Linda Bruckner, a partner at Sciarabba Walker & Co. LLP and a member of the NYSSCPA's International Taxation Committee, provided a wide overview of tax treaties in her presentation at the Foundation for Accounting Education’s International Taxation Conference on Jan. 23.

Calling in from “snowy Ithaca,” Bruckner told the conference attendees that there are several types of tax treaties to which the United States is a signatory, primarily income tax treaties (of which there are 69), estate and gift tax treaties (17) and totalization agreements (30). The main purpose of these treaties, she said, was to avoid double taxation through such forms as credits, exemptions and reduced tax rates.

Make sure to read the treaties in their entirety, she warned the attendees, to confirm that the treaty being read has been ratified, and be sure to read the protocols.

“Protocols are just amendments to the treaties,” she said. “A lot of times they're published and floating around on the internet before they've been ratified or accepted.” She told an anecdote about a client who found on the internet a protocol of a treaty that would be beneficial to him, and presented it to the firm, which determined that it was just an unratified draft. “So be careful of that,” she said.

Bruckner also emphasized that definitions are important, particularly when establishing residency, which affects taxation.

“The more that's defined, [the] more helpful it is to us,” she said. She explained residency tiebreaker rules that determine an individual’s primary place of residence, usually for tax purposes. “It's really going to be looked at,” she said, because if a country considers someone a resident, that person is subject to the tax laws of that country. Countries will look at determinants such as the location of someone’s permanent home and vital interests—which can be both economic and personal, she said.

After a brief discussion of the taxation of real estate—“pretty much the country where the real estate is located is going to be able to tax an income from that real estate,” she said—Bruckner moved on to her “favorite” topic in this area: the taxation of pension retirement accounts.

She urged the attendees to pay attention to the tax treaty provisions of each country, and provided some examples of the differences.

“We work with clients with pensions in Australia,” Bruckner said. “Australia probably has the worst treaty provisions when it comes to retirement,” she added, giving the example of a young Australian adult client who inherited a large retirement account from her father. Her firm’s efforts to prevent the client from double taxation became “quite a project,” she said.  

Turning to the United Kingdom, where tax rates are much higher than those in the United States, she said, “It's more advantageous to report the pension contributions as additional employment income because they will get sheltered by the tax credits."

As she is based in Ithaca, Bruckner works with many students and professors at Cornell University, and she discussed the international tax obligations for students and scholars.

“With Cornell, we do get a lot of foreign professors, foreign researchers, foreign students. So we have quite an international community in Ithaca,” she said. “And one of the things that we've seen [is that there are a number of treaties] that have provisions where, if the researcher scholar comes over—and vice versa, if someone from the United States goes to a foreign country—there's a period … where the income that they earn in the [other] country is exempt from taxation.”

That period is usually two years, she said, but she encountered a case in which the period was three years. In that case, her client had not filed within the specified period and stayed in the United States longer than three years, making him liable to pay U.S. taxes. Having overstayed his tax-exempt period, the client paid his taxes. Bruckner subsequently found a private letter ruling that allowed the client to obtain a refund.    

“It's really tough trying to interpret sometimes the actual wording of the treaty provision,” she said.

Bruckner then explained the concept of the limitation of benefits, which is not applicable for individuals, but for entities. “This is in treaties to prevent ‘treaty shopping,’” she said. “In other words, they don't want entities to set up corporations in treaty-friendly countries [and] do business elsewhere and rely on the treaty to get tax benefits.”

She then emphasized the importance of the savings clause in a tax treaty.

“This is a biggie and really, really critical for everybody to understand,” she said. “So what is the savings clause? It basically says, 'We don't care what the treaty is; we have a right to tax our citizens and residents as we see fit,'” meaning that the treaty or certain sections of it can be negated.

“It makes it as if the treaty didn't exist for those certain positions,” she said. “See the savings clause, and make sure you understand whatever you're looking for. It's usually up in the scope section, but it can be anywhere, so you have to be really careful.”

Bruckner concluded her presentation with a discussion of totalization agreements, which provide relief from double taxation from two countries’ social insurance systems. She referred attendees to the International Programs and Resources page of the Social Security Administration’s website for more detailed information.