Technically, a tax treaty is referred to as a “Bilateral Income Tax Treaty” and millions of U.S. Taxpayers (individuals and business entities) are impacted by the language found within International Tax Treaties. A U.S. Tax Treaty is generally signed between the U.S. and a foreign country in which the U.S. is on good terms at the time the treaty was entered into. The U.S. currently has entered into more than 50 bilateral income tax treaties with countries all around the world.
Generally, the income tax treaty to be analyzed contains numerous articles and often a technical explanation for the reasons behind agreements reached. It is critical to review the income tax treaty and any relevant technical explanations in detail to ensure that all aspects are considered. Often, there may be many similarities between treaties, but no two treaties are identical. That is why it is important to read each treaty and relevant article carefully.
For example, Article 15 defines whether independent personal services are taxed in one or both contracting states (i.e., countries). Typically, one of the tests is number of days a person stays in one of the countries. Tax practitioners often consider 183 days is the point when a person is taxed in one contracting state. In some tax treaties this is the same, however, in the U.S./India income tax treaty, 90 days or more is the requirement. Utilizing a general understanding or experience can cause difficulty in the complex world of income tax treaties.
In summary, income tax treaties are difficult documents to understand, and the details are not the same from one treaty to the another. Careful analysis must be completed. The Global Business Services Group at McGuire Sponsel can assist with reviewing income tax treaties. If you have any questions about our team or any global business issue, do not hesitate to reach out.
Jason Rauhe, CPA is a Principal in the firm’s Global Business Services practice and is responsible for assisting clients and adding depth in all areas of the firm’s international tax consulting services including transfer pricing, and the firm’s compliance expertise.
Rauhe previously served as Director of International Tax at a Top 100 CPA Firm, where he was responsible for the firm’s international tax division and major industry alliance networks.