Tag: DTA

Definition: U.S. Federal Tax Legislation

Section 7701(a)(30) of the Internal Revenue Code considers an individual to be a ‘U.S. Person’ where such an individual is either a U.S. citizen or a U.S. resident. An individual born or naturalized in the U.S. and subject to its jurisdiction is a U.S. citizen. Any individual who isn’t a U.S. citizen is a resident if they:

passes the substantial presence test; or
holds a U.S. green card;
elects to be taxed as a resident

An individual automatically becomes a U.S. resident upon becoming a U.S. green card holder. There are peculiarities concerning the ‘start date’ of individuals moving to the U.S. to become green card holders; discussing this with your advisor is essential.

An individual will be regarded as a resident alien in terms of the substantial presence test (SPT) if they meet the following requirements:

such an individual was present in the U.S. on at least 31 days during the calendar year; and
the sum of the number of days on which such an individual was present in the U.S. during the present year and the 2 preceding calendar years (the year before the current year x 1/3 + 2 years before the current year x 1/6) equals or exceeds 183 days.

The regulations further clarify certain peculiar aspects to determine an individual’s residency. Further, where an individual resides in the U.S., residency should also be determined under the applicable State tax legislation.

Definition: India-U.S. DTA

A tax treaty, in general, intends to benefit the taxpayers of the countries entering into such a convention or agreement. The manner to avail of the benefit is often stated under the domestic tax legislation of a country and might be self-executive or need additional action for its application. The objective of the tax treaties is the elimination of double taxation. Article 1 of the India-U.S. DTA identifies citizens or permanent residents of India or the U.S. whose obligations are affected by the tax treaty application.

Article 4 of the India-U.S. DTA defines an individual as a ‘resident’ of a country under domicile, citizenship, residence, place of management, place of incorporation, or any other criterion of a similar nature and limits its application concerning income sourcing rules in a country. It further contains tie-breaker regulations to be applied where an individual is a resident of both the U.S. and India. The tie-breaker test is used as under:

an individual who is deemed as a resident of the country in which they have a permanent home available to them;
if there is a permanent home is available in both States, then they shall be deemed as a resident of the country with which their personal and economic relations are closer (center of vital interests);
if the country in which they have a center of vital interests cannot be determined, or if they do not have a permanent home available in either country, then they shall be recognized as a resident of the country in which they have a habitual abode;
if they have a habitual abode in both countries or neither of them, they shall be recoginzed as a resident of the country of which they are a national;
if they are a national of both countries or neither, the Contracting States’ competent authorities will settle the question by mutual agreement.

It further limits or restricts the source country to tax certain income and requires an individual’s country of residence to provide tax relief either by way of a foreign tax credit or an exemption for the foreign-source income.

In understanding the terms “permanent home,” “habitual abode,” and “personal or economic relations” to establish a closer connection, reference is drawn from the OECD Model Tax Convention and UN Double Tax Model Convention.

Albeit the above residency rules under the India-U.S. DTA, the ‘saving clause’ under Paragraph 3 of Article 1 of the India-U.S. DTA preserves India and the U.S. with a right to tax its citizens and permanent residents as if there is no tax treaty benefit. Therefore, once an individual becomes a U.S. citizen or permanent resident, the tax treaty benefit is unavailable.

The interpretation of the “residency” rules under the India-U.S. DTA requires deep analysis, and a cross-border tax advisor should be consulted with applying the tax treaty to the facts and circumstances of your situation.

Asena Advisors focuses on strategic advice that sets us apart from most wealth management businesses. We protect wealth.

What to ask and provide your advisor in determining your residence?

#	*Questions*	*Basic information to be shared with your advisor*
1.	Whether domestic tax legislation determines residency based on a number of days, citizenship, holding a green card, domicile, or any other manner?	Provide your advisor with the following: country(ies) of your citizenship; countries where you have traveled or stayed during a tax year; your visa status, if not a citizen of a country where you are employed or doing business; your latest I-94 arrival/departure record (if in the U.S.); your passport with immigration stamps to support the entry and exit.
2.	What is the residency’ start date’ if I obtained U.S. green card during the year?	Provide your advisor with the following: the issue date of your green card; the date you first entered the U.S. to become a green card holder; the number of days in which you were present in current and prior tax years before the issue of your green card.
3.	Does the “saving clause” under the DTA cover me?	Inform your advisor if you are a citizen or a U.S. green card holder.
4.	What is the manner of determining residency if you are a resident of more than one country?	Provide your advisor with the below details to apply tie-breaker rules under the tax treaty: the details of where you own a permanent home or leased premises; the country where your family stays; the country where you earn your income.
5.	What compliance do you need to do if you are a resident of more than one country?	Provide your advisor with the following: details of the income earned; details of any taxes paid or withheld in earning the income; details concerning your business interest. requirement to report any additional information like international bank accounts.
6.	Whether you can file a treaty-based return?	Provide your advisor with the details mentioned in (3) above and ask how it impacts your residency. Note: See our blog on U.S. Expatriation Tax for more details.
7.	What is my residence status if I travel on a student, trainee, teacher, or similar visa status to the U.S.?	Inform your advisor about your visa status because there are preferential rules to determine your residence in the U.S. for specific visa categories.

Our team of international tax specialists at Asena Advisor has in-depth knowledge of interpreting international tax treaties and ascertaining their applicability to your specific circumstances. Please contact Janpriya Rooprai, Head of the US-India Tax Desk, for more information.

Janpriya Roopari

US-AU DTA: Article 18 – Pensions, Annuities, Alimony and Child Support

Posted on May 18, 2022December 5, 2022 by Peter Harper

Background

The background of this week’s blog is a bit different from the previous ones due to the unique nature of the topic. This week we will be looking at Article 18 of the DTA – Pensions, Annuities, Alimony, and Child Support, which affects a much broader demographic than other articles. The background focuses more on the global economy and financial markets, but there is a reason for this.

Most people start saving for their retirement when they earn their first salary. Contributions are made monthly (either by yourself or on your behalf) towards a Pension Fund (IRA, 401k, super, etc.) and are invested in various classes of assets. We diversify investments to reduce risk and maximize continuous growth, and it gives people a sense of comfort and security to invest in their future via a Pension Fund.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.

In recent months, the world has contended with the emergence of the Omicron variant, central bank policy tightening, and persistent inflation. And most recently, Russia’s invasion of Ukraine has ignited a geopolitical crisis that is shaking global financial markets to their core.

As tensions continue to mount in Eastern Europe, the concern about what is to come has led to some people impulsively cashing out their retirement portfolios or reviewing them.

I’ve always been a great admirer of Warren Buffet and his quotes on investments.

So just to lay the foundation for this week’s blog, I thought I would share two relevant quotes about the current economic climate.

“The most important quality for an investor is temperament, not intellect.”

“Uncertainty actually is the friend of the buyer of long-term values.”

Humans are, by nature, irrational beings and are often tempted to make trades when they think the market is working against them, whereas in contrast, it is the well-tempered investor that learns not to watch the market. This person ultimately ends up reaping the most rewards over the long term.

Their investment philosophy is that you don’t need to have an extremely high I.Q. to build more wealth, but rather that you should be more disciplined with your reaction toward the market’s irrationality.

Now to link the background with the rest of the blog to follow, if you are a U.S. resident with an Australian pension or vice versa, prior to considering whether to cash out your pension or not, make sure you take a step back and instead make sure you understand the potential adverse tax implications of having an international pension fund.

Introduction

The purpose of the Australian treaty is to prevent double taxation and fiscal evasion.

Because the U.S. does not tax contributions or accumulated earnings, and Australia does not tax the distribution of benefits, a U.S. resident could perceivably relocate from the U.S. to Australia and never pay income tax on contributions, accumulated earnings, or the payment of pension benefits that accrued while the employee worked in the U.S. To prevent this issue, the two countries formed a double taxation agreement.

Interpreting Article 18 of The DTA – Pensions, Annuities, Alimony, and Child Support

Article 18 addresses the taxation of cross-border pensions and annuities. Subject to Article 19, pensions and other similar remuneration paid to an individual who is a resident of one Contracting State in connection with past employment shall be taxable only in that State.

Article 18(4)

defines the term’ pensions and other similar remuneration, as used in this Article, to mean ‘periodic payments made by reason of retirement or death, in consideration for services rendered, or by way of compensation paid after retirement for injuries received in connection with past employment.’

Article 18(5)

defines the term ‘annuities,’ as used in this Article, to mean ‘stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).’

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.

Article 18 is critical to any U.S. person who is a beneficiary of an Australian Superannuation Fund for the following reasons:

The U.S. has taxing authority over vested Australian superannuation benefits pursuant to Article 18 of the DTA; and
In the absence of a specific Article dealing with contributions and the annual income derived by pension schemes (as exist in the U.K. treaty), the U.S. retains the right under Article 1 of the DTA to tax contributions and accumulated earnings under its domestic tax laws.

In terms of the IRC, most foreign retirement plans are not considered “qualified plans” under Section 401(a), which means the plans generally do not qualify for tax-deferral treatment.

For a pension plan to be tax-exempt, the plan must satisfy the requirements contained in § 401 Internal Revenue Code 1986 (IRC). Section 401(a) IRC specifically provides that, for a pension plan to be a “qualified plan” (and therefore exempt from tax under § 501 IRC), it must be organized in the U.S. Accordingly, this means that no Australian superannuation plan (whether retail or self-managed) can be a “qualified plan.” (Read our Whitepaper on Taxation of Foreign Pensions for more details)

There are essentially three phases of U.S. tax treatment that need to be looked at when dealing with the taxation of an Australian superannuation plan. I will provide a brief summary of the three phases for this blog, but please review our Whitepaper for more information.

Phase 1 – Contributions

Suppose contributions are made to an Australian superannuation fund after an Australian citizen becomes a U.S. person (or a U.S. citizen becomes an Australian resident). In that case, the contributions will be taxable in the U.S. under § 402(b)(1) IRC.

Phase 2 – Earnings Derived Within A Superannuation Plan After An Australian Citizen Becomes A U.S. Person

Subchapter J contains the general rules concerning estates, trusts, beneficiaries and decedents, specifically the grantor trust rules. While it is critical that an individual assessment of the circumstances of every taxpayer be undertaken, most superannuation plans (or portions thereof) in Australia could be classified as grantor trusts for U.S. tax purposes.

Phase 3 – Distribution of benefits

In our opinion, there are two possible ways in which accrued Australian superannuation benefits (contributions and earnings) may be taxed in the U.S.

The first is that Australian superannuation benefits of a U.S. person will be taxable upon such a person attaining 60 years of age (the Australian retirement age). The taxpayer will first be liable for tax in Australia, but receive foreign tax credits in the U.S. (creditable only against U.S. federal income tax) for the Australian tax paid (which will be nil if the account is in the benefits phase). In the event of any shortfall, they will pay further federal, state, and city income tax (where applicable).

The second view (the alternate view) concerns highly compensated employees (HCE) and the application of § 402(b)(4) IRC. If an employee is a highly compensated U.S. person who is also a member of a foreign pension plan (i.e., an Australian superannuation plan), technically, on a literal reading of § 410(b)(3)(C) IRC, there is a high likelihood that the foreign pension plan will fail the minimum coverage tests because contributions made in favor of non-resident aliens with no US-source income are not included for the purposes of determining whether the coverage tests have been satisfied.

Conclusion

Both Australia and the U.S. recognize the need for their citizens to be able to self-fund their retirement and the importance of having a globally mobile workforce. This is evident when looking at the concessional tax treatment for individuals who maximize superannuation and pension contributions, and the current impact government-supported pension plans have on federal and state budgets.

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.

The inadequacies in the DTA arise because it approaches Australian superannuation and U.S. pensions as though they are only taxed at one point, which is on distribution.

Unfortunately, unless Article 18 is amended, the adverse tax implications of U.S. migration on a taxpayer’s superannuation benefits may become a determining factor in whether an executive migrates between Australia and the U.S.

So, the current global economic turmoil might be the perfect opportunity to focus on reviewing the tax exposure of your pension fund instead of considering cashing it out.

Our team of International Tax specialists at Asena Advisors will be able to assist you with these complex tax rules that could apply to your pension fund. In times of adversity, you need proper guidance to your specific needs, and our Multi-Family Office will help you find opportunities in uncertain times.

US-AU DTA: Article 17 – Entertainers

Posted on April 20, 2022December 5, 2022 by Peter Harper

INTRODUCTION

In this week’s blog we will be discussing Article 17 of the US/Australia DTA which relates to entertainers and how they are taxed from an international perspective.

In general, Article 17, provides that if a resident of one country derives income in the other country as an entertainer or sports person, some of the income earned may be protected from tax in that other country, but usually not to the same degree as other individuals who are not entertainers or sports person.

What distinguishes entertainers and sportspersons from other individuals who receive income from employment is that by the nature of their work, some entertainers and sportspersons may have the opportunity to earn a large amount of income in a very short period of time.

INTERPRETING ARTICLE 17 OF THE DTA – ENTERTAINERS

Article 17 states that income derived by visiting entertainers and sportspersons from their personal activities as such will be taxed in the country in which the activities are exercised, irrespective of the duration of the visit.

However, where the gross receipts derived by the entertainer from those activities, including expenses reimbursed to the entertainer or borne on the entertainer’s behalf, do not exceed $10,000 or its equivalent in Australian dollars in the year of income, the income will be subject to tax in accordance with Article 14 or Article 15, which deals with independent or dependent personal services, as the case may be.

It should be noted that income derived by producers, directors, technicians and others who are not artists or athletes is taxable in accordance with Article 14 or 15, accordingly. The commentary to the OECD Model Convention indicates that the word “entertainer” extends to activities which involve a political, social, religious or charitable nature, provided entertainment is present.

It does however not extend to a visiting conference speaker or to administrative or support staff. The commentary acknowledges that there may be some uncertainty about whether some persons are entertainers or not, in which case it will be necessary to consider the person’s overall activities.

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.

Article 17(2) is a safeguarding provision to ensure that income in respect of personal activities exercised by an entertainer, whether received by the entertainer or by another person, is taxed in the country in which the entertainer performs. This is irrespective of whether or not that other person has a “permanent establishment” or “fixed base” in that country.

If it is however established that neither the entertainer nor any person related to him/her participates in any profits of that other person in any manner, the relevant income accruing to that other person shall be taxed in accordance with the provisions of Article 7, 14 or 15, dealing respectively with business profits and income from independent or dependent services, as the case may be.

A legislative instrument has removed the PAYG withholding requirement in relation to entertainers and sportspersons who are US residents when working in Australia. This only applies where the payments relate to entertainment or sports activities carried on in Australia and where the combined payments do not exceed $10,000 or its equivalent in Australian dollars in the year of income..

This legislative instrument applies from 3 April 2014 until 1 October 2024.

A US entertainer who fulfils the contractual obligations of a US employer by performing in Australia, for a salary paid by the employer, is considered to derive “income from personal activities”, within Article 17 of the US/Aus DTA. This is irrespective of the fact whether or not the entertainer is at arm’s length from the US employer. Where the entertainer is paid an annual salary, an apportionment will be necessary to determine the amount applicable to the period of time spent in Australia.

Where the contract for the personal services of a US entertainer in Australia is made between a US resident and an Australian resident, and Article 17(2) of the DTA applies, both the US resident and the entertainer may be taxable in Australia.

The US resident will be liable to tax under Article 17(2) on the taxable income derived by it, and the entertainer may be taxed under Article 17(1) on remuneration derived from the US resident in respect of the personal activities in Australia.

CONCLUSION

For any person interested in tax planning, Article 17 could be a good motivator to start exercising to ensure this Article applies to you. However, that is easier said than done.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with your international tax planning needs to ensure that Article 17 is adhered to by entertainers. Lastly, we will never say no to an autograph.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with submitting the relevant forms in the US and Australia to get access to these relief measures.

US-AU DTA: Article 16 – Limitation of Benefits

Posted on April 13, 2022December 5, 2022 by Peter Harper

INTRODUCTION

In this week’s blog we will be discussing the technical Limitation of Benefits (LoB) Article (Article 16) of the US/Australia DTA.

Article 16 states that, in addition to being a resident of the US or Australia, taxpayers need to satisfy the requirements of Article 16 to obtain the benefits of the DTA.

In particular, the benefits of the DTA are only available if the resident is:

A qualified person (Article 16(2));
Actively engaged in a trade or business (Article 16(3)); or
Entitled to treaty relief because the IRS or ATO makes a determination (Article 16(5)).

The purpose of these restrictions is to prevent residents of third countries from using interposed companies or other entities resident in either Australia or the US to access treaty benefits, also commonly referred to as treaty shopping.

Treaty shopping is the use by residents of third countries of legal entities established in either the US or Australia with a principal purpose of obtaining the benefits of the US/Australia DTA.

INTERPRETING ARTICLE 16 OF THE DTA – LIMITATION OF BENEFITS

Article 16(1) stipulates that except as otherwise provided in Article 16 only residents of the US or Australia for the purposes of the DTA that are qualified persons are entitled to the benefits otherwise available under the DTA.

The benefits otherwise available under the DTA to residents are all limitations on source-based taxation under Article 6 through 15 and Article 17 through 21, the treaty-based relief from double taxation provided by Article 22 (Relief from Double Taxation), and the protection afforded to residents of a Contracting State under Article 23 (Non-discrimination).

The limitation in Article 16 does however not apply where a person is not required to be a resident in order to enjoy the benefits of the DTA. For example, Article 26 (Diplomatic and Consular Privileges) applies to diplomatic and consular privileges regardless of residence.

Article 16(2) lists the eight categories of resident that will constitute a qualified person for a taxable year and thus will be entitled to all benefits of the DTA provided that they otherwise satisfy the requirements for a particular benefit. It is therefore important to note that the tests must be satisfied for each year that benefits under the DTA are sought.

Article 16(2)(a) – Individuals

Article 16(2)(a) states that individual residents of a Contracting State will be a qualified person and hence entitled to rely on the DTA.

However, the definition of US resident in Article 4(1)(b)(ii) excludes citizens who are also a resident of another country with which Australia has a DTA. In addition, an individual that receives income as a nominee on behalf of a third country resident, may be denied the benefits of the DTA due to the beneficial ownership requirement in Article 10 for example, despite meeting the requirement in Article 16(2)(a).

Article 16(2)(b) – Governmental bodies

Article 16(2)(b) states that the Contracting State, any political subdivision or local authority of the state, or any agency or instrumentality of the state will be a qualified person and hence entitled to rely on the DTA.

Article 16(2)(c)(i) – Publicly traded companies

Article 16(2)(c)(i) states that a resident company will be a qualified person in the following circumstances:

Its principal class of shares is listed on a US or Australian stock exchange; and
Those shares are regularly traded on one or more recognized stock exchanges.

Article 16(2)(c)(ii) – Subsidiary companies

Article 16(2)(c)(ii) states that a resident company will be a qualified person if:

At least 50% of the aggregate vote and value of its shares are owned directly or indirectly by five or fewer companies that are qualified persons due to Article 16(2)(c)(i); and
In the case of indirect ownership, each intermediate shareholder is a resident of either the US or Australia.

Article 16(2)(d) – Other listed entities

Article 16(2)(d) states that certain publicly traded entities (other than companies) and entities beneficially owned by certain publicly traded entities or companies may be qualified persons and hence entitled to rely on the DTA.

Article 16(2)(d)(i) – Publicly traded entities

Article 16(2)(d)(i) states that a resident entity that is not an individual or a company is a qualified person if:

The principal class of units is listed or admitted to dealings on US or Australian stock exchange; and
These units are regularly traded on one or more recognized stock exchanges.

Article 16(2)(d)(ii) – Other Entities

Article 16(2)(d)(ii) states that a resident entity that is not an individual or a company will be a qualified person if at least 50% of the beneficial interests in the entity are owned directly or indirectly by five or fewer companies that are a qualified person due to Article 16(2)(c)(i) or publicly owned entities that satisfy the requirements of Article 16(2)(d)(i).

Article 16(2)(e) – Tax exempt organizations

Article 16(2)(e) states that a resident religious, charitable, educational, scientific or other similar organizations is a qualified person if:

It is organized under the laws of the US or Australia; and
Was exclusively established and maintained for a religious, charitable, educational, scientific or other similar purpose.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.

Article 16(2)(f) – Pension funds

Article 16(2)(f) states that a pension fund is a qualified person if:

It is organized under the laws of either the US or Australia;
Established and maintained to provide pensions or similar benefits to employed or self-employed persons pursuant to a plan; and
More than 50% of the beneficiaries, members or participants are individuals resident in either the US or Australia.

Article 16(2)(g) – Unlisted entities

Article 16(2)(g) states that a person other than an individual that is a resident of either the US or Australia is a qualified person and hence entitled to rely on the DTA if both an ownership and base erosion test are satisfied.

However, one or more of the following categories of qualified persons must principally own the unlisted entity directly or indirectly:

Individuals who are residents in the US or Australia (Article 16(2)(a));
Government bodies of the US or Australia (Article 16(2)(b); and
Entities resident in either the US or Australia that satisfy public listing and trading requirements in Article 16(2)(c)(i) and Article 16(2)(d)(i)).

Ownership test — companies

Article 16(2)(g)(i) requires that 50% or more of the aggregate voting power and value of the company must be owned directly or indirectly on at least half the days of the company’s taxable year by certain qualified persons.

Ownership test — trusts/partnerships

Article 16(2)(g)(i) requires that 50% or more of the beneficial interests of entities other than companies must be owned directly or indirectly on at least half the days of the entity’s taxable year by certain qualified persons.

Base erosion test

Article 16(2)(g)(ii) disqualifies a person that satisfies the requirement in Article 16(2)(g)(i) if 50% or more of the unlisted entity’s gross income for the taxable year is paid or accrued (directly or indirectly) to a person or persons who are not residents of either Contracting State in the form of payments deductible for tax purposes in the payer’s state of residence.

Article 16(2)(h) – Headquarters companies

Article 16(2)(h) states that a resident of the US or Australia that is a recognized headquarters company (RHC) for a multinational corporate group (MCG) is a qualified person and hence entitled to rely on the DTA.

A RHC is a US or Australian resident company where:

It has a substantial involvement in the supervision and administration of companies forming the MCG.
The MCG being supervised is engaged in an active business in at least five countries and each company generates at least 10% of the gross income of the MCG.
The gross income from any single country where a MCG member carries on business activities must be less than 50% of the gross income of the MCG.
No more than 25% of the gross income of the RHC can be derived from the other Contracting State.
The supervision and administrative activities for the MCG are carried out by the RHC independently of any other person.
Generally applicable taxation rules apply in its country of residence.
Income derived in the other Contracting State is attributable to the active business activities carried on by MCG members in that state.

Article 16(2)(h)(i) – Supervision and Administration

Article 16(2)(h)(i) requires that to be a RHC, the company must provide in its state of residence a substantial portion of the overall supervision and administration of the MCG.

Article 16(2)(h)(ii) – Active business

Article 16(2)(h)(ii) requires that the MCG supervised by the headquarters company must consist of corporations that are residents in, and engaged in active trades or businesses in, at least five countries. In addition the business activities carried on in each of the five countries (or groupings of countries) must generate at least 10% of the gross income of the MCG

Article 16(2)(h)(iii) – Single country income limitation

Article 16(2)(h)(iii) requires that the business activities carried on in any one country other than the headquarters company’s state of residence must generate less than 50% of the gross income of the MCG. If the gross income requirement under this clause is not met for a taxable year, the taxpayer may satisfy this requirement by averaging the ratios for the four years preceding the taxable year.

Article 16(2)(h)(iv) – Gross income limitation

Article 16(2)(h)(iv) requires that no more than 25% of the headquarters company’s gross income may be derived from the other Contracting State.

Article 16(2)(h)(v) – Independent supervision of MCG

Article 16(2)(h)(v) requires that the headquarters company have and exercise independent discretionary authority to carry out the supervision and administration functions for the MCG.

Article 16(2)(h)(vi) – Taxation rules

Article 16(2)(h)(vi) requires that the headquarters company be subject to the generally applicable income taxation rules in its country of residence.

Article 16(2)(h)(vii) – Income derived from the other Contracting State

Article 16(2)(h)(vii) requires that the income derived in the other Contracting State be derived in connection with or be incidental to the active business activities referred to in Article 16(2)(h)(ii).

Article 16(3) states that a resident of a Contracting State that is not a qualified person under Article 16(2) is a qualified person for certain items of income that are connected to an active trade or business conducted in the other Contracting State.

In broad terms, the benefits of the DTA will be available if the person resident in the US or Australia:

Is engaged in the active conduct of a trade or business in their state of residence;
The income derived in the other Contracting State is derived in connection with or incidental to the trade or business conducted in their state of residence; and
The trade or business activity in the person’s state of residence is substantial in relation to the activity in the state of source of an item of income.

Article 16(3)(a) firstly requires that a resident of the US or Australia must be engaged in the active conduct of a trade or business in their state of residence. However, a business of making or managing investments for the resident’s own personal account is not regarded as an active trade or business unless these activities are banking, insurance or securities activities carried on by a bank, insurance company or a registered, licensed or authorised securities dealer.

Secondly, the income derived in the other Contracting State must be derived in connection with or incidental to the trade or business conducted in the state of residence.

Article 16(3)(b) states that where a person or an associate carries on a trade or business in the other Contracting State which gives to an item of income the trade or business carried on in the state of residence must be substantial in relation to the activity in the state of source of the income.

The substantiality requirement is intended to prevent a narrow case of treaty shopping abuses in which a company attempts to qualify for benefits by engaging in de minimis connected business activities in the treaty country in which it is resident.

The substantiality requirement only applies to income from related parties.

Article 16(3)(c) states that where a person is engaged in the active conduct of a trade of business then the following will be deemed to be part of that activity:

Partnership activities provided the person is a partner, and
Activities of connected persons.

There are three circumstances in which a person will be connected to another person are, firstly, if either person possesses at least 50% of the:

Beneficial interest of the other;
Aggregate vote and value of a company’s shares; or
Beneficial equity interests of the company.

Secondly, if another person possesses directly or indirectly, at least 50% of the:

Beneficial interest;
Aggregate vote and value of a company’s shares; or
Beneficial equity interest in the company in each person.

Thirdly, a person is connected to another person if the relevant facts and circumstances indicate that:

One has control of the other; or
Both are under the control of the same person or persons.

The above rule is of particular importance to holding companies since they will generally not be able to satisfy Article 16(3)(a) due to the fact that they are managing investments for their own account.

Article 16(4) is an anti-avoidance provision and denies the benefits of the DTA where a company has issued shares that entitle the holders to a portion of the income from the other state that is larger than the portion of such income that holders would otherwise receive.

Article 16(5) states that the competent authorities of the US and Australia can grant the benefits of the DTA to a resident of the relevant Contracting State if they are not a qualified person in accordance with Article 16(2). However, to exercise this discretion the IRS or ATO has to determine that the establishment, acquisition or maintenance of such a person and the conduct of its operations did not have the principal purpose of obtaining the benefits of the DTA.

Article 16(6) defines the term “recognized stock exchange” as:

The NASDAQ System owned by the National Association of Securities Dealers and any stock exchange registered with the Securities and Exchange Commission as a national securities exchange for purposes of the Securities Exchange Act of 1934
The Australian Stock Exchange and any other Australian stock exchange recognized as such under Australian law, and
Any other stock exchange agreed upon by the competent authorities of the Contracting States.

Article 16(7) lastly states that nothing in Article 16 restricts, in any manner, the ability of the Contracting States to enact and enforce the anti-avoidance provisions in their domestic tax laws.

CONCLUSION

The Limitation on benefits clause is drafted with the intention of avoiding treaty shopping.

When planning an international structure it is therefore crucial to ensure compliance with Article 16. Failure to plan properly could result in a loss of valuable benefits and can render the structure ineffective.

To achieve optimal results, immediate business concerns of the client should be carefully balanced with the long-term goals to ensure the establishment of activities in the most favorable environment.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with your international tax planning and ensure that Article 16 is adhered to.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with submitting the relevant forms in the US and Australia to get access to these relief measures.

US-AU DTA: Article 15 – Dependent Personal Services

Posted on March 16, 2022December 5, 2022 by Peter Harper

INTRODUCTION

In this week’s blog we will be discussing the tax implication of rendering dependent personal services as stipulated in Article 15 of the US/Australia DTA.

The main purpose of Article 15 is to ensure that income derived by an individual who is a resident of the US or Australia as an employee or director in the other country is taxed appropriately.

In terms of Article 15 the source state will have taxing rights on such income if the individual is present in that state for a certain period of time.

INTERPRETING ARTICLE 15 OF THE DTA – DEPENDENT PERSONAL SERVICES

Article 15(1) sets out the basis upon which the remuneration derived by employees and directors should be taxed. Pensions, annuities, and remuneration of government employees are covered by Article 18 and 19 of the DTA and therefore not covered in terms of Article 15.

Generally, other salaries, wages, directors’ fees, etc derived by a resident of one country from an employment exercise or services performed as a director of a company in the other country will be taxed in that other country.

Article 15(2) includes an exemption from tax in the country being visited where the visits are only for a limited period. The conditions for exemption are:

That the visit or visits not exceed, in the aggregate, 183 days in the year of income of the country visited;
That the remuneration is paid by, or on behalf of, an employer or company who is not a resident of the country being visited, and
That the remuneration is not deductible in determining taxable profits of a permanent establishment, fixed base or a trade or business which the employer or company has in the country being visited.

Where these conditions are met, the remuneration derived in the source state will be taxed only in the country of residence.

Article 15(3) stipulates that income derived from employment aboard a ship or aircraft operated in international traffic is to be taxed in the country of residence of the operator. The US Treasury however explained that under US law, the US taxes such income of a non-resident alien only to the extent it is derived from US sources (i.e. in US territorial waters). This paragraph does not confer an exclusive taxing right.

Article 15(3) does not confer an exclusive taxing right and both countries retain the right to tax their residents and citizens under Art 1(3) of the DTA (Personal scope).

Remuneration derived by US residents from employment in Australia may in terms of Article 15 of the DTA, be taxable in the US rather than Australia if the remuneration is paid in respect of a visit not exceeding 183 days in the year by an employer who is not resident in Australia and has no permanent establishment in Australia.

Asena Advisors is the only multi-disciplinary (Accounting and Legal) international CPA firm in the United States that specializes in U.S. -Australia taxation.

COVID RELIEF

Both the US and Australia implemented certain relief measures for individuals who inadvertently spent more than 183 days in the source due to the Covid pandemic.

US Covid Relief Measures

Days that you were unable to leave the US either because of a medical condition that arose while were in the US or where you were unable to leave the US due to COVID-19 travel disruptions, you may be eligible to exclude up to 60 consecutive days in the US during a certain period.

Australia Covid Relief Measures

The ATO recognized that the Covid pandemic has created a special set of circumstances that need to be taken into account when evaluating the source of the employment income earned by a foreign resident who usually works overseas but instead performed that same foreign employment in Australia. If the remote working arrangement is short term (3 months or less), the income from that employment will not have an Australian source. However, for working arrangements longer than 3 months, an individual’s personal circumstances need to be examined to ascertain if the employment is connected to Australia. Employment income (ie salary or wages) is likely to be determined as having an Australian source if:

- The terms and conditions of the employment contract change;
- The nature of the job changes;
- Work is performed for an Australian entity affiliated with the overseas employer;
- The economic impact or result of the work shifts to Australia;
- The employing entity is in Australia;
- Work is performed with Australian clients;
- The performance of the work depends on the individual being physically present in Australia to complete it;
- Australia becomes the individual’s permanent place of work;
- The individual’s intention towards Australia changes.

Income earned from paid leave (such as annual or holiday leave) while in Australia temporarily does not need to be declared in Australia.

CONCLUSION

Individuals should therefore make sure that they do not unnecessarily file tax returns in the source state if their stay was extended due to Covid related measures.

Our team of International Tax specialists at Asena Advisors, will be able to assist you with submitting the relevant forms in the US and Australia to get access to these relief measures.

US-AU DTA: Article 14 – Independent Personal Services

Posted on March 2, 2022November 19, 2022 by Peter Harper

INTRODUCTION

In this week’s blog we will be discussing the tax implication of rendering Independent Personal Services as stipulated in Article 14 of the US/Australia DTA. Article 14 is luckily far less complex than our previous blogs.

The main purpose of Article 14 is to ensure that income derived by an individual who is a resident of the US or Australia from the performance of personal services in an independent capacity in the other country is taxed appropriately.

INTERPRETING ARTICLE 14 OF THE DTA – INDEPENDENT PERSONAL SERVICES

In terms of US domestic legislation, income earned by a non-resident individual for personal services rendered in the US which are of an independent nature is taxed at a flat rate of 30%.

Income derived by an individual who is a resident of either the US or Australia for rendering independent personal services in the other country will be taxed in that other country in which the services are performed if:

Article 14(a) – the recipient is present in that country for a period or periods aggregating more than 183 days in the year of income (or taxable year) of the country visited, or

Article 14(b) – that person has a ‘fixed base’ regularly available in that country for the purpose of performing their activities, and the income is attributable to activities exercised from that base.

We are the only multi-disciplinary international CPA firm in the United States that specializes in U.S.– Australia taxation.

Only the country of residence can tax this income if neither of the 2 tests above are met. The US Treasury Department noted that its understanding of the term fixed base is similar to the term permanent establishment.

Independent personal services include all personal services performed by an individual for their own account which includes any services performed as a partner in a partnership. This however does not include services performed as a director of a company which will be covered by Article 15 of the DTA – Dependent personal services.

Lastly, it is important to note that these personal services include all independent activities and are not limited to specific professions.

CONCLUSION

The interpretation by courts of Article 14 post COVID will be quite interesting as the way we conduct business has shifted significantly and could perhaps see an amendment to this article in the new future.

Our team of International Tax specialists at Asena Advisors, will be able to guide you on how to interpret and apply Article 14 to your specific circumstances.