Just this week in expat tax news, the Senate ratified four long-stalled tax treaty protocol updates for Spain, Japan, Luxembourg, and Switzerland. After years-long delays, nearly all Senators voted in favor of the ratification, with Mike Lee and Rand Paul voting against each; Dick Durbin voted against just the Luxembourg treaty. Find out the most important facts about this development in the tax treaty protocol.
What Are Tax Treaties?
Tax treaties exist between the US and other countries in order to determine to which country taxes are owed. Specific tax treaties may have other helpful benefits for expats, too. They reduce instances of double taxation, and in the opinion of some politicians, increase international trade and investment, and decrease tax fraud due to easier info sharing. When tax treaties stall out in Congress as these four did, it can cause extra expense, hassle, and double taxation to individuals and businesses abroad.
If you live in a country that has a tax treaty with the US, you would complete Form 8833 (Treaty-Based Return Position Disclosure) and return it with your Federal Tax Return. Failure to file this form and disclose the treaty position can result in a $1,000 fine. Using the full benefits of the tax treaty can be complicated, however, so it is best to work with a professional who specializes in expat taxes.
How Are the Tax Treaties Being Updated?
Many of the treaties include provisions to shrink withholding taxes, and others include terms that will resolve tax disputes more swiftly. To speed up the resolution process, arbitration will be mandatory for any disputes that aren’t resolved by a tax authority within two years.
Why Was the Ratification Stalled in the Senate?
Nay-saying Senators – primarily Rand Paul – cited concerns about the privacy of taxpayers as their main reason for resistance. The tax treaties stipulate a specific process to request additional information about taxpayers for whom more information is needed in order to implement the treaty provisions. However, the information-sharing provisions of tax treaties are what make the system possible for both countries. Paul’s opposition meant the updated protocols did not unanimously pass, so they required floor time in the Senate, and thus an extensive deferment occurred.
Dick Durbin opposed the updates due to the long wait, as some treaties were decided ten years ago.
A Look Ahead at Expat Tax News: What’s Next for Tax Treaties?
A few other countries’ tax treaty updates have been submitted to the Senate but have not yet been ratified: Poland, Chile, and Hungary. The Senate Foreign Relations Committee passed all seven of these treaties back in 2015, and they have been awaiting ratification ever since. The treaties were negotiated years before that. However, hopefully, the Senate will use the current momentum to pass Poland, Chile, and Hungary’s treaties, and end the long wait for ratification and the stress it adds for individuals and businesses abroad. But before they are passed, the Treasury Department is checking to ensure they don’t go against certain parts of the recent tax reform. We’ll keep you posted on any more developments in the tax treaty protocols as they happen.
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