Tax Form 8833 Treaty Based Return Position Disclosure

Look no further than Tax Form 8833, the Treaty Based Return Position. This form may seem daunting at first, but understanding its importance can save you time and money in the long run. In this blog post, we’ll break down everything you need to know about Tax Form 8833 and how it can work for you instead of against you during tax season.

Essentially, this is a ‘treaty-based’ Return Position Disclosure Under Section 6114 or 7701 (b), where the form needs to be filled out by the taxpayers that need a reduction or an exemption of the income from the US income tax. Tax form 8833, needs to disclose the position of the individual to the government. So, what does the tax form 8833 includes and what are its applications? Let us take a look.

Information about Tax Form 8833

This particular form type needs the taxpayers to clearly state the applicable treaty country and other related articles of the treaty that are either relied on or related to. Also, the Internal Revenue Code provisions have been overridden by the treaty-based return position taken. Other than these requirements, the form also needs a brief paragraph that explains the position of the treaty along with the nature and the amount of the relevant items of income.  

Usually, people who own businesses abroad need to travel a couple of times to and fro to tend to the various business needs. However in the quest to take care of your business, one overlooks the number of times each of these trips has taken place. This is when you are faced with your tax bills that seem to be a bit ‘unexpected’. This generally occurs because the taxes have been calculated by the government for the income earned in the country along with the income that has been earned by your business abroad as well.

Here most times, the entire aspect of ‘travelling for business’ appears to look like some sort of a ‘shady business’ that has been crafted by the individuals to ‘escape the clutches of taxes’. Well not at all. The good news is that a bit of an ‘education about the taxes’ will reveal that there are ways to have them work in your favour. So, how does this work? Well, to start with, learn the first rule of ‘compliance with the tax rules set by the government’. This is a win-win situation, where you get rewarded for having been obliged with timely and precise tax payments. However, things can appear to be a bit complicated, when you have to deal with the taxes for a business in the US as well as one abroad. Seems like double the taxes. This is where the application of Tax Form 8833 or the tax treaties comes into the picture. Let us take a look:

While most times, the tax treaties can be used to reduce the US tax returns in the case of non-residents as well as the foreign taxes for US residents, nevertheless, the treaty needs a closer look into the details to establish the eligibility criteria.

NOTE:  One must bear in mind that the dual resident taxpayer is an Alien individual who is regarded to be a resident of both the other country and the US, under each of the country’s involved tax laws. Here, the dual taxpayers who wish to claim the treaty advantages as a resident of the foreign country will be regarded as nonresident Alien to figure out the US income tax liability.

Read More-: Tax Form 5471

How do the Tax Treaties Help in the Reduction of Taxes for the Foreign Earned Income?

First, you need to understand that these tax treaties include income tax, estate and gift tax, commerce, friendship and also navigation. Hence to enjoy the benefits of the reduced taxes, one must foremost complete Tax Form 8833 and also include it along with your US-based tax returns.

The Tax Form 8833: Who Needs to File them?

In case the tax treaty modifies or overrules a certain provision of the Internal Revenue code-IRC leading to the reduction in the taxes owed by you, then you need to file the tax form 8833.

To be more precise, the US non-residents who file the form need to comply with Section 301.6114. These are the treaty-based return provisions. On the other hand, taxpayers who have dual resident status, need to file the form to comply with section 301.7701(b)-7. This is the coordination with the income tax treaties. On the form, one can easily spot the check box that will help you select the required option as and when applicable.

Some of the benefits of the tax treaty-based provisions include:

• The reduction and the modification in the amount of the taxes that are lost or gained from disposing of the US-based real property.
• The reduced tax rate on the dividends or the interest paid by a foreign organization which is US sourced.
• Granting the credit for the foreign tax that is not allowed by the IRC

The Details Required within Tax Form 8833

• The First six lines on the form are pretty simple. Here the first line requires the name of the treaty country and the individual’s treaty position.
• Also the list of the applicable articles of the tax treaties.
• Line 2 requires you to list the internal Revenue code provisions or the provision that are overruled or also modified.
• Line 3: your address in the US
• Line 4: “name the specific test in the Limitations on Benefits (LOB) article” What test are they talking about? And what is a Limitation on Benefits?” are some of the questions stated. As for the benefits of the anti-treaty shopping provision, this implies avoiding the residents of the third countries from acquiring the advantages of the treaty. As for the tax treaties, which comprise the limitations of the benefits articles, the taxpayer must undergo certain tests to be eligible for such treaty-related benefits.
• Here one must bear in mind that it is not just the individual taxpayers that are subjected to the LOB tests. The publicly traded corporations, charitable organisations, governments, trusts, and others in such categories must be able to meet the specific test requirements as well.
• ‘Table 4’ is related to the LOB tests, referred to above and includes the list of eleven different kinds of entities that might be a LOB test requirement. This particular table is rather important as it comprises some of the most vital information regarding LOB, however, it can be quite a challenge to figure out what might apply to a certain individual’s situation. To better understand this, it is important that you completely understand the LOB provision of any tax treaty under which one might claim their benefits. It is required one should clearly understand the text of the relevant LOB article to understand more about the tests available and the related requirements of the tests as well. In case the tax treaty does not include any LOB article, hence one might not need to take up any test.
• A comprehensive online resource is available on the online resource centre by the US department of treasury. Here one can easily find out about the text of any tax treaty or tax exchange Information Agreement -TIEA. Located at the top of the page is a drop-down box that contains the list of all the foreign countries that have a tax treaty agreement with the US. Here, one can easily select the required country and click GO, this will easily activate any tax treaty or the TIAE document for that particular country. 
• Line 5: This is a simple, ‘Yes or No, question regarding your disclosure of the treaty-based position as specifically required under Sect 301.6114-1(b).
• Line 6: Here all the information of the taxpayers who take a treaty-based return position needs to be provided. This is irrespective of whether the report is required or not. Here the user needs to clearly explain the treaty-based position and also the facts that are based on it. Next, one needs to enlist the nature and the amount of the individual’s gross receipts. This requires the itemization of each gross payment, gross income item or the other items that require you to claim the treaty benefit.
• Finally, if there is any LOB test contained in the tax treaty, then the user needs to explain why the test is identified on line 4 and the basis of the special requirements for claiming the benefits.

Also Read-: Tax Form 8938 Reporting Requirements Explained 2023

What are the Exceptions from Reporting?

According to Section 301.6114-1(c), waiving the reports on certain treaty-based return positions is stated. Here the waiver can be applied, for which one needs to take a closer look at the regulations. Some of the major exceptions include:

• The income received by a foreign person which is US based, including the likes of interest, Dividends, rents, and Royalties, is subjected to a US tax rate of 30%. However, a reduced rate or an exemption is applicable in case of a tax treaty.
• When the income derived is modified or reduced by a treaty, that is derived from the dependent personal services, pensions, annuities social securities, and any other public pensions of athletes, artists, trainees, students, or teachers. This also includes fellowship grants and taxable public scholarships.
• The Social Security Totalization Agreement or the Diplomatic or Consular Agreement is associated with modification or the reduction of the taxpayer’s income.
• In case the individual has been excised from the tax imposed by section 4371, by the treaty. This implies the taxes implied on insurance policies, annuity contracts, and reinsurance policies issued by the reinsurer or the foreign insurer.
• If the individual is a member of the estate, trust, or partnership who has disclosed the treaty position that the beneficiary or the partner is required to disclose.
• In case the individual is allowed to claim the reduced tax on interest, dividends, royalties, rents, or any other form of determinable annual or periodic income which is normally subjected to a rate of 30%.7) Those items require disclosure of a total of $10000 or less

The Penalties

In case the individual fails to file the Tax form 8833, then a penalty of $1000 and $10000 for the corporations is applied. One can also be exempted from payment of the fine altogether if a reasonable explanation is provided.

The Termination of the Residency

There is also a chance that one can face the termination of the residency in case of failing to file form 8833. In case you are a dual resident taxpayer and also a long-term resident LTR, then the filing of form 8833 to be treated as a resident of a foreign country for taxation might lead you “have been deemed to have terminated your US residency status for federal income tax purposes.”

In case of this, the individual can be subjected to the tax under IRC section 877A- tax responsibilities of expatriation. In this case, you might need to file form 8854, which is both the initial and Annual Expatriation statement.

Note: An individual who has been a lawful, permanent resident of the US for at least 8 out of the 15 tax years that end with the year the individual status as LTR ends is known as a long-term resident.

You may also read-: Tax Form 8621

Conclusion

Taxation is a tricky business, however, it is essential nevertheless to ‘get your accounts on the right track’. The same is also applicable if you wish to generate maximum benefits from the same. However in case you have any doubts regarding the same, feel free to reach out 1800 964 3096 to our team of experts and we will be more than happy to help you out.

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