IX. INCOME TAX TREATIES

An income tax treaty is an agreement entered into between two governments under which each country agrees to limit or modify the application of its domestic tax laws in an attempt to avoid having the same income taxed by both countries. Nonresident aliens of certain foreign counties may be entitled to reduced rates of, or exemption from, tax under a tax treaty between their country of residence and the U.S. These individuals must notify you that they are residents of a country with which the United States has an income tax treaty and qualify for reduced rates of, or exemption from, income tax withholding.

Most tax treaties to which the U.S. is a party provide for at least a partial exemption from tax for pay for labor or personal services performed in the United States by a qualified individual. Most tax treaties also include specific articles designed to foster education and cultural exchanges. These articles are directed at the taxation of students, trainees, teachers, and researchers.

Generally, the qualifying individual must be a resident of the treaty country. In some cases the individual must be a citizen of the treaty country. An issue sometimes arises where an individual is of the U.S. and a foreign country. Usually, when this occurs the determination is made by ascertaining where the individual's permanent home is, the country in which he/she is a citizen or national, and where his/her personal and economic relations are closer, etc. IRS publication 901 U.S. Income Tax Treaties provides an overview of the income tax treaties in force as of the publication date. This publication should not be relied upon to determine if an individual qualifies for the benefits of a tax treaty. The exemptions from or reduced rates of U.S. tax vary under each treaty. Therefore, you must check the provisions of the tax treaty that applies. The tax treaty articles and the Treasury Department's technical explanations are provided at http://www.dbf.state.fl.us/bosp/appii_a.html . After a new tax treaty enters into force, the Treasury Department prepares a "technical explanation" of the text of the tax treaty provisions. The technical explanations are useful for interpreting the tax treaties.

When reviewing an income tax treaty article, it is important to pay close attention to the qualifications for exemption specified in the text of the article. For example, the article may limit the exemption to payments made by a certain type of payor (i.e., a foreign resident). To determine an individual's eligibility for a tax treaty an analysis must be undertaken to determine:

• What is the residency status of the individual as defined by their home country and by the U.S.?
• What is the primary purpose of the individual's presence in the U.S.?
• What is the type of payment (scholarship, fellowships, independent personal service, or dependent personal service)?
• How long will the individual be with the organization?
• How long will the individual be in the U.S.?
• Who is the payor?

The tolling of the time limitations in tax treaties varies between tax treaties. Article 20 of the U.S. -- United Kingdom Tax Treaty limits the visit to the U.S. to two years. If the individual stays longer than two years the benefit of the treaty is lost retroactively. In this situation, if the agency/university has reason to believe that the individual will be staying longer than two years they should not grant the tax treaty exemption. The treaty with Canada allows a tax exemption on up to $10,000 of remuneration paid in the calendar year. However, if the individual earns more than $10,000, the entire benefit of the tax treaty is lost retroactively.

These examples illustrate the importance of reviewing the actual treaty articles and technical explanations.

A. Eligibility for Treaty Exemption

The individual's primary purpose for being present in the U.S. generally determines the article under which he/she will be eligible to claim an exemption.

Example. An Indian student is present in the U.S. under an F-1 visa. The primary purpose of an F-1 visaholder's visit is to be a student; therefore, the individual will not qualify under Article 22 as a teacher or researcher.

Example. An individual from a tax treaty country comes to the U.S. under an F-2 or J-2 visa. The primary purpose of the F-2 or J-2 visaholder's visit to the U.S. is to accompany the spouse or dependent (the F-1 or J-1 visaholder). Therefore, they are not eligible for an exemption under any tax treaty and are subject to withholding at the standard nonresident alien rates.

B. Students, Teachers, and Researchers Claiming Treaty Benefits

Some tax treaties have an exemption for nonresident alien students receiving payment for personal services performed while temporarily in the United States as a student, trainee, or apprentice, or while acquiring technical, professional, or business experience. All tax treaty student articles include a limitation on the time that an individual can claim treaty benefits. The limitation is generally either "reasonable period needed to complete the education or training" or five years. Certain tax treaties combine the year limitations with the teacher article to limit the combined period of benefits to five years.

Under most tax treaties pay for teaching is exempt from U.S. tax and from withholding for a specified period of time. Most tax treaties limit the "teacher exemption" to two years from the date of the teacher's arrival in the U.S., not the date that the individual began working. The tax treaties with Greece and China allow a three-year benefit. Benefits are lost retroactively under the teacher articles of the treaties with Germany, India, the Netherlands, and the United Kingdom. Under the some tax treaties, (i.e. United Kingdom) individuals may use the benefits of the treaty more than once if the individual reestablishes his/her tax residency and physical presence in the treaty country before claiming benefits again, while other treaties limit the treaty benefit to one time. If an individual has enjoyed the benefits of the student article in the immediately preceding period, some treaties do not allow teacher or researcher benefits.

To qualify for an exemption from withholding because of a tax treaty, an alien student, teacher, or researcher must complete IRS Form 8233 (see instructions below), the required attachment and the Reduction or Exemption From Withholding, Form DBF-BP-5. The Reduction or Exemption From Withholding, Form DBF-BP-5 along with one copy of the IRS Form 8233 with the required attachment are to be submitted to:

Office of Comptroller
Department of Banking and Finance
Bureau of State Payrolls
101 E. Gaines Street
B-23, Fletcher Building
Tallahassee, FL 32399-0350

C. Independent Contractors Claiming Tax Treaty Benefits

Under most tax treaties, compensation for independent personal services performed in the U.S. is exempt from income tax only when the services are performed during a period of temporary presence in the U.S. (usually a period of 183 days or less). Additionally, some tax treaties have dollar limits, which include monies paid for reimbursement of expenses.

Often, you must withhold under the statutory rules on payments made to nonresident aliens for services performed in the U.S. This is because the factors on which the treaty benefits are based may not be determinable until after the close of the tax year. The nonresident alien must then file a U.S. income tax return to recover any over withheld tax and to provide the IRS with proof that he or she is entitled to a treaty exemption.

D. Instructions for Form 8233 (Rev. October 1996)

Part I

Name, Address, and taxpayer identification number.---Enter your complete name, address, and taxpayer identification number (TIN). You are required to furnish a taxpayer identification number when completing this form. You may use a social security number (SSN) if you have one. If you do not have, and are not eligible to obtain, an SSN, you must apply for an IRS Individual Taxpayer Identification Number (ITIN), using Form W-7, Application for IRS Individual Taxpayer Identification Number. Contact a Social Security Administration (SSA) office to find out if you are eligible to get an SSN. If you do not have an SSN but are required or eligible to get one, apply on Form SS-5, Application for a Social Security Card.

Visa Type and Number. ---Enter the visa type that is currently granted to you by the Immigration and Naturalization Service (INS). For example, foreign students are usually granted an "F-1" visa. Foreign professors, teachers, or researchers are usually granted a "J-1" visa. However, some persons granted a "J-1" visa may also be considered business/vocational trainees, for example, a person admitted to complete a postgraduate residency in medicine. Also enter the serial number that was assigned to your visa at the time it was granted. If you do not have, or do not require, a visa, write "None."
Lines 1a, 1b, and 2. ---Everyone must complete lines 1a, 1b, and 2, except citizens of Canada or Mexico, who can complete either lines 1a and 1b, or line 2.

Line 3. ---Check the box that describes the primary reason you are in the United States. For example, if you have an "F-1" visa the primary reason you are in the United States is as a student. Individuals that are not employees of the university should check the self-employed person box.

Nonresident alien students, professors/teachers, and researchers using Form 8233 to claim exemption from withholding on compensation for personal services that is exempt from tax under a U.S. tax treaty must attach to Form 8233 the statement required by Revenue Procedure 87-8, 87-9, or 93-22. These attachments are found .

The Treasury Department last updated these Revenue Procedures in 1993; therefore statements for countries with which the U.S. has entered into agreements after 1993 (Czech Republic, France, Israel, Netherlands, Portugal, and Slovak Republic) are not included in the procedures. Nonresident alien students, professors or teachers, and researchers from those countries are to attach a statement in a format similar to those contained in the revenue procedures. The Bureau of State Payrolls has developed attachments for these countries. If you believe that the format and content of these attachments are correct, you may use these attachments.

Line 4a. ---If you are a nonresident alien individual performing independent personal services (self-employment) in the United States, fully describe the nature of the service, for example, "Consulting contract to design software," or "Give three lectures at Florida State University." If you are a nonresident alien student or researcher who is also performing dependent personal services, fully describe the nature of your employment, for example, "Part-time library assistant," or "Teaching one chemistry course per semester to undergraduate students." If you are a nonresident alien professor/teacher, write "Teaching." If you are a nonresident alien business or vocational trainee, fully describe the nature of your employment, for example, "Neurosurgical residency at Shands Hospital," or "One-year internship in engineering at Florida Department of Transportation."

Line 4b. ---Enter the total amount of compensation for personal services you will
receive from this payor during the tax year. Enter an estimated amount if you do not know the exact amount.

Line 5a. ---You must provide full information concerning the specific treaty and article on which you are basing your claim for exemption from withholding, for example, "U.S./Germany tax treaty, Article 20(1)."

Line 5b. ---If all income received for the service performed to which this Form 8233 applies is exempt, write "All." If only part is exempt, enter the exact dollar amount that is exempt from withholding.

Line 5c. ---Generally, you may claim an exemption from Federal income tax only under an U.S. tax treaty with the country in which you claim permanent (or indefinite) foreign residence. This is the foreign country in which you live most of the time. It is not necessarily the country of your citizenship. For example, you are a citizen of Pakistan but have your home (where you live) in England. You cannot claim any exemption provisions under the U.S./Pakistan tax treaty. You can only use the U.S./United Kingdom tax treaty to claim exemption.

Line 6. ---Enter any other information you believe may be necessary to clarify or explain your request for exemption from withholding.

Lines 7 and 8. For Independent Personal Services Only.

Line 7. ---Generally, 30% must be withheld from your compensation after subtracting the value of one personal exemption. However, if you are a resident of Canada, Mexico, Japan, or the Republic of Korea, a student from India, or a U.S. national, you may be able to claim additional personal exemptions for your spouse and children. See Publication 519 for more information.

Line 8. ---Each allowable personal exemption must be prorated for the number of days during the tax year you will perform the personal services identified on each Form 8233 in the United States. To figure the daily proration amount for each allowable exemption, divide the personal exemption amount (for example, $2,650 for tax year 1997) by 365 (366 for a leap year). Then multiply the result by the number of days you will perform these services in the United States. The amount allowed for each personal exemption changes from year to year, and may be obtained from the IRS.

Signature. ---The nonresident alien individual or duly authorized representative must sign and date Form 8233.

Part II

University's Responsibilities. ---When the nonresident alien individual gives you Form 8233, review it to see if you are satisfied that the exemption from withholding is warranted. If you are satisfied, based on the facts presented, complete and sign the certification in Part II.

Agencies/universities must make a reasonable review of the Form 8233 before signing it. If an error was not clear from the face of the form, the agency/university will not be held liable. However, agencies/universities should review their records to ensure that individual has not exceeded time limitation for exemptions, etc. Agencies/universities will generally be presumed to have knowledge of records that it has in its possession. When the time limitations of a tax treaty has been met and the individual is no longer eligible for the benefits of a tax treaty, the Bureau of State Payrolls should be notified in writing.

You will need one original and three copies of the completed Form 8233. One copy of the form must be submitted to the Bureau of State Payrolls. See Students, Teachers, and Researchers Claiming Treaty Benefits and Independent Contractors Claiming Tax Treaty Benefits above for submission instructions. The original of form 8235 must be mailed within five days of acceptance to:

Office of the Assistant Commissioner (International)
Director, Office of International District Operations
Attn.: CP:IN:D:C:SS
950 L'Enfant Plaza South, SW
Washington, DC 20024

It is recommended that forms mailed to IRS be sent via certified mail.

Give one copy of the completed Form 8233 to the nonresident alien individual. Keep a copy for your records. Each copy of Form 8233 must include any attachments submitted by the nonresident alien individual. The exemption from withholding is effective for payments made at least 10 days after you properly mail Form 8233 to the IRS.

Individuals should complete IRS Form 8233 to allow a sufficient amount of time to comply with the Internal Revenue Service mandated time limitations. Nonresident alien independent contractor voucher submission dates should be controlled to comply with the IRS mandated time limitations. For nonresident alien employees, forms must not be submitted to the Bureau of State Payrolls unless the time limitations will be met by the next applicable pay date.
Each university/agency is responsible for monitoring the tax treaty benefit eligibility period for each individual who has filed an IRS Form 8233.

You must not accept Form 8233, and you must withhold, if either of the following applies:

• You know or have reason to know that any of the facts or statements on Form 8233 may be false; or
• You know or have reason to know that the eligibility of the nonresident alien individual's compensation for the exemption cannot be readily determined (for example, if you know that the nonresident alien individual has an office in the United States regularly available for performing personal services).

If you accept Form 8233 and later find that either of the situations described above applies, you must promptly notify the IRS at the address above, and the Bureau of State Payrolls, in writing.

Also, if the IRS notifies you that the eligibility for the exemption of the nonresident alien individual's compensation are in doubt or that the compensation is not eligible for exemption, you must begin withholding. See Regulations section 1.1441-4(b)(2)(iii) for examples illustrating these rules. If you submit an incorrect Form 8233, the IRS will notify you that the form submitted is not acceptable and that you must notify the Bureau of State Payrolls immediately.

An incorrect Form 8233 is (a) any Form 8233 that claims a tax treaty benefit or exemption that does not exist or is obviously false; or (b) any Form 8233 that has not been completed in sufficient detail to allow determination of the correctness of the tax treaty benefit or exemption claimed.

Signature. ---You or your duly authorized agent must sign and date Form 8233. See Regulations section 1.1441-7(b) for information about duly authorized agent.

Form 8233, the required statement, and Reduction or Exemption From Withholding, Form DBF-BP-5 are valid for one calendar year.

E. Fellowship/Scholarship Recipients Claiming Tax Treaty Benefits

A nonresident alien who wishes to claim part or all of his/her scholarship or fellowship - cash or non-cash - exempt from tax because of a tax treaty must provide an IRS Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Withholding, to the university. This form replaces IRS form 1001; Ownership, Exemption, or Reduced Rate Certificate; and becomes mandatory on January 1, 2000. A copy of form DBF-BP-5, Reduction or Exemption From Withholding, included in Appendix 7, must be filed with the Bureau of State Payrolls with a copy the W-8BEN if the scholarship will be paid through the Payroll Processing System. The university is responsible for keeping all IRS Forms W-8BEN and for monitoring the tax treaty benefit eligibility period for each student who is claiming tax treaty benefits.

The university is not required to send IRS Form W-8BEN to the IRS, but it is required by the IRS to keep the form on file for at least four years after the end of the last year to which it applies. Once filed, IRS Forms W-8BEN that include a valid taxpayer identification number will remain in force until the status of the person whose name is on the form changes, or a change in circumstances makes any information on the form incorrect.

F. Instructions for IRS Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (Revised October 1998)

The specific instructions for the nonresident alien claiming the exemption on this form are:

Part I

Name (line 1), type of beneficial owner (line 2), address (lines 4 and 5), and U.S. taxpayer identification number (line 6). - Enter your complete name, address, and taxpayer identification number (TIN). You may use a social security number (SSN) if you have one. If you do not have, and are not eligible to obtain, an SSN, you must apply for an IRS Individual Taxpayer Identification Number (ITIN), using Form W-7, Application for IRS Individual Taxpayer Identification Number. Contact a Social Security Administration (SSA) office to find out if you are eligible to get an SSN. If you do not have an SSN but are required or eligible to get one, apply on Form SS-5, Application for a Social Security Card. Enter "individual" in line 2 as the type of beneficial owner. All other lines can be left blank.

Part II

Claim of tax treaty benefits. - Check box number 9a and enter the country for which an income tax treaty exemption is claimed.

Special Rates and Conditions. – Enter the tax treaty article number and the corresponding tax rate (0 percent if an exemption for a scholarship grant or the applicable rate for a royalty payment).

All other boxes should be left blank.

Do not enter any information in Part III.

Part IV

Signature - Carefully read the certification contained in the form and sign and date the form.

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