A Totalization Agreement, Tax Treaty, IGA, CAA & TIEA Overview

A Totalization Agreement, Tax Treaty, IGA, CAA & TIEA Overview

Totalization Agreements vs Tax Treaties

The United States has entered into several different types of agreements with foreign countries on matters involving taxation. While the most common type of agreement between two different countries on tax matters is the ‘double taxation agreement’ or ‘international tax treaty,’ there are various other different types of treaties as well. In this article, we will summarize the basics of the different types of agreements that the United States has entered into with foreign countries.

Some of the more common types of agreements include:

      • Double Taxation Agreements (aka Tax Treaties)

      • Totalization Agreements (TA)

      • Intergovernmental Agreements (FATCA)

      • Competent Authority Arrangements (CAA)

      • Tax Information Exchange Agreement (TIEA)

Double Taxation Agreements (aka Tax Treaties)

The main purpose of the double taxation agreement is to assist taxpayers who may reside in one country that is a party to the agreement but may be a citizen, national or permanent resident of the other country and earns income in one or both countries.  Sometimes, the income may be tax-exempt in one jurisdiction, but subject to tax in the other jurisidction. In order to avoid double taxation and help taxpayers prepare for filing taxes in either one or both jurisdictions, double taxation agreements provide several different provisions detailing how certain income will be taxed — such as Permanent Establishment income, Passive Income, the sale of assets, and more.

As provided by the IRS:

      • The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. Under these same treaties, residents or citizens of the United States are taxed at a reduced rate, or are exempt from foreign taxes, on certain items of income they receive from sources within foreign countries. Most income tax treaties contain what is known as a “saving clause” which prevents a citizen or resident of the United States from using the provisions of a tax treaty in order to avoid taxation of U.S. source income.

      • If the treaty does not cover a particular kind of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same way and at the same rates shown in the instructions for the applicable U.S. tax return.

      • Many of the individual states of the United States tax income which is sourced in their states. Therefore, you should consult the tax authorities of the state from which you derive income to find out whether any state tax applies to any of your income. Some states of the United States do not honor the provisions of tax treaties.

      • This page provides links to tax treaties between the United States and particular countries. For further information on tax treaties refer also to the Treasury Department’s Tax Treaty Documents

Totalization Agreements (TA)

Totalization agreements are entered into between the United States and foreign countries on issues involving Social Security. More specifically, the goal is to avoid having to pay into two separate social security systems. To avoid this outcome, the US government has entered into about 25 different totalization agreements to avoid double taxation of Social Security:

As provided by the IRS:

      • Totalization Agreements, also referred to as bilateral agreements, eliminate dual social security coverage (the situation that occurs when a person from one country works in another country  and is required to pay social security taxes to both countries on the same earnings). Each Totalization Agreement includes rules intended to assign a worker’s coverage to the country where the worker has the greater economic attachment. The agreements generally ensure that the worker pays social security taxes to only one country, provided the worker and the employer meet the procedural requirements under the agreement for obtaining an exemption from the other country’s social security taxes.

Intergovernmental Agreements (FATCA)

FATCA refers to the Foreign Account Tax Compliance Act. The purpose of FATCA is to ensure taxpayers probably report their foreign account information and income to the US government. The United States has entered into more than 110 agreements with foreign countries, in which more than 300,000 Foreign Financial Institutions (FFIs) are actively reporting US persons with foreign accounts to the US government — and vice versa.

As provided by the IRS: 

      • FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. FFIs are encouraged to either directly register with the IRS to comply with the FATCA regulations (and FFI agreement, if applicable) or comply with the FATCA Intergovernmental Agreements (IGA) treated as in effect in their jurisdictions.  For access to the FATCA regulations and administrative guidance related to FATCA and to learn about taxpayer obligations please visit the Internal Revenue Service FATCA Page.

Competent Authority Arrangements (CAA)

The main purpose of a competent authority arrangement is to identify issues that may be ambiguous in a tax treaty – or require further clarification — and provide information regarding how the government will enforce certain provisions of the treaty. One recent example would be the Competent Authority Arrangement involving Malta retirement schemes. The United States has entered into multiple competent authority arrangements with different countries.

As provided by the IRS:

      • A Competent Authority Arrangement is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions. Competent Authority Arrangements also exist between the United States Internal Revenue Service and each United States Territory and Commonwealth tax agency to address issues of interest to the respective jurisdictions (at the end of this page).

      • The Competent Authority Arrangements for purposes of Country-by-Country exchange can be found separately on the Jurisdiction Status Table

Tax Information Exchange Agreement (TIEA)

As provided by the IRS:

      • A tax information exchange agreement (TIEA) allows the competent authorities of the United States and the TIEA partner to exchange of information on tax matters in order to provide assistance to each other in the administration and enforcement of domestic tax laws.

      • Example of TIEA introduction clause:

        • The competent authorities of the Parties shall provide assistance to each other through exchange of information that is foreseeably relevant to the administration and enforcement of the domestic laws of the Parties concerning taxes covered by this Agreement. Such information shall include information that is foreseeably relevant to the determination, assessment and collection of such taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters. Information shall be exchanged in accordance with the provisions of this Agreement and shall be treated as confidential in the manner provided in Article 10 (Confidentiality).

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