Publication 54 - Tax Guide For U.s. Citizens And Resident Aliens Abroad - 2006 Page 34
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44income of $206,000 and incurred operating ex-
Treaty benefits generally are available to re-
Nondiscrimination provisions. Most U.S.
penses of $80,000. Of the net profits of
sidents of the United States. They generally are
tax treaties provide that the treaty country can-
$126,000, you received $63,000 as your distrib-
not available to U.S. citizens who do not reside
not discriminate by imposing more burdensome
utive share.
in the United States. However, certain treaty
taxes on U.S. citizens who are residents of the
benefits and safeguards, such as the nondis-
You choose to exclude $82,400 of your
treaty country than it imposes on its own citizens
crimination provisions, are available to U.S. citi-
share of the gross income. Because you ex-
in the same circumstances.
clude 80% ($82,400 ÷ $103,000) of your share
zens residing in the treaty countries. U.S.
Saving clauses. U.S. treaties contain sav-
citizens residing in a foreign country may also be
of the gross income, you cannot deduct
ing clauses that provide that the treaties do not
entitled to benefits under that country’s tax trea-
$32,000, 80% of your share of the operating
affect the U.S. taxation of its own citizens and
expenses (80% × $40,000). Report $63,000,
ties with third countries.
residents. As a result, U.S. citizens and re-
your distributive share of the partnership net
sidents generally cannot use the treaty to re-
You should examine the specific treaty
profit, on Schedule E (Form 1040), Supplemen-
TIP
duce their U.S. tax liability.
articles to find if you are entitled to a tax
tal Income and Loss. On Form 2555, show
credit, tax exemption, reduced rate of
However, most treaties provide exceptions
$82,400 on line 42 and show $32,000 on line 44.
tax, or other treaty benefit or safeguard.
to saving clauses that allow certain provisions of
Your exclusion on Form 2555 is $50,400.
the treaty to be claimed by U.S. citizens or re-
In this situation (Example 5), you can-
sidents. It is important that you examine the
TIP
not use Form 2555-EZ since you had
applicable saving clause to determine if an ex-
Common Benefits
earned income other than salaries and
ception applies.
wages and you had business expenses.
Some common tax treaty benefits are explained
below. The credits, deductions, exemptions, re-
Competent
ductions in rate, and other benefits provided by
tax treaties are subject to conditions and various
Authority Assistance
restrictions. Benefits provided by certain treaties
are not provided by others.
6.
Personal service income. If you are a U.S.
If you are a U.S. citizen or resident alien, you
resident who is in a treaty country for a limited
can request assistance from the U.S. competent
number of days in the tax year and you meet
authority if you think that the actions of the
certain other requirements, pay you receive for
United States, a treaty country, or both, cause or
Tax Treaty
personal services performed in that country may
will cause a tax situation not intended by the
be exempt from that country’s income tax.
treaty between the two countries. You should
Benefits
Professors and teachers. If you are a U.S.
read any treaty articles, including the mutual
resident, pay you receive for the first 2 or 3 years
agreement procedure article, that apply in your
that you are teaching or doing research in a
situation.
treaty country may be exempt from that coun-
The U.S. competent authority cannot con-
Topics
try’s income tax.
sider requests involving countries with which the
This chapter discusses:
Students, trainees, and apprentices. If
United States does not have a tax treaty.
you are a U.S. resident, amounts you receive
•
Some common tax treaty benefits,
from the United States for study, research, or
Effect of request for assistance. If your re-
business, professional and technical training
•
How to get help in certain situations, and
quest provides a basis for competent authority
may be exempt from a treaty country’s income
•
assistance, the U.S. competent authority gener-
How to get copies of tax treaties.
tax.
ally will consult with the treaty country compe-
Some treaties exempt grants, allowances,
tent authority on how to resolve the situation.
and awards received from governmental and
Useful Items
certain nonprofit organizations. Also, under cer-
You may want to see:
How to make your request. It is important
tain circumstances, a limited amount of pay re-
that you make your request for competent au-
ceived by students, trainees, and apprentices
Publication
thority consideration as soon as either of the
may be exempt from the income tax of many
following occurs.
treaty countries.
597
Information on the United
•
Pensions and annuities. If you are a U.S.
You are denied treaty benefits.
States-Canada Income Tax Treaty
resident, nongovernment pensions and annui-
•
Actions taken by both the United States
901
U.S. Tax Treaties
ties you receive may be exempt from the income
and the foreign country result in double
tax of treaty countries.
taxation or will result in taxation not in-
See chapter 7 for information about getting
Most treaties contain separate provisions for
tended by the treaty.
these publications.
exempting government pensions and annuities
from treaty country income tax, and some trea-
In addition to making a request for assistance,
ties provide exemption from the treaty country’s
you should take steps so that any agreement
income tax for social security payments.
Purpose of
reached by the competent authorities is not
Investment income. If you are a U.S. resi-
barred by administrative, legal, or procedural
dent, investment income, such as interest and
Tax Treaties
barriers. Some of the steps you should consider
dividends, that you receive from sources in a
taking include the following.
treaty country may be exempt from that coun-
The United States has tax treaties or conven-
•
try’s income tax or taxed at a reduced rate.
Filing a protective claim for credit or refund
tions with many countries. See Table 6-1 at the
Several treaties provide exemption for capi-
of U.S. taxes.
end of this chapter for a list of these countries.
tal gains (other than from sales of real property
•
Delaying the expiration of any period of
Under these treaties and conventions, citi-
in most cases) if specified requirements are met.
limitations on the making of a refund or
zens and residents of the United States who are
Tax credit provisions. If you are a U.S.
other tax adjustment.
subject to taxes imposed by the foreign coun-
resident who receives income from or owns cap-
tries are entitled to certain credits, deductions,
ital in a foreign country, you may be taxed on
•
Avoiding the lapse or termination of your
exemptions, and reductions in the rate of taxes
that income or capital by both the United States
right to appeal any tax determination.
of those foreign countries. If a foreign country
and the treaty country.
•
Complying with all applicable procedures
with which the United States has a treaty im-
Most treaties allow you to take a credit
for invoking competent authority consider-
poses a tax on you, you may be entitled to
against or deduction from the treaty country’s
benefits under the treaty.
taxes based on the U.S. tax on the income.
ation.
Page 34
Chapter 6 Tax Treaty Benefits
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