Guide to Global Payroll Management - 2020 - A-1

Income Tax Treaty Summaries

INCOME TAX TREATY SUMMARIES

INTRODUCTION
The U.S. has income tax treaties with more than 60 foreign countries. In general, tax treaties reduce the tax
rates or provide exemptions from tax on certain items of income received by foreign citizens and residents from U.S.
sources and by U.S. citizens and residents from foreign sources. This appendix includes detailed summarizes of
payroll-related provisions of all the income tax treaties currently in effect between the U.S. and other countries. For a
discussion of treaty issues pertaining to nonresident aliens working in the U.S., see page 2-2. Treaty issues pertaining
to expatriates are discussed on page 5-5.
A primary goal of income tax treaties is to prevent international double taxation, which occurs when more than one
country taxes the same income. A treaty may prevent double taxation by giving one of the countries the right to tax
a particular item of income based on such factors as the source of the income or the citizenship or residence of the
recipient. Where both countries have the right to tax certain income, double taxation may be eased through a foreign
tax credit allowed by the country of citizenship or residence. Other purposes of treaties are to foster educational and
cultural exchanges between treaty countries, encourage international commerce and investment, and provide for the
exchange of tax information.
TREATY VS IRC If a tax treaty provision and a conflicting provision of the Internal Revenue Code
both apply to a particular taxpayer, the treaty generally will be given priority. Thus, if a person qualifies for exemption of a certain type of income under a treaty but would otherwise be taxed on that
income under the IRC, the exemption will be allowed.

How a treaty becomes law
Income tax treaties are negotiated by the Treasury Department. Once the negotiated treaty has been signed, it is
forwarded to the President of the United States for approval. If the President approves it, the treaty is sent to the U.S.
Senate for its advice and consent. Once approved by the Senate, the treaty is returned to the President for ratification.
After ratification by the other country involved, "instruments of ratification" are exchanged between the U.S. and the
other country and the treaty becomes law.

Terms defined
The "personal services income" provisions of most treaties use the following terms, for which the IRS has provided
general definitions but the meaning of which may vary from treaty to treaty:
*

"Fixed base," "regular base," and "permanent establishment" generally mean a fixed place of business-such as a factory, office, warehouse, or mining site-through which an enterprise carries on
its business.

"Borne by" generally means having ultimate financial accounting responsibility for or providing the
monetary resources for an expenditure or payment, even if another entity in another location actually made the payment.
NOTE In most treaties, the different parts or sections are called "Articles." The bracketed reference
at the end of each treaty provision described below (e.g., "[Art. 20]") is to the particular article number in the treaty.

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Guide to Global Payroll Management - 2020

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