Category Archives: tax treaty tie breaker

Part 2: The problem is NOT “worldwide taxation”. The problem is imposing “worldwide taxation” on people who don’t live in the South Africa or the USA and are “tax residents’ of other countries.

As goes taxation, so goes civilization.

This is Part 2 of my post discussing the South Africa tax situation. Part 1 is here.

This is a follow up to my post exploring whether South Africa is moving to a tax system that is based on “citizenship-based taxation” or (in the case of the United States of America) “taxation-based citizenship”. That post was the result of a “special request”. The response from that first post included:

I now understand the difference between the SA system and the US. I believe that the similarity that caused the consternation when this first came up was the issue of “tax residency”. CBT mandates that those declared US citizens by the US are simultaneously declared US tax residents. In a similar fashion SA has a concept of tax residency that *does* include some people who do not physically reside in SA but NOT just because they’re citizens. I get it. Thanks again for clarifying this!

That being said, I think the term “tax residency” is crazy. I wish that someone with the power to influence terminology in the general usage of language could come up with something that accurately describes the basis on which a person can be taxed by a country in which that person does not live. Taxes don’t reside; people do, and they can only live one place at a time. Any ideas? 🙂

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Part 1: South Africa is NOT attempting to compete with USA by challenging the US monopoly on citizenship-based taxation

As goes taxation, so goes civilizations

This is Part 1 of my posts discussing the South Africa situation. Part 2 is here.

There have been a number of suggestions in various blogs that South Africa is somehow taxing on the basis of citizenship. American citizens (whether by accident or design) are most sensitive to any discussion of “citizenship-based taxation”. After all, U.S. tax policies combined with FATCA (which is part of the Internal Revenue Code) are destroying the lives of those who have entered the U.S. tax system.

I recently received an email that asked:

They’re talking about SA expats, people who no longer live in SA, being taxed by SA. Like us, these people are residents and earners in countries other than their country of origin (and, I would assume, citizenship). http://www.internationalinvestment.net/regions/south-african-expats-hit-tax-exemption-removal-plans/ If this is not CBT, on what basis are they being taxed? If SA is just wanting to expand its definition of tax residency on what basis do they feel they can apply this to someone who no longer lives in their country?

The short answer …

South Africa imposes “worldwide taxation” on those who are “tax residents” of South Africa. The rules for an individual to qualify as a “tax resident” of South Africa are here. South African “tax residency” is irrelevant to citizenship.

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The teaching of Topsnik 2 – 2016: #Greencard expatriation and the S. 877A “Exit Tax”

What! You want to abandon your Green Card and leave the USA!

Introduction – Introducing Gerd Topsnik – The World According to Facebook

“This case will be seen as the first of an (eventual) series of cases that determine how the definition of “long term resident” applies to Green Card holders. The case makes clear that if one does NOT meet the treaty definition of “resident” in the second country, that one
cannot use that treaty to defeat the “long term resident” test. A subsequent case is sure to expand on this issue. Otherwise, the case confirms that the S. 877A Exit Tax rules are “alive and well” and that the “5 year certification” test must be met to avoid “non-covered status”

Topsnik may or may not be a “bad guy”. But even “bad guys” are entitled to have the law properly applied to their facts. It would be very interesting to know how the court would have responded if Topsnik had been paying tax (a nice taxpayer) in Germany as a German resident.”

A nice summary of Topnik 1 and Topsnik 2

This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.

This is the second of the two Topsnik posts.

Topsnik 1 focused on the “tax residence” of Green Card Holders. The decision in Topsnik 1 is here:

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The teaching of Topsnik 1 – 2014: Taxation for #GreenCard @TaxResidency and “tax treaty tiebreakers”

Introduction

This is part of a series of posts on: (1) “tax residency“, (2) the use of “treaty tiebreakers” when an individual is a “tax resident” of more than one jurisdiction and (3) how to use “treaty tiebreakers” to end “tax residency” in an undesirable tax jurisdiction.

Topsnik 1: It’s about the taxation (not expatriation) of  Green Card Holders

The 2014 decision in Topsnik is an interesting example of how these components interact. Mr. Topsnik was given a Green Card in 1977. He moved from the United States in 2003 and did NOT formally abandon his Green Card. He then attempted to argue that because he was a “tax resident” of Germany that he could use a “treaty tie breaker” to argue that he was NOT a “U.S tax resident”.

In summary the court ruled on a number of questions which INCLUDED:

1. Was Mr. Topsnik a U.S. “tax resident”?

Because Mr Topsnik never formally abandoned his Green Card (as required by the regulations) that he WAS a “U.S. tax resident” for ALL relevant years. This meant that he was taxable in the United States on all of his world income.

For clarity the regulations to Internal Revenue Code 7701(b) specifically state:

(b)Lawful permanent resident –

(1)Green card test. An alien is a resident alien with respect to a calendar year if the individual is a lawful permanent resident at any time during the calendar year. A lawful permanent resident is an individual who has been lawfully granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned.

(2)Rescission of resident status. Resident status is considered to be rescinded if a final administrative or judicial order of exclusion or deportation is issued regarding the alien individual. For purposes of this paragraph, the term “final judicial order” means an order that is no longer subject to appeal to a higher court of competent jurisdiction.

(3)Administrative or judicial determination of abandonment of resident status. An administrative or judicial determination of abandonment of resident status may be initiated by the alien individual, the Immigration and Naturalization Service (INS), or a consular officer. If the alien initiates this determination, resident status is considered to be abandoned when the individual’s application for abandonment (INS Form I-407) or a letter stating the alien’s intent to abandon his or her resident status, with the Alien Registration Receipt Card (INS Form I-151 or Form I-551) enclosed, is filed with the INS or a consular officer. If INS replaces any of the form numbers referred to in this paragraph or § 301.7701(b)-2(f), refer to the comparable INS replacement form number. For purposes of this paragraph, an alien individual shall be considered to have filed a letter stating the intent to abandon resident status with the INS or a consular office if such letter is sent by certified mail, return receipt requested (or a foreign country’s equivalent thereof). A copy of the letter, along with proof that the letter was mailed and received, should be retained by the alien individual. If the INS or a consular officer initiates this determination, resident status will be considered to be abandoned upon the issuance of a final administrative order of abandonment. If an individual is granted an appeal to a federal court of competent jurisdiction, a final judicial order is required.

Green Card holders must understand that they do NOT end their status as “U.S. tax residents” by leaving the United States and taking up residence in another country! Specific steps (related to notification) are required.

2. Could Mr. Topsnik use the “treaty tiebreaker” to argue that he was a “tax resident” of Germany and NOT a “tax resident” of the United States?

No. The use of a “treaty tiebreaker” requires that an individual be a “tax resident” of both countries. In this case the “treaty tie breaker” could be used ONLY if Mr. Topsnik was a “tax resident” of both Germany and the United States. The court held that Mr. Topsnik was NOT a “tax resident” of Germany but was a “tax resident” of the United States.

Note that the fact that Mr. Topsnik was NOT a “tax resident” of Germany meant that he was NOT eligible to use the “tax treaty tie breaker” rules. Eligibility to use the “tax treaty tie breaker” rules would NOT guarantee that Mr. Topsnik would be a “German tax resident”.

Conclusion: Mr. Topsnik was ONLY a “U.S. tax resident” and was therefore taxable in the United States on his world income!

Moral of the story: If a Green Card Holder ceases to reside in the United States he as NOT ended his status as a U.S. “tax resident”.
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Part 2: OECD Common Reporting Standard (“CRS”): “tax residence” and the “tax treaty tiebreaker”

This is Part 2 – a continuation of the post about “tax residency under the Common Reporting Standard“.

That post ended with:

Breaking “tax residency” to Canada can be difficult and does NOT automatically happen if one moves from Canada. See this sobering discussion in one of my earlier posts about ceasing to be a tax resident of Canada. (In addition, breaking “tax residency in Canada” can result in being subjected to Canada’s departure tax. I have long maintained that paying Canada’s departure tax is clear evidence of having ceased to be a “tax resident of Canada”.)

Let’s assume that our “friend”, without considering possible “tax treaties” is or may be considered to be “ordinarily resident” in and therefore a “tax resident” of Canada.

Would a consideration of possible tax treaties (specifically the “tax treaty residency tiebreaker) make a difference?

This question will be considered in Part 2 – a separate post.

What is the “tax treaty residency tiebreaker”?

It is entirely possible for an individual to be a “tax resident” according to the laws of two (or more countries). This is a disastrous situation for any individual. Fortunately with the exception of “U.S. citizens” (who are always “tax residents of the United States no matter where they live), citizens of most other nations are able to avoid being “tax residents” of more than one country. This is accomplished through a “tax treaty tie breaker” provision. “Treaty tie breakers” are included in many tax treaties. (Q. Why are U.S. citizens always U.S. tax residents? A. U.S. treaties include what is called the “savings clause“).

Some thoughts on the “savings clause”

First, the “savings clause” ensures that the United States retains the right to impose full taxation on U.S. citizens living abroad (even those who are dual citizens and reside outside the United States in their country of second citizenship).

Second, the U.S. insistence on the “savings clause” ensures that other countries agree to allow the United States to impose U.S. taxation on their own citizen/residents who also happen to have U.S. citizenship (generally because of a U.S. place of birth.)

Where are “tax treaty tie breakers” found? What do they typically say?

Many countries have “tax treaty tie breaker” provisions in their tax treaties. The purpose is to assign tax residence to one country when a person is a “tax resident” of more than one country.

As explained by Wayne Bewick and Todd Trowbridge of Trowbridge Professional Corporation (writing in the context of Canadian tax treaties):

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Green card holders, the “tax treaty tiebreaker” and reporting: Forms 8938, 8621 and 5471

Before you read this post!! Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?

Now, on to the post.

The “Treaty Tiebreaker” and information reporting …

The Internal Revenue Code imposes on “U.S. Persons” (citizens or “residents”):

1. The requirement to pay U.S. taxes; and

2. The requirement to file U.S.forms.

All “U.S. Persons” (citizens or residents) are aware of the importance of “Information Returns” AKA “Forms” in their lives.

What is a U.S. resident for the purposes of taxation?

This question is answered by analyzing Internal Revenue Code S. 7701(b). If one is NOT a U.S. citizen, a physical connection to the United States (at some time or another) is normally required for one to be a “tax resident” of the United States..

What happens if one is a “tax resident” of more than one country?

The “savings clause” ensures that U.S. citizens are the only people in the world who have no defence to being deemed a tax resident of multiple countries. U.S. citizens (“membership has its privileges”) are ALWAYS tax residents of the United States. U.S. citizens who reside in other nations, may also be “tax residents” of their country of residence.

In some cases, a U.S. “resident” (which includes a Green Card holder) may be deemed to be a “nonresident” pursuant to the terms of a U.S. Tax Treaty. A Green Card holder “may” be able to use a “Treaty Tiebreaker” provision to be treated as a “nonresident”.

Warning!! Warning!!

Before a “Green Card” holder uses the “Treaty Tiebreaker” provision of a U.S. Tax Treaty, he/she must consider what is the effect of using the “Treaty Tiebreaker” on:

A. His/her immigration status under Title 8 (will he/she risk losing the Green Card?)

B. His/her status under Title 26 (will he expatriate himself under Internal Revenue Code S. 7701(b)) and subject himself to the S. 877A “Exit Tax” provisions?
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Part 1: Tax Treaties, determining “tax residence” and new OECD Common Reporting Standard (“CRS”)

 

The above tweet references an article from Stikeman Elliot which includes:

For CRS purposes, the term “reportable person” generally refers to a natural person or entity that is resident in a reportable jurisdiction (excluding Canada and the United States) under the tax laws of that jurisdiction, or an estate of an individual who was a resident of a reportable jurisdiction under the tax laws of that jurisdiction immediately before death, other than: (i) a corporation the stock of which is regularly traded on one or more established securities markets; (ii) any corporation that is a related entity of a corporation described in clause (i); (iii) a governmental entity; (iv) an international organization; (v) a central bank; or (vi) a financial institution.  See definitional subsection ITA 270 (1).

This morning I received an email that included the following question:

My friend lives and works in country A, and has bank accounts in Country B. He is a permanent resident of Canada. Will the banks in either Country A or Country B, report his accounts to the Canada Revenue Agency? Country A (where he resides) has no income tax system. This is common in Gulf Countries. Country A has not signed on to Common Reporting Standard. Country B (a European country) has signed on to the Common Reporting Standard.

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