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UK tax for USA green card holder

Double tax relief question

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I have a client who is a UK National and is now permanent  UK resident and has been throughout 2019/20   .   She lived in the USA for a number of years and has a Green Card.   she no longer has a home in USA or spends any time there other than maybe a week a year  .    

She receives pensions from the USA and UK .    She is therefore required to submit UK and US tax returns , both as I understand have to include worldwide income .   ( I think a Green Card holder can be taxed as a US resident even if they don't live there any more, as the US have rules which are different to most other countries )     . I do the UK tax return.

Some of the income is taxed at source , but quite a lot of it hasn't been .   There will be extra tax to pay somewhere .   My query concerns who has "first bite"  at any extra tax to pay" 

either 

A) Having declared worldwide income on the UK return  , does the client pay all extra tax via SA , and then we tell the US adviser how much UK tax is payable so they can claim DT relief for UK tax against the US liability ?. 

Or 

B) Does the USA return collect all the additional tax on worldwide income,  and we are then told how much is payable in USA so we can claim DT relief against the UK liability? 

  

  any clarification is appreciated ,   thank you 

 

Replies (14)

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By Anonymous.
03rd Aug 2020 15:07

Does the DTT have a tie break clause?

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By Sarah Z
03rd Aug 2020 15:39

Have you read the DTT for each type of income?

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By Ianhodges
04th Aug 2020 15:45

The DTT indicates to me that she should be regarded as UK tax resident . She has no home or any property in the USA, nor any habitual presence there , she is UK national and UK domiciled, permanent Uk resident .
The income at stake is all pension income from UK and USA .(largest source is UK) DTT indicates all taxable only in UK if UK resident . The client has a US adviser who , because she has a green card, is seeking to tax worldwide income in the USA , and with DT credit for UK tax paid. I am starting discussions with them as I'm not convinced they are correct and , irrespective of having a green card I think we must still be working in accordance with the DTT

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Replying to Ianhodges:
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By Matrix
04th Aug 2020 17:16

That means that the UK has first taxing rights. The income is also taxable in the US with a credit for the UK tax.

The adviser is saying this aren’t they, they are not saying that the US has first taxing rights? So you just prepare the return as normal and provide a copy if required.

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Replying to Matrix:
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By Tax Dragon
04th Aug 2020 17:32

I too would be hesitant in interfering in US tax. There are people (I'm not one of them) in the UK that specialise in US tax... biiig fees, because biiig risk.

As a generic comment, DTAs can provide relief by providing a tax credit as you describe; they can also provide relief by excluding income from tax in one of the states. Pensions are often taxable only in the state where the taxpayer resides, but it can depend on the type of pension.

Another issue is how the DTA interacts with the domestic law of the states involved, and what claims may be needed (and how they are made).

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By Matrix
04th Aug 2020 17:43

Ianhodges wrote:

I think we must still be working in accordance with the DTT

If US domestic law says the taxpayer is subject to tax on their worldwide income then the DTT is not going to trump it.

You mention this in your OP, the DTT determines who has first bite. You have read the DTT and you say it is the UK.

So the answer is A.

(I have not read the DTT.)

(Well not for a while, I knew the limitation of benefits clause quite well years ago in my day job. It was new then.)

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Replying to Matrix:
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By Tax Dragon
04th Aug 2020 17:48

Matrix wrote:

If US domestic law says the taxpayer is subject to tax on their worldwide income then the DTT is not going to trump it.

So what's the point of the treaty? Tax credit relief exists without treaties. Treaties REDUCE tax, never INCREASE it.

(In short, I disagree.)

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Replying to Tax Dragon:
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By Matrix
04th Aug 2020 17:57

Without a treaty there could be double tax. Why do you think it could increase?

My point is that the existence of a treaty doesn’t change domestic law.

For example, many of the dividend articles in the UK treaties give the UK the right to deduct 15% withholding tax but this is trumped by domestic law whereby there is no withholding tax.

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Replying to Matrix:
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By Tax Dragon
05th Aug 2020 09:29

Matrix wrote:

For example, many of the dividend articles in the UK treaties give the UK the right to deduct 15% withholding tax but this is trumped by domestic law whereby there is no withholding tax.

Yes, treaties don't impose (or increase) taxes. They do alleviate (or reduce) taxes. What taxes do they alleviate/reduce? Domestic taxes. How do they do that? By 'trumping' domestic law.

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By Ianhodges
05th Aug 2020 09:29

thanks . I think the crux of this is , does American domestic tax law take precedence over the double tax treaty .

In a nutshell, I have a scenario where not much tax has been deducted at source , I put worldwide income on the UK tax return and in accordance with the DTT it is all taxable only in the UK , so she pays £x,000 extra tax by SA to HMRC .
However, if the US laws trump the DTT (excuse the pun) , which I have seen it suggested it does , all worldwide income is declared in USA first , she pays the necessary $x,000 extra to the IRS as if she were a US resident . I am then provided with a figure of US tax paid which I put on the UK tax return for DT relief so probably very little extra then paid to HMRC .
I don't mind what the correct answer is, and the client wont. Just trying to get there .
It all boils down to which tax authority has first bite, does the extra tax on worldwide income get paid to the IRS or to HMRC . (something which is obviously very important to the IRS and HMRC to get right) I can only claim DT relief in the UK if the US tax was correctly paid in the first place .

thank you

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Replying to Ianhodges:
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By Tax Dragon
05th Aug 2020 09:33

But you said that the US accountant was suggesting the UK had the first bite.... what's going on with this thread?! Have I really lost all my English comprehension skills?!

I thought your question was whether the US had a bite at all, under the DTA.

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Replying to Tax Dragon:
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By Ianhodges
05th Aug 2020 12:38

sorry I didnt make clear enough.
The US adviser is going to declare worldwide income in US tax return . Tax paid in UK on UK source income they are happy to DT credit for against the US liability .
They think the primary taxing right on the US source income is the US . (contrary to what the DTT indicates , which I read it basically says for a UK resident all pension income is taxable only in country of residence ) .

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Replying to Ianhodges:
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By Tax Dragon
05th Aug 2020 17:39

I don't want to depress you, but I think it could turn into a serious issue. I think I am right in saying that the UK gives credit for tax properly payable abroad after accounting for the relevant DTA. That's why, for example, credit in the UK for overseas tax on overseas dividends is often limited to 15%, even though there might be 30% tax or even more withheld from the payment - because the DTA limits the tax that can be charged in the overseas jurisdiction to 15%. (The taxpayer can claim the difference back from the overseas jurisdiction under the DTA. Of course, most of the time that doesn't actually happen.)

So, if the tax paid in the US is not in accordance with the DTA, it's possible that you ain't going to get credit for it in the UK.

Much as I would not get involved in advising the client on the US tax, in view of this concern I would want clarity on why the US firm interpreted the DTA differently. (If that is what is happening on your case. Could it be something else?)

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By David Treitel
07th Sep 2020 12:39

This is a very common scenario.

The United Kingdom has the primary right to charge tax on worldwide income and gains. The domestic laws of the United States give relief for foreign tax on foreign source income. The saving clause of the treaty allows the United States to charge US tax on worldwide income and gains - except for US Social Security pension.

Article 24 of the treaty is the normal method for giving relief; you'd want to ask the US adviser if s/he considers that claiming relief under Article 24 might trigger expatriation tax under IRC Section 877A. An unplanned expatriation event could be very bad news indeed for the client.

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