Residents of certain foreign countries may be entitled to reduced tax rates, or exemption from tax, under an applicable tax treaty between their country and the United States. Using information provided by the visitor, the Tax Department determines whether a visitor may use a tax treaty.
The existence of a tax treaty between the U.S. and a visitor's resident country does not guarantee that the visitor may take advantage of any benefits. Eligibility for treaty benefits are often related to the primary purpose of the visitor at the time of entry into the U.S. (even if corrected later while still in the U.S.)
Even when a foreign visitor is a resident of a country that has a tax treaty with the U.S., the income being paid to the visitor may not be exempt from tax under the treaty. In addition, certain countries place specific dollar limitations on the amount of income that can be exempt from tax under their treaty. For example, the tax treaty with the People's Republic of China exempts all personal service income received by Chinese teachers, lecturers, and researchers, but provides an annual personal service exemption of only $5,000 to Chinese students. On the other hand, students from Australia (as well as students from many other tax treaty countries) can claim exemption only for income sourced outside the U.S.
An individual may receive income tax exemption for a limited period or for a certain amount of income. In a very few cases, staying longer than the period specified or earning more money than the exemption allows can have severe penalties. An individual subject to one of these treaties maybe exempt two years, but if he or she remains for a third year, then the entire amount earned from the beginning of the stay is retroactively subject to tax. Retroactive clauses are included in tax treaties such as Germany, India, the Netherlands, and the United Kingdom.
Details about these exceptions can be found in IRS Publication 901, U. S. Tax Treaties.
Publication 901 details only basic information. IU must determine that the facts presented justify the treaty benefits. If the facts do not justify the treaty benefits, the exemption will not be granted.
If IU has rejected the exemption application, foreign visitors may be able to appeal directly to IRS. This appeal may be part of filing a 1040-NR, or it may be a separate process. IU staff cannot get involved in individual appeals directly to IRS. Foreign visitors wishing to appeal for a withholding exemption should consult a tax lawyer or their local IRS office for assistance.
How to Apply for Tax Treaty Benefits:
International visitors are asked to complete the International Tax Questionnaire (ITQ) which provides the information necessary to determines if benefits are available. The ITQ is available at www.fms.indiana.edu/tax/forms/questionnaire.pdf
The ITQ collects information about the visitor's visa status and past visits. It should be submitted to the Tax Department with the following documentation:
- Copy of the current U.S. visa page from the visitor's passport.
- Copy of the I-94 Departure Card, usually stapled to the passport.
- Visitor's U.S. social security number (SSN) or individual taxpayer identification number (ITIN), or proof that the visitor has submitted an application for one of these numbers.
- Copy of the visitor's I-20 (for F-1 students) or DS-2019 (for J-1 visa holders).
- Copy of the identification page of the passport
If it is determined that a foreign visitor may qualify for reduced tax rates, then a representative will prepare the appropriate IRS forms and contact the employee for a signature. If the foreign visitor is eligible for an tax exemption for wages, then a Form 8233 will be prepared. If the foreign visitor is eligable for a tax exemption for a fellowship or scholarship, then a W-8BEN will be prepared.
IU is required to submit the Form 8233 to the IRS for review. The IRS reserves the right to reject Form 8233 and require IU to withhold taxes. If this occurs, the Tax Department will contact the visitor.
Form 8233 is good for one calendar year. Employees will have to submit their immigration documentation to the Tax Department at the end of every calendar year to renew their tax treaty benefits. W-8BEN treaty benefits do not need to be applied for annually.