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November 18, 2012

US Tax Treaties May Allow Nonresidents to be Taxed at Lower Rates

Tax treaties may allow residents of foreign countries to be taxed at a reduced rate, or to be exempt from U.S. income taxes on certain items of income they receive from sources within the United States.  Whenever you are a US Nonresident and the US has a tax treaty with your resident country, you MUST review that treaty to determine if it has benefits.

Treaties rarely benefit US Citizens or Green Card Holders due to the savings clause contained in almost all treaties which state that the IRS can still continue to tax its US tax residents and Citizens under the regular tax law regardless of what a treaty might state.  A US taxpayer residing in a treaty country may be able to use the treaty to avoid adverse tax consequences in that country. There is no standard treaty so each applicable treaty must be reviewed to determine its consequences.  Unfortunately the language used in the treaties if often vague and unclear. The IRS has not done much to clear up the ambiguities and to explain those parts which are unclear.

Look here for the complete texts of many of the tax treaties in force and their accompanying Treasury Technical Explanations. For further information on tax treaties refer also to the Treasury Department’s Tax Treaty Documents page.

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