The United States has entered into income tax treaties over fifty countries. Treaties serve to bolster trade and foreign investment. On certain types of income, treaties will reduce the rate of withholding tax that would have been applied to payments between taxpayers of two countries.
Absent a treaty, the US will generally impose a 30 percent withholding tax on items of U.S.-source fixed or determinable annual or periodical gains, profits, and income that are not effectively connected with the conduct of a U.S. trade or business, and paid to a non US person. Fortunately treaties will reduce the rate from 30% to 15%, 10%, 5%, and in certain cases zero withholding will be applied.
For example, the US and Canada recently updated their income tax treaty and reduced the withholding rate on interest payments between both related and unrelated taxpayers to zero.
Whilst the treaty provide for such reductions, the US payers must obtain certain signed document from the foreign person before allowing for a reduction of withholding in an amount less than 30%. Without such support in place at time of payment, the IRS could impose the shortfall in withholding on the US payer. Such forms include but are not limited to:
When filing the US return or US nonresident return, be sure to include Form 8833 to disclose to the IRS the treaty position that you have taken. The IRS website has much more detailed information should you like to learn more about the US treaties that exist. The above information is only general in nature and should not be relied upon for withholding or filing positions.
By Debra Callicutt, CPA