Tax treaties or the Double Taxation treaties (DTT), as the name suggests are entered into between the two countries to coordinate their tax system at the international level.
With the advent of globalization during 60’s & 70’s it became imperative to enter into bilateral conventions in order to reduce double taxation on international income. DTT contemplate to several provisions devoted to achieving this function. They allocate the taxing rights for each kind of income and capital between the residence and the source country, delimitate double taxation relief mechanism for scenarios at which both contracting state have the right for taxing the same tax base, limit the withholding tax rate applied by the source country and harmonize main fiscal definition.
United States has tax treaties with over 68 countries. The purpose of US Tax treaties is that Residents of foreign country may be eligible to be taxed at reduced rate or exempt from US Income taxes on certain items of income they receive from sources within US. These reduced rates and exemptions vary among countries and specific items of income.
Treaty provisions are generally reciprocal in nature meaning a US citizen or US resident receiving income from treaty country may also be taxed at reduced rate by that foreign country.
Impact of the tax treaty may not be to increase tax above the liability that would result under the domestic law or under agreement between the contracting States. If domestic Law provides a more favorable treatment than the convention that taxpayer may apply the provisions of the domestic law. For example, if certain interest income is derived by a non-resident is exempt from tax statute, but the treaty authorizes a tax at source of not more than 10%, the statutory exemption will apply. A taxpayer may not make inconsistent choices between the rules of the Internal Revenue Code and the Convention Rules.
Publication 901 released by Internal Revenue Services (IRS) is a good quick reference guide to know whether a tax treaty between United States and a country offers a reduced rate of, or possibly a complete exemption from, U.S. income tax for residents of that country.
This publication contains discussions of the exemptions from tax and certain other effects of the tax treaties on the following types of income.
- Pay for certain personal services performed in the United States.
- Pay of a professor, teacher, or researcher who teaches or performs research in the United States for a limited time.
- Amounts received for maintenance and studies by a foreign student or apprentice who is here for study or experience.
- Wages, salaries, and pensions paid by a foreign government.
Tax treaty technical explanation must be referred by taxpayers having international income to understand the taxability in contracting states and to check if the taxpayer is entitled to tax credit, tax exemption, reduced rate of Tax, or other treaty benefit.
There are 50 states in United states that have their own tax law, applicability of treaty provisions is different in each state.
In order to claim benefits of treaty provisos a lot of process and paperwork is expected of a taxpayer. We at A&C expertise in understanding each of the 68 tax treaties that United States has entered and apply to each client situation. We also have expert who take compliance requirement on behalf of taxpayers .
Need assistance with tax advice? Contact our tax specialists at (469) 467-4660.