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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. · Article XIV- Independent Personal Services- seeks to address the taxation of income from self-employed persons. · 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. · Article XIV- Artistes and Athletes- seeks to address the taxation of income from such persons. · Article XXII- Other Income- - seeks to address the taxation of all other income not addressed elsewhere. · 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. · 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. Other General Facts To Consider: 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. 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. ********************************************************************* The Hidden Jewel Form 2555- Foreign Earned Income Exclusion’s Other Cousin September 14, 2004 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.
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. Qualified foreign housing expenses are typically much higher than a taxpayer’s included employer paid for housing income, or quarters. 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. 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.
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. *********************************************************** To Be Or Not To Be Self-Employed Versus Employed On A Foreign Assignment Outside The US September 14, 2004 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. To Be Employed Versus Self-Employed (SE) 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. 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. 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. 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. Another Interesting Fact 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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