Yesterday, the U.S. Treasury released it’s 2016 Model Tax Treaty.
I suspect that people will interpret this in terms of how it affects their individual situations. This gives a huge clue with respect to information exchange and how the U.S. views “double taxation”, citizenship-based taxation and related issues.
In the past, Brokers have been tremendously resourceful in analyzing complex documents.
I invite you to read the model agreement and comment on whether you see any improvement in how it affects your situation in different countries. Common sense dictates, that the text of the model treaty can be used as an interpretive aid for interpreting the existing treaties.
I am particularly interested in whether you see anything in this which would affect: pensions, PFIC, foreign corporations, etc.
Is this about continuing double taxation or is it about ending double taxation?
Is this Treaty better suited to justifying the exchange of information under FATCA?
When (if) you comment, please make clear which country you live in.
I notice right at the beginning, in Article I it reads:
4. Except to the extent provided in paragraph 5 of this Article, this Convention shall not affect the taxation by a Contracting State of its residents (as determined under Article 4 (Resident)) and its citizens. Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.
5. The provisions of paragraph 4 of this Article shall not affect:
a) the benefits conferred by a Contracting State under paragraph 3 of Article 7 (Business Profits), paragraph 2 of Article 9 (Associated Enterprises), paragraph 7 of Article 13 (Gains), subparagraph (b) of paragraph 1, paragraphs 2, 3 and 6 of Article 17 (Pensions, Social Security, Annuities, Alimony and Child Support), paragraph 3 of Article 18 (Pension Funds), and Articles 23 (Relief From Double Taxation), 24 (Non-Discrimination) and 25 (Mutual Agreement Procedure); and
b) the benefits conferred by a Contracting State under paragraph 1 of Article 18 (Pension Funds), and Articles 19 (Government Service), 20 (Students and Trainees) and 27 (Members of Diplomatic Missions and Consular Posts), upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that Contracting State.
I’ll be interested to see what the more knowledgeable here, who understand this fluff, have to say. I start to read it & I immediately want to shove a stake through my eye!
Why can’t ANYTHING ever be written in human-speak? Why is it ALWAYS, “party of the first part”, etc, etc…?
Awaiting the verdict.
Article 1 4 is the “savings clause” which is that part of the tax treaty which gives teeth to CBT, since it is this paragraph that allows the US to tax “by reason of citizenship its citizens, as if this Convention had not come into effect” (present day words in the UK-US Convention). The new words are similar, “the Convention shall not affect the taxation by a Contracting State of its … citizens”.
But then there seems to be a new second sentence which is more fierce, ending “… a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.” On the face of it, this allows the US to tax people who have renounced and who are no longer US citizens. Perhaps FATCA will make it possible to enforce this, whereas previously it would not have been possible. Perhaps banks worldwide will need to ask “Are you – *or have you ever been* – a US citizen.” I hope I read this wrongly.
The pre-2008 expatriation regime allowed for a continued 10 year long US-taxation of covered expatriates. Perhaps this sentence is there for that, since its affect will not fully expire until 2017. The UK-US treaty has presently Article 1 6 which allows for taxation of an ex-citizen “whose loss of citizenship…had as one of its principal purposes the avoidance of tax …. but only for a period of 10 years.” A difference is that the new sentence in the model treaty does not restrict to 10 years.
Article 1 5 provides a few exceptions to the savings clause. These are not identical to the exceptions in present day UK-US treaty. Further study is needed to see if these exceptions are more generous or not. My first reading of this is that Boris Johnson would still have to pay US capital gains tax on sale of his London principal residence.
Jane,
My exact sentiments.
How are any but the legal profession to understand the mumbo-jumbo of this? https://lsslib.wordpress.com/2014/05/28/tips-from-the-editor-legalese-gobbledygook-the-need-for-clarity-in-legal-writing/
Hire someone from the US tax compliance industry — as we know what any help line for IRS or CRA or the tax agency of any other country would tell us when we ask our questions on what the heck this means for us?
Thank goodness for John Richardson’s help with all of this — and of course others like Professors Allison Christians and Arthur Cockfield. (as at http://www.parl.gc.ca/HousePublications/Publication.aspx?Language=e&Mode=1&Parl=41&Ses=2&DocId=6597204).
Here some interesting differences as regards the article on Exchange of Information and Administrative Assistance. I have noted the changes in bold.
Present UK-US treaty: “shall exchange such information as is necessary for carrying out the provisions of this Convention … concerning taxes covered by this Convention”
New model treaty: “shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention … *concerning taxes of every kind*
Im out buying more gold coins and hiding them from the King’s men !
Leave a minimum of money in the bank !
Only solution to preserve your wealth.
I commented on Articles 17 and 18 over in the Media and Blog Articles thread.
http://isaacbrocksociety.ca/media-and-blog-articles-open-for-comments-part-3-of-3/comment-page-24/#comment-7220448
@ricard
I’m wondering whether the removal of the 10 year limit on taxing former citizens has anything to do with the current exit-tax regime and the concept of ‘tax-citizen’ as opposed to actual citizens. My understanding is that, under the post-2008 regime, if you renounce and fail to file form 8854 the US still wants to tax you. But, legally, you are no longer a US citizen, and the current treaties only allow the US to tax former citizens for 10 years. So, maybe Treasury sees the current treaty wording as placing a 10-year sunset clause on being a tax-citizen post-renunciation? The model treaty just removes the sunset clause.
Wish, I had the financial coffers to run in the next Federal election:
Part of my platform. đ
What would you do if you were the Prime Minister of Canada? (Question not open to Americans).
1. Increase our military defense spending to 5% of GDP for four years to achieve parity with NATO military force – improve the military, secure both the southern border and the northern coast as well as the BC/Yukon/Alaska border. Replace our CF-18s.
2. Consider building a wall along the 49th Parallel and build a wall if Trump gets in.
3. Conduct a review of all essential services and cut down on unnecessary expenditures.
4 .Conduct a Ministry review of all ministries. Eliminate all unnecessary ministries that are excessively drawing from GDP for things that do not provide economic growth or are necessary for health, welfare and other needs.
5. Eliminate the Canadian Senate. We do not need a body of political office-holders that sit there and feed off the political trough.
6. REPEAL the Canadian approval of FATCA and tell US DoT and IRS to do their own dirty work.
7. Tell the US Consulate-General, that he is no longer welcome in Canada until such time as his government ceases financial sanctions. 30% sanction on Canada’s banks if they do not give up the names of US citizens (residents in Canada).
re savings clause : “Notwithstanding the other provisions of this Convention, a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.”
Is the inclusion of former long-term residents new? Does that mean that the US does not have the right to tax non-resident green card holders under the current treaties?
Professor Christians just posted about it on her blog. More to come:
http://taxpol.blogspot.ca/2016/02/new-us-model-income-tax-treaty-now-with.html
@Karen
The inclusion of former long-term residents is not new. It’s hard to see what is new and what is old unless you create comparison docs. Fortunate Allison Christians has created one on that blogpost, so you can see all the edits.
I did notice this little glimmer of hope towards the end:
“b) In the case of _, the term âpension fundâ includes the following:”
@Karen
Yes, the 10-year sunset is being removed, although I think that it turned out to be impractical in the end.
@Karen
Sorry, it’s late here. Taxing people after they had cut off all ties with the country turned out to be impractical in the end.
â⌠a former citizen or former long-term resident of a Contracting State may be taxed in accordance with the laws of that Contracting State.â
Without having read the document closely, it appears on the surface that this clause may be for the purpose of going after unpaid “exit taxes.” I could be wrong but what else could it be for?
For the UK, not only is the 10 year sunset absent, but this model treaty also lacks any restriction on income source and covered expat status, both found in the current US/UK treaty:
“A former citizen or long-term resident whose loss of citizenship or longterm resident status had as one of its principal purposes the avoidance of tax … shall be treated for the purposes of paragraph 4 of this Article as a citizen of that Contracting State but only for a period of 10 years following the loss of such status. This paragraph shall apply only in respect of income from sources within that Contracting State…”
I don’t think countries usually sign a ‘model’ treaty without some customization. I have little faith, though, that UK politicians and negotiators would be smart enough to see the danger here. For years I’ve been hoping that the UK would renegotiate the treaty to snuff out the execrable exit tax. Now I’m concerned that any renegotiation might only make things even worse.
@Karen,
I cannot find my notes on this but with regard to the “sunset” clause”, it was to be phased out as it applied to those required to pay tax on US sourced income for the 10 years after renunciation….prior to the creation of 877A…..I am missing something but this was the general gist…….
@Publius re long-term resident — I now see that was included in the Australia/US treaty via the 2001 protocol (but not in the original 1982 treaty).
Regarding the definition of pension fund in Article 3 paragraph 1(k) — for Australia this would have to be amended to cover superannuation as superannuation funds are NOT exempt from tax. They enjoy a lower tax rate (15%) during the accumulation phase, and are tax exempt only in the pension(withdrawal) phase.
I suspect this definition will be negotiated separately in each country. There are several different models for taxing retirement savings, and it is presumptuous of the US to assume that the only valid “pension funds” are those that tax only on withdrawal. In the Australian model there is reduced tax on contribution, reduced tax on earnings during accumulation, and no tax on withdrawals or earnings during pension phase (during retirement when regular withdrawals are required). We can argue whether the Australian model is ideal or appropriate (and I have some strong opinions there), but that is really irrelevant when it comes to drafting the treaty. The system is what it is, and should be respected by the US.
Other provisions affecting retirement savings:
[TL;DR version: If I’m reading these provisions correctly, they would correct all of the current problems with US taxation of Australian superannuation for US citizens resident in Australia.]
Article 10 paragraph 3 — dividends paid to a pension fund. Looks like it’s saying that there’s no withholding on dividends if the dividends are paid to a pension fund. So, if the pension fund definition includes superannuation funds, then US dividends paid to Australian super funds would no longer be subject to 15% withholding in the US. And conversely, Australian dividends paid to US pension funds would not be subject to withholding in Australia (which applies only to unfranked dividends in Australia anyway). This would be an incentive for Australia to sign on to a treaty based on this model — Australia would be able to collect tax on US dividends inside super during accumulation (currently the Australian tax on these dividends would be offset by the 15% US withholding), but wouldn’t be giving up much since many Australian dividends paid to US pension funds wouldn’t be subject to withholding now anyway. (I’m not sure what the breakdown is between franked and unfranked dividends from Australian companies, but I suspect more than half are franked and therefore not currently subject to withholding when paid to overseas shareholders).
The model treaty has two separate articles on pensions. Article 17 which seems to be about earnings inside the fund and withdrawals, and Article 18 which covers contributions. They are difficult to parse (as are all treaties). Of particular interest:
Article 17 paragraph 2(b) regarding US citizen beneficiaries of non-US pension funds. As I read it, if you’re resident in the country of the pension fund then the savings clause doesn’t apply to Article 17 paragraph 1. For a US citizen resident in Australia, I think that means that while you’re resident in Australia, only Australia can tax income earned inside your Australian pension fund (superannuation if the definition is amended appropriately).
Article 18 paragraph (3) regarding employer contributions on behalf of US citizens resident in the other contracting state. Assuming that superannuation funds are “pension funds”, this seems to make employer superannuation contributions non-taxable to US citizens resident in Australia. I think it also allows US citizens to exclude pre-tax (salary sacrifice) employee contributions.
I haven’t seen anything about PFICs in the model treaty. I think this is another area of great injustice to US taxpayers abroad. Any managed investment that can be purchased by a retail investor in Australia will require current distribution of income, just like US mutual funds. There is no tax deferral or avoidance objective to these investments. There is no policy justification for treating these investments under the PFIC regime.
@Tricia
Under the current 877A regime — the US still taxes you as a citizen until you file form 8854 (at least that’s my understanding). So, if you renounce or relinquish and are no longer a citizen eligible for a passport, then you are a “former citizen” under the treaty. If you’re in a country with the 10-year sunset clause in the treaty, doesn’t that mean that the US can’t tax you as a citizen once the 10 years are over — regardless of what’s written in 877/877A. For people who renounced/relinquished after 2008 without telling the IRS, the 10-year limit could actually help them (after the 10 years has elapsed).
I’m not really sure about this interpretation — I’m just offering it up for discussion.
The model treaty contains several clauses just for US citizens living “abroad”. The treaty could be greatly simplified if the US would just join the rest of the world and tax residents instead of citizens. But I guess that would negatively impact the employment prospects for lawyers and accountants.
@Karen
Yes, that is what I am trying to say.
No, that is the whole point-there is a notification element added. If you do not notify the IRS after 2008, you’re toast as far as taxation goes……..
@Tricia
But… if you’re no longer a citizen for passport purposes, then aren’t you a “former citizen” under the treaty? Sure, the US thinks you’re still subject to tax. But if they are limited to 10 years of taxing “former citizens” by the treaty (that’s how many current treaties read), then doesn’t that invalidate the notice requirement after 10 years? You’d still be taxed by the US during the intervening 10 years, but if you have little income…
I don’t think it would be a good idea to rely on this — the treaties will all be replaced with this model treaty or something similar. And it can’t possibly apply until 2018 (10 years after 2008). It’s just a curiosity.
If the US tries through treaty agreements to tax former US citizens on non-US source income, that would be whole new level of abusive taxation.
@Karen
Interesting argument. I did not speak very clearly. The clause about taxing former citizens in the Treaty was there to have a way to enforce it. I meant they could not be taxed once the ten years was over. And it has been suggested that it will be taken out once it cannot possibly apply because it was meant to be used in a very specific way. And I also erred in saying 2008 – it is 2004 where lack of notification becomes an issue. Unfortunately, anyone who relinquished or renounced after June 3, 2004 had two citizenships from the US; the normal one (immigration) and the “TAX Citizen.”
This is not quite parallel but might be helpful if one really analyzes the wording. John Richardson has done a very technical analysis of the “plain wording” of Sec 877A making distinctions between “individual” “citizen” and “former citizen.”
You might find something interesting/useful here:
Part 10 The S 877A Exit Tax and Possible Treaty Relief under the Canada-US Tax Treaty
Is it only me, or is Allison Christian’s edits in her pdf in bright yellow & unreadable (even if I highlight it)?
@Karen
I was comparing the 2006 model treaty to 2016 model treaty. I made up my own by copying the texts of both agreements into word documents and then using the compare document feature under review documents to find the differences and put them in a third document.
@The Watcher
The model agreement in 1996 didn’t include all that language restricting collection to covered expatriates and to U.S.-source income, so the U.K. government must have negotiated for it. The U.K. hasn’t agreed a tax treaty with the U.S. since 2001.
@Tricia
One thing that might be worthwhile doing is finding the favorable deviations from model treaties that different countries have been able to get as concessions. It strikes me that Canada has been less adept than the U.K. at negotiating on things like the taxation of estates being inherited by non-resident aliens. In Britain, the tax free limit is the gift limit for the year (which increases annually) as well as the unit amount (which hasn’t budged in decades). Yes, London is expensive, but so is Vancouver. It is much easier to get a concession if another country has received it previously.