You should note that the title also includes the phrase, "Prevention of Fiscal Evasion with Respect to Taxes on Income." A much greater part of the treaty is related to this part of the title than to avoidance of double taxation.
In reality, most U.S. taxpayers living in Thailand will not find much help here.
The United States has published a model tax treaty and the U.N. and OECD have also issued model treaties. Although this treaty was negotiated before the publication of the U.S. model, it does reflect substantial consistency with the language and policies of the model. Thus, the treaty does not differ in any significant manner from treaties with other nations. In general, these treaties are intended to benefit the residents or citizens of one country who do business in (but do not necessarily live in) the other country.
Although not discussed in any detail or referred to in any article, the treaty is designed to prevent individuals or companies from avoiding tax in any country ï¿½ the prevention of fiscal evasion referred to in the title. It accomplishes this by saying which of the contracting states has the right to tax specific types of income or income from designated sources. This is intended to prevent both countries from taxing this income but it also means that taxpayers cannot claim that such income is not taxable by either. Taxpayers cannot take inconsistent positions with the two countries and thus avoid paying tax to either.
Right at the start, in Article 1, the treaty specifically says that it does not affect the ability of either country to tax its own citizens. This provision, known as the saving clause, is the key reason why the treaty does not benefit U.S. taxpayers who reside in Thailand and is found is all U.S. tax treaties. The treaty specifies several classes of income that may not be taxed by the U.S. if received by a resident of Thailand. However, if that person is also a citizen of the U.S. this saving clause permits the U.S. to tax such income under the normal Internal Revenue Code rules.
For example, if a resident of Thailand goes to the U.S. to perform personal services for a period of 90 days or less, the income is not attributable to a fixed base in the U.S., and the remuneration is less than $10,000, the treaty prevents the U.S. from taxing the income. If, however, the Thai resident is also a citizen of the U.S., the saving clause overrides the other provision of the treaty and permits the U.S. to tax the income without reference to the treaty.
With respect to citizens of the U.S., in other words, the treaty does not take precedence over the Internal Revenue Code.
A somewhat different rule may (and I stress MAY) apply to non-citizen, permanent residents of the U.S. who are also residents of Thailand. The saving clause says that the benefits of the treaty will apply to residents who meet the definitions of residency contained in the treaty. These may differ from the definition used in determining liability for tax under the Internal Revenue Code.
Thus, a non-citizen, permanent resident of the U.S. who is also a resident of Thailand and has a permanent home available in Thailand but not in the U.S. would be treated as a resident of Thailand. The U.S. would not be permitted to apply statutory rules to determine taxable income if the rules are inconsistent with the treaty. In the previous example, the U.S. would presumably not be permitted to tax the income earned in the U.S!
The saving clause applies only to the determination of liability for income tax, however. Other provisions of the Internal Revenue Code would still apply. For example, the taxpayer would be a "U.S. person" for determining whether a corporation is a "controlled foreign corporation" whose other shareholders must report certain income in their personal income tax returns.
What effect electing to use the treaty benefits would have on a green card holderï¿½s standing with the Immigration and Naturalization Service is another matter.
Any benefits the treaty does provide are not applied automatically. Affected taxpayers must make an affirmative election to apply any given treaty provision. A statement must be attached to the personï¿½s tax return for each year affected, specifying the item on the return and the article of the treaty which applies.
Even if the treaty permits a country to tax a specific item of income, it may not impose such tax if it is not also imposed under domestic law. In other words, neither country may impose a tax on residents of the other country if the tax is not also imposed on its own people. For example, since Thailand does not assess a tax on certain capital gains realized by its citizens, it cannot assess such a tax on U.S. taxpayers.
It follows, then, that a taxpayerï¿½s liability need not be determined under the treaty if the code produces a more favorable result. Nor is it necessary to apply treaty positions to everything on a return; taxpayers can use the treaty for one class of income or deduction and the code for another. What they cannot do is apply either in an inconsistent manner; they must apply either the treaty or code to every element within any class.
Another reason U.S. taxpayers resident in Thailand will not benefit from the treaty is that it is unnecessary. The Internal Revenue Code already has provisions designed to alleviate, if not eliminate, the effect of double taxation.
For U.S. taxpayers who meet the requirements of the Code, up to $80,000 of income earned in Thailand may be excluded from U.S. tax. These rules are very specific and the exclusion applies only to income from personal services. Some taxpayers may also qualify for an additional exclusion, if their housing costs exceed the allowance given to U.S. government employees abroad.
If this does not eliminate the double tax, taxpayers may also be able to take a credit against their U.S. tax for some or all of any taxes paid to Thailand. Only taxes applicable to income taxed by the U.S. are eligible for the credit. Taxes attributable to income excluded under the above rules cannot be used to offset U.S. tax on income in excess of the exclusion. The treaty also includes a clause guaranteeing this credit to citizens of one country for taxes paid to the other.
Neither of these provisions is 100% effective in eliminating double taxation. Alone or in combination, however, they do generally keep the duplication to a minimum.
In structure, most of the treaty is devoted to specifying which country may tax income from various, listed sources. Usually, this applies to income derived by a citizen or resident of one country from a source in the other. For example, salaries earned in a country are taxable by that country; rents received from property located in one country are taxable in that country; dividends and interest on investments in one country are taxable in that country.
Despite the title of the treaty, such authority is not exclusive because
the saving clause will permit the home country to tax the income without regard to the treaty.
Nevertheless, the treaty does contain some provisions which deny a country the right to tax certain forms of income earned by residents of the other country. So, for example, pensions paid by a U.S. retirement plan to a resident of Thailand (who is not also a U.S. citizen) would not be subject to tax in the United States. This is true even if the recipient is not the one who earned the right to the pension (a surviving spouse.) On the other hand, social security benefits are taxable, if at all, in the country making the payment.
The treaty exempts certain teachers, researchers, and students or trainees from taxation on income related to these activities.
Generally, Thailand cannot tax the salaries of U.S. government employees working in Thailand. However, if that person became a Thai resident and then accepted employment with the U.S. government, the salary would be subject to Thai tax!
Generally, government pensions are taxable in the paying country; a treatment similar to social security. The result will differ when the recipient is a citizen and resident of Thailand and not a U.S. citizen. In such cases, social security benefits are taxable in the U.S. and the pension is taxable in Thailand.
The treaty runs to 31 articles and takes about 26 pages of print. Yet the only real provision aimed at eliminating double taxation is Article 25. All this article does, however, is guarantee that U.S. citizens will receive a credit against any U.S. tax for taxes paid to Thailand. Such credit is to be determined under the rules included in the Internal Revenue Code, discussed earlier.
Another article requires each country to grant any benefits allowed to its citizens or residents to the citizens or residents of the other country. For taxpayers living in Thailand, though, this merely insures that they receive the same treatment as Thai nationals in calculating any Thai tax.
If you think the process through, the net result for U.S. taxpayers living in Thailand is to calculate a tax on their income at the highest applicable rates –ï¿½whether U.S or Thai. Then, it is simply a matter of allocating that tax between the two countries. Usually, this means that the tax is paid to Thailand but, in a few situations, a small portion of the total may be payable to the U.S.
Published for Thaivisa.com and eThailand.com by:
Lanny K Williams, C P A
Nawarat, Williams and Company Limited
Income Tax Services for Expatriate Americans
The Royal Place II
6/311 Soi Mahadlek Luang 2
Ratchadamri Road, Lumpini
Tel. 09-925 9905