NEW TREATY WITH JAPAN POSES CHALLENGES
FOR TAXPAYERS, ADMINISTRATORS, AND THE IRS

by Paula Singer, Esq. 

On March 30, 2004 the United States and Japan entered into a new income tax treaty that replaces the treaty that had been in effect since 1973. The new treaty includes several changes that impact treaty benefits of foreign workers, scholars, and exchange visitors:

1. Students, Trainees, and Recipients of Grants. Consistent with U.S. Treasury policy, the new treaty limits benefits for students, trainees, and grant recipients provided that the payments are made from outside the United States. Trainee benefits are limited to one year. U.S. source grants for research, training, and studying are no longer exempt from tax under the student article. (Qualified scholarships – those for tuition, and required fees, books, supplies, and equipment – of degree candidates are exempt and are not subject to tax under U.S. tax law.)
   
   
2. Teachers and Researchers. Compensation for teaching or engaging in research at a university, college, school, or other educational institution is exempt from tax for two years from the individual’s date of arrival provided that the individual continues to be a resident of Japan.
   
   
3. Nonresident Workers. The special rule allowing individuals from Japan to claim personal exemptions for their spouse and dependents who lived with them for a period of time in the United States has been eliminated.
   
   
4. Independent Contractors. Treaty benefits are available for independent contractors who have no fixed place of business or permanent establishment. These terms are covered by Article 7, Business Profits and Article 5, Permanent Establishment. There is no separate article covering self-employment income in the new treaty.
   
   
5. Artists and Athletes. The treaty limitation for gross receipts has been increased to $10,000 for artists and athletes who otherwise qualify for benefits on income from employment or self-employment.

These new treaty provisions are effective beginning January 1, 2005.

Individuals who enter the United States in 2005 may only claim benefits under the new treaty. Individuals who were in the United States in 2004 may be eligible to claim benefits under the prior treaty. The new treaty provides two provisions for claiming benefits under the prior treaty: 1) carry-over benefits under the student/trainee and teacher/researcher articles of the prior treaty and 2) a one-year election to continue benefits under the prior treaty.

Carry-over Benefits are available to individuals who were eligible for benefits under the student/trainee or teacher/researcher article of the prior treaty when the new treaty became effective on March 30. These individuals may continue to claim the benefits under the prior treaty until the end of the benefit period. Individuals are not required to have been claiming benefits in order to have been eligible for benefits. For example, a student who was in the United States on March 30 but did not receive taxable compensation or a taxable grant until after that date would still be eligible for the carry-over benefits.

A One-year Election of Benefits under the prior treaty is available to individuals who were present in the United States after March 30 and eligible for benefits under the prior treaty. These individuals may elect to continue these benefits during 2005. Benefits are not limited to student/trainee and teacher/researcher benefits. For example, nonresident alien workers who were eligible to claim additional personal exemptions on their Form 1040NR tax return for 2004 can make an election to claim the additional personal exemptions on their 2005 return.

The Challenges administrators and the IRS must face include explaining why individuals who consider themselves similarly situated to other individuals from Japan cannot claim treaty benefits because of the date that they came to the United States. Administrators and the IRS must also explain why some teachers and researchers receive benefits under Article 19 (the prior treaty) while other teachers and researchers receive benefits under Article 20 (the new treaty) in the same calendar year. Administrators have already designed a form to accompany Form 8233 claims to clarify these situations. The IRS will also have to design a procedure that allows eligible individuals to elect to claim additional personal exemptions in 2005 but prevents ineligible individuals from doing so.

Paula Singer, Esq., CEO of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA has over 25 years of experience providing advice and compliance services to individuals, their employers, and payors on cross-border employment matters.

Watch for Volume 2, Number 3 for a discussion on “Social Security Tax Exemptions for Students.”

Q. I've just run across my first resident alien that can claim a tax treaty benefit. She is a resident of Japan. Tax Navigator® created a Form W-9 with treaty notations on it but no Form 8233. Why?

A. Form 8233 is valid only for nonresident aliens. For resident aliens with treaty claims, the IRS specifies a Form W-9, which must identify the treaty article and saving clause exception under which the claim is being made. Do not send the Form W-9 to the IRS. Keep it in your files.

Windstar Welcomes Aboard the Following New Clients:

Art Institute of Chicago
Boyce Thomson Institute for Plant Research
Bucknell University
Community College of Southern Nevada
H. Lee Moffitt Cancer Center
Seminole Community College

Sign up now for the Spring NRA Training

The spring NRA Training Session will be held at the Marriott in Newton, MA from April 19-22. Check www.windstar.com for schedule and registration. Linda Dodd-Major, creator and former director of the INS Office of Business Liaison, will be a guest lecturer at the session.

Windstar Will Dock at These Upcoming Trade Shows

AACC Annual Conference
Booth #802, Hynes Convention Center, Boston, MA
April 9-12, 2005

The American Association of Community Colleges presents its 2005 annual conference, Bridging Access to Success.

For more information visit www.aacc.nche.edu

APA 2005 Annual Congress
Booth #509 – San Diego Convention Center, San Diego, CA
May 1-5, 2005

Paula Singer will present “Understanding Tax Treaty Benefits and Limitations” on May 3 and 4, and Linda Dodd-Major and Paula Singer will present “Understanding Payments to Foreign Workers” on May 4.

For more information, visit www.americanpayroll.org.

NAFSA 2005 Annual Conference
Washington State Convention & Trade Center, Seattle, Washington
May 29 - June 3, 2005

For more information, visit www.nafsa.org.

Crow’s Nest Article in Chinese Paper

An article from The Crow’s Nest, “Tax Treaty Benefits For Foreign Students” has been translated to Chinese and posted on EpochTimes, www.epochtimes.com, a global newspaper written in 5 languages and published in 11 countries.

Windstar Publishing Announces New Book From Paula Singer

Windstar Publishing has just released “A Simple, More Efficient Tax Collection System For America” by Paula Singer, Esq. The book explores how our tax laws can become easier to understand and tax collection easier to administer.

For more information, visit shopping.windstar.com.

©Copyright 2005 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.