1982	1982-1 C.B. 257	1982-1 C.B. 291
Japan	TIAS 7365	Jan. 1, 1973	1973-1 C.B. 630	1973-1 C.B. 653
Kazakstan	TIAS	Jan. 1, 1996
Korea, Republic of	TIAS 9506	Jan. 1, 1980	1979-2 C.B. 435	1979-2 C.B. 458
Latvia	TIAS	Jan. 1, 2000
Lithuania	TIAS	Jan. 1, 2000
Luxembourg	TIAS	Jan. 1, 2001
Mexico	TIAS	Jan. 1, 1994	1994-2 C.B. 424	1994-2 C.B. 489
Protocol	TIAS	Oct. 26, 1995
Morocco	TIAS 10195	Jan. 1, 1981	1982-2 C.B. 405	1982-2 C.B. 427
Netherlands	TIAS	Jan. 1, 1994
New Zealand	TIAS 10772	Nov. 2, 1983	1990-2 C.B. 274	1990-2 C.B. 303
Norway	TIAS 7474	Jan. 1, 1971	1973-1 C.B. 669	1973-1 C.B. 693
Protocol	TIAS 10205	Jan. 1, 1982	1982-2 C.B. 440	1982-2 C.B. 454
Pakistan	TIAS 4232	Jan. 1, 1959	1960-2 C.B. 646	T.D. 6431, 1960-1 C.B. 755
Philippines	TIAS 10417	Jan. 1, 1983	1984-2 C.B. 384	1984-2 C.B. 412
Poland	TIAS 8486	Jan. 1, 1974	1977-1 C.B. 416	1977-1 C.B. 427
Portugal	TIAS	Jan. 1, 1996
Romania	TIAS 8228	Jan. 1, 1974	1976-2 C.B. 492	1976-2 C.B. 504
Russia	TIAS	Jan. 1, 1994
Slovak Republic	TIAS	Jan. 1, 1993
Slovenia	TIAS	Jan. 1, 2002
South Africa	TIAS	Jan. 1, 1998
Spain	TIAS	Jan. 1, 1991
Sweden	TIAS	Jan. 1, 1996
Switzerland	TIAS	Jan. 1, 1998
Thailand	TIAS	Jan. 1, 1998
Trinidad and Tobago	TIAS 7047	Jan. 1, 1970	1971-2 C.B. 479
Tunisia	TIAS	Jan. 1, 1990
Turkey	TIAS	Jan. 1, 1998
Ukraine	TIAS	Jan. 1, 2001
United Kingdom	TIAS 9682	Jan. 1, 1975	1980-1 C.B. 394	1980-1 C.B. 455
Venezuela	TIAS	Jan. 1, 2000

1 (TIAS) - Treaties and Other International Act Series.

2 Information on the treaty can be found in Publication 597, Information on the United States-Canada Income Tax Treaty.

3 The U.S.-U.S.S.R. income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and    Uzbekistan.

4 The general effective date for the area that was the German Democratic Republic is January 1, 1991.

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