Using Income Tax Treaties and Quick Reference Tables

Purpose

This document describes how to use income tax treaties and quick reference treaty tables to determine whether tax exemption or reduced rate withholdings apply to non United States (U.S.) citizens receiving payment from the Research Foundation of SUNY (RF).

Background

An income tax treaty is a bilateral agreement entered into between two governments under which each country agrees to limit or modify the application of its domestic tax laws in an attempt to avoid “double taxation” of income to the individual. The U.S. has income tax treaties with a number of foreign countries. Under these treaties, non U.S. citizens may be exempt from or receive a reduced rate on income taxes on certain income received from U.S. sources. U.S. citizens, in contrast, are taxed on worldwide income.

The IRS provides "sourcing rules" to non U.S. citizen income payments. There are different sourcing rules tied to each income category (i.e., employees, independent contractors, fellows, other miscellaneous income payments). For more information on income sourcing rules, refer to the procedure How to Determine Foreign Source Funding.

The IRS also provides "quick reference" tax treaty tables that summarize the countries that have an income tax treaty with the United States.

Understanding and Obtaining Tax Treaties and Quick Reference Tables

Non U.S. citizens receiving income from the RF can claim an exemption or a reduced rate for U.S. income taxes. When this is the case, operating locations will receive an IRS form from the non U.S. citizen requesting the exemption and the operating location (agent) must then assess the validity of the exemption request. This is done by reviewing the quick reference income tax treaty tables and the text of the income tax treaty itself.

Reviewing Income Tax Treaties

In many cases operating locations will need to review the text of the actual tax treaty language to validate income tax treaty exemption claims. The complete texts are available on the IRS Web site on the Income Tax Treaties page.

Important! In order for a non U.S. citizen to be eligible for an income tax treaty exemption, they must have tax residence in the country for which they are claiming tax treaty exemption. This means the person is subject to the laws of the foreign country and is liable for tax in that foreign country by reason of domicile, residence, or citizenship. The RF provides two forms to acquire this information - "Request for Alien Information for Employees and Fellows" (pdf) (excel) and "Request for Alien Information for Miscellaneous Income Payments" (pdf) (excel).

Reviewing Income Tax Treaty Quick Reference Tables

The IRS provides income tax treaty "quick reference" tables to help you determine income tax treaty exemptions. The tables provide the income type codes eligible for treaty exemption as well as any maximum treaty amounts or maximum time limits for presence in the U.S. for each treaty country.

The IRS indicates “caution” in the use of quick reference tax treaty tables because they are not a complete guide to all provisions of every income tax treaty. The complete text of the tax treaty should be reviewed to validate income tax treaty exemption claims.

The following two quick reference tables are available:

When to Use Income Tax Treaties and Quick Reference Tables

Operating locations should review the appropriate quick reference table followed by the full text (if applicable) of the tax treaty prior to a non U.S. citizen receiving an income payment. The quick reference table can assist in the initial evaluation, but the income tax treaty text may also need to be reviewed to ensure accuracy and compliance with tax withholding or exemption. If any uncertainties regarding the tax treaty status remain after the review, contact the central office payroll department for assistance. Any errors or under withholdings and subsequent penalties or interest are the responsibility of the operating location as office of record.

If the treaty does not cover a particular type of income, or if no treaty exists with the non U.S. citizen's country of residence for taxation purposes and no other tax exemption applies, taxes must be withheld
at the statutory rate. The general rate for nonresident aliens is 30%. Fellows are generally allowed a reduced rate of 14%. Employees are taxed based on graduated rate tables, with special default rates (generally, single, 1 allowance). Royalty income may be exempt from all withholdings, or a reduced rate may apply.

If the income is eligible under a tax treaty and all the required documentation is current, reviewed, and complete, then the payment is not subject to income taxes. However, the RF is required to report the payment and exemption to the IRS on Form 1042-S.

Important! Participant Stipend recipients are not eligible for treaty exemption.

Determining if a Tax Treaty Exemption Applies

The following questions are designed to assist in determining whether a non U.S. citizen is eligible for income tax exemption under a tax treaty (regardless of the type of income payment). If the answer to all questions is “Yes,” the individual is generally eligible to claim an income tax treaty exemption.

Instructions:

If the answer to the first question is “Yes,” continue to the next question. If the answer to any question is “No," the individual is not eligible for exemption under an income tax treaty.

Question

Action

Guidance

Q1 - Is there a tax treaty between the US and the individual’s country of residence?

You may need to review the General Definitions or Scope sections of the income tax treaty text to determine if “territory” or “possession” is an area covered for a country under a treaty.

Common Confusion:

On Tables 1 and 2 the “Commonwealth of Independent States" actually refers to nine different European countries that comprise the US – USSR treaty. The countries include Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan.

Q2 - Does the Individual’s U.S. Tax residency status qualify under the tax treaty for a possible exemption from tax?

Determine residency status for tax purposes:

Saving Clause:

Most income tax treaties have a “saving clause” that restricts U.S. citizens, permanent residents, or resident aliens from claiming treaty benefits. Some treaties, however, have an exception to the "saving clause," which allows a resident alien and sometimes even permanent residents to continue eligibility for tax treaty benefits after passing the Green Card or Substantial Presence test.

Residency definitions are generally found in the first few articles of the treaty.

Refer to the document Tax Treaty Eligibility - Resident Alien Status for a table listing the countries that have exceptions to the Savings Clause for resident aliens and permanent residents.

Q3 - Does the primary purpose of the individual’s visit to the United States qualify for exemption under an article of the treaty?

Determine which article can be used to claim exemption based on the individual's primary purpose for being present in the United States.

Articles:

Each countries income tax treaty contains “articles” explaining the types of income the tax treaty will cover. For example, if the nonresident alien is in the U.S. with a primary purpose to study, then they will most likely be exempt under a student article within that country of residence treaty (if applicable).

Q4 - Is the individual being paid the type of income covered in the article?

Determine if an article addresses the type of income paid to the individual.

Coverage:

The individual may be receiving compensation income, fellowship income, or both. Some articles within treaties are very specific or very broad on the type of income covered. Although the IRS quick reference table is helpful, this is another reason that the actual income tax treaty articles may need to be reviewed.

Q5 - Does the individual meet the specific qualifications set forth in the tax treaty article?

Review the specific language of the article to ensure there are no specific restrictions that must be followed, such as time and amount limits.

Limits

The treaty may also claim that the payer must be a particular type of entity or the recipient a particular type of recipient.

 

Example:

Most student articles have a maximum dollar amount allowed in a calendar year for compensation gaining experience or compensation during training (i.e., China, $5000). Also most teacher articles have a maximum time limit for teaching or research (i.e., China, 3 years).

Important! Each income tax treaty is unique. An issue addressed in one treaty for one country may not be addressed in a treaty for another country. Although tax treaties are similar in nature and language, it is impossible to apply uniform guidelines for all tax treaty exemptions. The actual text of the tax treaty may need to be analyzed.

Additional Assistance: If income tax treaty coverage is still unclear after reviewing the quick reference tables or the tax treaty text, call the central office Corporate Payroll Office for further assistance.

Reviewing Specific Income Tax Treaty Exemption Requests

Withholding Agent

When operating locations receive a request from a non U.S. citizen for an income tax treaty exemption, they must ensure that the appropriate IRS forms have been completed and that the income tax exemption is valid. The operating location is considered the "withholding agent." Refer to the section, "Withholding Agent's Review Responsibility" later in this document for more information on this role.

Tax Identification Number

The non U.S. citizen should have a valid U.S. tax identification number (SSN or ITIN). If the non U.S. citizen files for tax treaty exemption and does not yet have a U.S. tax identification number, he or she must include a copy of the SS-5 (SSN) application or W-7 (ITIN) application. If the IRS reviews paperwork for a treaty exemption claim (e.g., in the case of IRS Form 8233 or IRS Form W-8BEN) it is still possible the IRS may reject the claim without the appropriate documents.

Operating locations should review the income tax treaty quick reference tables and the tax treaty (if required) thoroughly to ensure that the exemption applies. The IRS forms and the income tax treaty tables and treaty articles that apply are based on the type of income the individual is receiving. The requirements are different for each of the following types of income:

Reviewing Requests for Employee, Independent Contractor, or Fellowship Recipient Exemptions

A non U.S. citizen must submit the following forms based on the type of payment being received.

Reviewing Requests for Royalty or Rent Income Exemptions

For non U.S. citizen's royalty and rent recipients, the following table describes the procedures that must be followed by operating locations after the non U.S. citizen submits IRS Form W-8BEN, "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding":

Step

Action

1

Refer to quick reference Table 1, "Withholding Tax Rates on Income Other Than Personal Service Income Under Chapter 3, Internal Revenue Code, and Income Tax Treaties."

2

Verify that a tax treaty applies using the table of tax treaty information to determine whether the foreign person’s country of residence has an income treaty with the United States. Look for the non U.S. citizen's country in the first column of the table (under Name).

If the country is listed, go to Step 3.

If the country is not listed, no exemption applies, the income is taxable at 30%, and the person must be notified.

3

If the non U.S. citizen is a nonresident alien, go to Step 4.

If the non U.S. citizen is a resident alien, determine if an exemption to the "saving clause" exists. Most income tax treaties have a “saving clause” that restricts U.S. citizens, permanent residents, or resident aliens from claiming treaty benefits. Some treaties, however, have an exception to the "saving clause," which allows a resident alien and sometimes even permanent residents to continue eligibility for tax treaty benefits after passing the Green Card or Substantial Presence Test. Refer to the document Tax Treaty Eligibility - Resident Alien Status for a table listing the countries that have exceptions to the saving clause for resident aliens and permanent residents. Typically the exception to the saving clause is only applicable to certain countries and employee income.

If there is an exemption to the saving clause, go to Step 4.

If there is not an exemption to the saving clause, no exemption applies, the income is taxable, and the person must be notified.

4

 

If the income is...

then...

royalties

identify the royalty type. Look in column (10) for Industrial Equipment and Industrial Knowhow Royalties, column (11) for Film and TV, or column (12) Copyright and Patent Royalties to find the appropriate withholding rate (if rate is "0" the payment is exempt and if the rate is 30% there is no article and the payment is taxable).

In 2011 the IRS expanded the royalty quick reference tables. You must go to the actual treaty and review the royalty type _____. See Processing Payments to NRA Royalty Recipients.

In general, taxes are withheld on the payment of royalties exercised in the United States. However, royalties may be given a reduced withholding rate or an exemption under an income tax treaty.

rent

look in column (13), Real Property Income and Natural Resources Royalties, to find the appropriate withholding rate (if rate is "0" the payment is exempt and if rate is 30% there is no article and the payment is taxable).

5

Find the treaty article within the income tax treaty to use. Typically the treaty article number for rent and royalty income is the same as the income code found in Table 1.

6

Ensure that IRS Form W-8BEN is complete and process the payment using the reduced or exempt rate.

Withholding Agent's Review Responsibility

As the withholding agent you are examining the IRS form and statement for completeness and eligibility for exemption given all the facts known. If the form is incomplete or inaccurate, it is not valid to claim exemption and you must withhold the appropriate taxes. You must make a reasonable review and cannot be held liable if the error was not clear from the face of the form or other information on file at your operating location. The institution is generally presumed to have knowledge of all records and documents that it may have in its possession as a whole, not simply within a particular office or department.

Reviewing the Non U.S. Citizen's Tax Status

The non U.S. citizen's tax status must be reviewed to ensure he or she remains eligible for the exemption. If circumstances change and the person is no longer eligible for exemption (e.g., if the person exceeds the time or amount limits) taxes must be withheld from future payments if no other exemption applies.

The individual also has a responsibility to notify the Research Foundation of any change in residency or tax status.

Change History

 

 

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