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| Tax Treaties
And How They Affect You The Individual: Common OECD Model Convention Treaty
Articles in Plain English |
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| September
14, 2004 |
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| The goal of
this article is to provide a comprehensive checklist of information for
the individual to consider prior to filing a tax return. This article
is not designed to teach you the technical competence required to perform
self compliance; however it will certainly arm you with what you need to
know to determine if your US tax preparer knows all that they should to
provide you with adequate professional services. |
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| Income
Tax Treaties |
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| The US, and
various other countries, have negotiated income tax treaties based upon
preset international models, one being the OECD Model Tax Convention.
One purpose of the tax treaties is to avoid double taxation when the tax
laws of two or more countries become punitive. For the purposes of
US nonresident and resident aliens alike the following articles have been
highlighted as possibly providing you relief: |
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Article IV- Residence-
will seek to determine where an individual is tax resident if they are
found to be tax resident of two or more countries under these respective
countries domestic tax laws, commonly referred to as the “treaty tie-breaker
rules”.
Article VI- Income
form Real Property- typically real property is real-estate, so this article
would cover in part rental income or losses. As above as the country
of source maintains the first right of taxation the possibility of double
taxation here is probable. Most income tax treaties under Article
VI will not avoid this matter, so the application of the catch-all article
XXIV is required.
Article X- Dividends-
seeks to reduce the US 30% flat tax lower as per specific treaty country.
Article XI- Interest-
seeks to reduce the US 30% flat tax lower as per specific treaty country.
Article XIII-
Gains- covering capital gains from the disposition of assets- seeks to
reduce the US 30% flat tax lower as per specific treaty country.
In many cases there is a catch-all provision that capital gains remain
taxable ONLY in the alienator’s state of residence.
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Article XIV- Independent
Personal Services- seeks to address the taxation of income from self-employed
persons.
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Article XV- Dependent
Personal Services- seeks to address the taxation of income of employees.
In many treaties if the compensation is: paid and bourne by a foreign employer
and the employee is not physically present in the US for more than 183
days, the compensation shall only be taxable in the employees state of
residence. In this case not the US.
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Article XIV- Artistes
and Athletes- seeks to address the taxation of income from such persons.
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Article XXII-
Other Income- - seeks to address the taxation of all other income not addressed
elsewhere.
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Article XXIV-
Elimination of Double Taxation- seeks to invoke what is sometimes already
incorporated in to pre-existing domestic tax law, the foreign tax credit.
This article is a catch-all that prevents double taxation with respect
to income not addressed above.
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Article XXVII-
Exchange of Information- is an agreement in principle to allow the respective
taxation authorities of all treaty countries to share information to help
avoid tax evasion and to allow for the smooth application of domestic tax
laws.
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| Other General
Facts To Consider: |
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| Typically
in the case of US persons- citizens and green card holders- the US has
conveniently slipped in to most income treaties a provision usually, under
Miscellaneous Rules, to enable them to continue to tax their people as
if the income tax treaty did not exist. |
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| This is typically
referred to as a “Savings Clause”. So US persons should consult
us separately as to which income tax treaty articles may or may not apply
to them. |
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| The Hidden
Jewel |
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| Form 2555-
Foreign Earned Income Exclusion’s Other Cousin |
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| September
14, 2004 |
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| The goal of
this article is to provide a comprehensive checklist of information for
the US person to consider prior to accepting an assignment outside the
US. This article is not designed to teach you the technical competence
required to perform self compliance however, it will certainly arm you
with what you need to know to determine if your US tax preparer knows all
that they should know to provide you with adequate professional services. |
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| The Foreign
Housing Exclusion (HE) Or Deduction (HD) |
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| In addition
to the FEIE there is a little known about jewel, the Foreign Housing Exclusion
(HE) for employed persons or the Foreign Housing Deduction (HD) for self-employed
persons. In addition to the above FEIE of $80,000, there is an opportunity
to augment this basic earned income exclusion by an overseas taxpayer’s
reasonable qualified foreign housing expenses. |
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| Qualified
foreign housing expenses are typically much higher than a taxpayer’s included
employer paid for housing income, or quarters. |
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| The nice feature
of the HE or HD is that the list of qualified housing costs is very broad
and all-inclusive: rent, Fair Market Value (FMV) of employer provided housing,
foreign real-estate or occupancy taxes, TV taxes, utilities but not telephone,
real or personal property insurance, “key” money or other similar
nonrefundable deposits paid to secure a lease, repairs and maintenance,
furniture rental, temporary living expenses and residential parking. |
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| This list
is quite exhaustive, but the increasingly amazing feature about the HE
or HD is that IT DOES NOT MATTER WHO PAYS FOR THESE QUALIFIED HOUSING
EXPENSES!!! Regardless of whether you the employee pay directly
for these costs or whether your employer directly pays or reimburses you
for these above costs, these costs are still includable in the HE or HD.
However, these costs may also need to be included in your employment income,
that is if paid or reimbursed by your employer. |
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| Other Interesting
Form 2555- FEIE, HE And HD Facts: |
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| The HE and
HD are both subject to a base deduction or “Housing Norm” which for 2003
is $30.77 per day. So if in 2003 you were abroad a full 365 calendar
tax year you would first need to deduct $11,231 prior to any of your Qualified
Housing Costs counting towards the HE or HD. |
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| To Be Or
Not To Be Self-Employed Versus Employed |
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| On A Foreign
Assignment Outside The US |
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| September
14, 2004 |
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| The goal of
this article is to provide a comprehensive checklist of information for
the US person to consider prior to accepting an assignment outside the
US. This article is not designed to teach you the technical competence
required to perform self compliance however, it will certainly arm you
with what you need to know to determine if your US tax preparer knows all
that they should know to provide you with adequate professional services. |
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| To Be Employed
Versus Self-Employed (SE) |
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| Generally
it is the author’s opinion that if you are employed and you go overseas
you have a distinct advantage over being self-employed (SE) overseas. |
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| Simply put
although your ‘foreign’ unreimbursed employee expenses will be excluded
from Schedule A without affecting your FEIE, all overseas SE persons Schedule
C ‘foreign’ expenses and applicable ‘foreign’ self-employed adjustments
on Form 1040 line(s) 23-32 will dollar for dollar reduce the amount of
the $80,000 FEIE available to you for use. This would also apply
to any moving expenses whether employed or self-employed, in that if claimed
and to the extent that they are considered foreign they would reduce the
amount of the $80,000 FEIE available. Moves back to the US are NOT
considered foreign. |
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| Additionally,
as SE all of your net SE income is subject to US FICA (Federal Insurance
Contributions Act) taxes- social security (6.2% on the first $87,900
of wages for 2004) and Medicare (1.45% on all wages) taxes,
however for SE persons they additionally end up paying for both the employee
and employer portions. This effectively combines to 15.3% (6.2%
+ 1.45% = 7.65% x 2) FICA taxes for all SE persons reporting net income
on a Schedule C, which is ALWAYS assessable if net income on Schedule C
arises. However persons employed abroad and NOT on US payroll, but
instead locally hired are NOT subject to US employee FICA taxes AT ALL.
They would become subject to the social security tax regime of the respective
country in which they work, if any. |
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| There is a
way however, that SE persons can avoid US FICA SE taxes. Any “Foreign
Controlled Corporation” FCC (where foreign is non US) is deemed
to have all of its income earned directly by the controlling US person.
So the ability for the deferral of income in a FCC is impossible.
However, FCC’s have one interesting feature, wherein if all of the net
income of an FCC is waged out to the controlling shareholder so as to avoid
the above deemed income rule those wages would NOT be subject to the US
FICA SE taxes of 15.3%!! This is a frequent suggestion of the author’s,
to US SE persons abroad, that is to do business through an FCC to avoid
US FICA SE taxes. However you must consider the implications of the
host country’s social security regime, which might make this suggestion
more costly. |
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| Another
Interesting Fact |
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| These exclusions
are elected, strictly voluntary and not mandatory, so in cases where claiming
the election results in exclusion income they should not be elected.
This would occur where Schedule C expenses outstrip income and these expenses
are added back actually creating income. |
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