IN THIS ISSUE

	Tax Treaty Benefits for Scholarships and Fellowships
	Register Today for August's Nonresident Alien Tax Training
	IRS Announces Increased Focus on International Tax Compliance
	Windstar Publishing Revises "Tax Treaty Benefits for Foreign Nationals Performing U.S. Services"
	Upcoming Trade Show Appearances

Tax Treaty Benefits for Scholarships and Fellowships

by Paula N. Singer, Esq.

Scholarship and fellowship payments that are not for qualified items are taxable to the recipient. Qualified items include tuition and fees required for enrollment, and fees, books, supplies, and equipment required for a course of study received by a candidate for a degree at a qualifying educational institution.

Scholarships and fellowships for nonqualified items such as room and board or research are taxable and, in the case of nonresident alien recipients, subject to NRA withholding at a 30 percent rate or a lower 14 percent rate for certain recipients in F, J, M, or Q status. For more details on these rules, see the articles about scholarships, fellowships, and stipends in the September/October, 2008, November/December, 2008, and March/April 2009 editions of the Crow’s Nest.

US Tax Treaty Policy
It is not the policy of the United States to provide tax treaty benefits for taxable scholarships and fellowships, as illustrated by Article 20 of the 2006 US Model Treaty. Article 20 grants benefits on payments received by a student, apprentice, or business trainee who is present in the United States for his or her full-time study at an accredited educational institution or for his or her full-time training provided that such payments arise outside the United States and are for the purpose of his or her maintenance, education, or training. (Article 20 limits payments for apprentices and business trainees to two years.) A similar provision was included in the 1996 U.S. Model Treaty.

As a result of this policy, the majority of tax treaties in effect provide a benefit only for foreign-source scholarship and fellowship grants. New treaties that have come into effect since 2006 replacing existing tax treaties (e.g., the treaties with Belgium and Iceland) have eliminated benefits for U.S.-source taxable scholarships and fellowships that were in the prior treaties. Treaties with new treaty partners such as Bulgaria also include the U.S. Model Treaty provision. 

Since nonresident alien recipients of foreign-source scholarships and fellowships are not subject to tax on foreign-source income, this treaty benefit is of no utility for the majority of grant recipients who are nonresident aliens. It is important for the minority of recipients of foreign-source scholarships and fellowships who become resident aliens subject to U.S. income tax on their worldwide income, including their grants from foreign organizations and governments. However, these grant recipients may not understand that their foreign grants are subject to U.S. tax, either because such grants may not be taxable by the treaty country or because there is no specific line for reporting taxable grants on Form 1040 (grants are recorded on the wages line with “SCH” on the dotted line), or both.

Tax Treaties with Benefits
Many older tax treaties include in the Student/Trainee Article benefits for “a grant, allowance, or award.” The treaties with Kazakhstan, Russia, and Ukraine use the wording “grant, allowance, or other similar payments.” The IRS interprets this wording to apply to taxable scholarship and fellowship grants, both U.S.- and foreign-source. (Awards as defined by Section 74 might be covered by the Other Income Article.) These benefits apply to both U.S.- and foreign-source grants.

Article 21 of the treaty with South Korea is typical. It provides benefits for an individual from South Korea who is temporarily present in the United States for the primary purpose of:

1. Studying at a university or other recognized [i.e., accredited] educational institution,
2. Securing training required to qualify for a profession or professional specialty, or
3. Studying or doing research as the recipient of a grant, allowance, or award from a governmental, religious, charitable, scientific, literary, or educational organization.

Under treaties that follow this model, benefits are available for researchers as well as for students and trainees. (For more details, see “Tax Treaty Benefits for Research,” in the July/August 2008 edition of the Crow’s Nest.)

Benefits are typically available for five taxable years from the date of arrival for the purpose of the treaty. A few treaties allow benefits for a slightly longer period by providing benefits for five years from date of arrival instead of limiting the benefit period to tax years.

Grant Recipient
In order for students, trainees, and researchers to be eligible for a treaty benefit on a scholarship or fellowship grant, the grant must be made by the grantor to the individual. (See, for example, the Treasury Explanation for Article 21(1)(a) of the treaty with France and for Article 20(3) of the treaty with Germany.) The fact that an individual is paid a salary that is funded by a grant is not sufficient to support treaty benefits although they may be eligible for a compensation benefit provided by the treaty, if any.

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

Watch for Volume 6, Number 4, for a discussion on Travel Reimbursements: Character and Source of Income

Q:  A J-1 student from China won a photography contest at our school. She wants to use Article 20 (b) of the treaty to exempt the $500 prize from taxes. She meets the requirements of the article and claims the prize is exempt because the article covers “grants or awards from a government, scientific, educational, or other tax exempt organization”. Can we exempt the prize under this article?

A:  No. The IRS interprets language like “grant, allowance, and other similar payments” to mean scholarship or fellowship income. An “award” as defined under Section 74 of the code would instead fall under the terms of the provisions of the Other Income article. So if the “award” is not specifically intended to assist the payee in the pursuit of her studies or personal research, Article 20(b) would not apply.

Register Today for Windstar’s Summer Training, August 4^th – 7^th

Registration is now open for Windstar’s next comprehensive Nonresident Alien Tax Training occurring August 5th – 7th at the Doubletree Guest Suites in Boston, MA.  A half-day pre-conference is also available on August 4th. 

Attendees will receive quality instruction on pertinent nonresident alien tax and immigration from industry insiders: 

• IRS agent Bob Driscoll on IRS international tax initiative
• Immigration expert Linda Dodd-Major on immigration and honoraria
• Windstar’s Terri Crowl on tax treaty benefits and considerations when creating policies and procedures

In addition, Paula N. Singer, Esq. will present sessions on:

• Tax rules for the road
• Tax residency determinations
• Tax treaties
• Scholarships, fellowships, and wages
• Accounts payable issues and payments to foreign entities

Attendees will also learn how to get the most out of the International Tax Navigator® via instruction given in both group and individual one-on-one settings. 

The Doubletree Guest Suites is an all suite hotel located on the banks of the Charles River, just minutes from downtown Boston and its major attractions.  Hotel features include:

• Shuttle service to major tourist destinations in Boston and Cambridge and nearby train stations
• Low cost transportation to and from Logan International Airport
• High-def flat screen televisions in each room
• Scullers Jazz Club

The Doubletree Guest Suites Boston received rave reviews from the April NRA training attendees! 

Click here to view a complete agenda and register for Windstar’s Spring Nonresident Alien Tax Training.

IRS Announces Increased Focus on International Tax Compliance

The IRS recently announced that it plans to increase enforcement of international tax compliance.  This approach involves expanding enforcement tools and methods, using data driven analysis, and further educating the IRS workforce on emerging international tax issues.

Strategic initiatives involve:

• Provide targeted outreach to tax-exempt sector to address international compliance issues
• Identify emerging issues and increase specialization to address these issues
• Strengthen information reporting and withholding systems to ensure appropriate information is received to determine compliance
• Improve cooperation with treaty partners and other government agencies to assist in information sharing and compliance activities

Click here to learn more about this initiative.

Recently Published Articles by Paula N. Singer

Paula N. Singer, Esq. had two articles published in tax related trade magazines.

• “B-1 Visitors-U.S. Tax Traps for the Unwary” Corporate Business Taxation Monthly, Commerce Clearance House (CCH), March 2009
• “U.S. Tax Returns for Foreign Nationals” TAXPRO Journal, National Association of Tax Professionals, Spring 2009

Visit the Windstar website for a complete list of articles published by Paula Singer.

Windstar Publishing Announces Revision of "Tax Treaty Benefits for Foreign Nationals Performing U.S. Services"

Award-winning author Paula N. Singer, Esq. has revised her comprehensive tax guide Tax Treaty Benefits for Foreign Nationals Performing U.S. Services. The guidebook contains over 150 pages of text plus forms, instructions, and numerous overview charts of treaty articles that provide exemptions for compensation for services.  Items addressed include the tax treaty provisions governing exemptions for employees, independent contractors, artists, athletes, crew members, directors, government workers, researchers, students, teachers, and trainees. 

Visit www.shopping.windstar.com to order your copy today.

Windstar Will Dock at the Following Trade Shows

Windstar Technologies/COKALA Tax Information Reporting Solutions Nonresident Alien Payments Seminar
Marriott Courtyard Dunn Loring Fairfax
Vienna, Virginia
June 2 – 3, 2009

* * * * * * * * * * * * *

National Association of College and University Business Officers (NACUBO) 2009 Annual Meeting
Booth Number 1838
John B. Hynes Memorial Convention Center
Boston, MA
June 27 - 30, 2009

* * * * * * * * * * * * *

Windstar Summer Nonresident Alien Tax Training
Doubletree Guest Suites
Boston, MA    
August 4 – 7, 2009

* * * * * * * * * * * * *

Look in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in trade show information.

©Copyright 2009 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.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties. When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting. Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.

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