How Is the U.S. Tax Treaty Deduction Going?

[Wandr]

Some years back there was a discussion here about the merits of the income tax deduction for Americans, using a treaty with Thailand.

There were two groups - one vehemently skeptical of the deduction. The other group was inclined to go along with it.

The filing was to be done by a Bangkok tax adviser - American International Tax Advisers.

Some people actually took them up on it, and I wonder if they will post how it went. Did the IRS accept it? Were there any subsequent hassles?

The tax adviser gave a persuasive presentation in Chiang Mai yesterday, but for me the best persuasion would be people's experience.

Thanks!

[gamb00ler]

The best authority is the tax treaty itself.  I found it very easy to understand but exceedingly difficult to believe the tax advisor's interpretation will survive any scrutiny by other than entry level IRS personnel.

 

The "savings clause" is the catch all clause that demolishes their taxation exemption stance.  There are other more reliable tax reduction strategies.

Edited February 19, 2022 by gamb00ler

[Wandr]

Can you tell us what this"savings clause" is, if it is possible to do so briefly?

[gamb00ler]

"Savings clause" - the actual text from the US-Thai tax treaty

 

2. Notwithstanding any provision of the Convention except paragraph 3 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect. 

 

The sentence beginning with the word "notwithstanding"  means:

Despite what ALL or ANY (except paragraph 3) other paragraphs of the treaty state either Thailand or USA reserves the right to tax its residents or citizens.

 

Paragraph 3 gives the types of payments/income that are exempted from taxation in the country that is not the source of the payments/income.

 

A notable absence from paragraph 3 is payments/income coming from a private pension or pre-tax retirement savings account (IRA's, SEP's, etc.).  The absence from Paragraph 3 means that either country can tax those incomes.  Thailand chooses to NOT tax them and US does choose to levy taxes on them.

 

Edited February 19, 2022 by gamb00ler

[jschorr]

It works for non-governmental pension fund income.  I have filed or revised returns for 4 years and I have survived 2 IRS audits (AI handles this as part of their fee), and in both cases the IRS accepted AI's interpretation of the treaty. One caution, you probably will be audited, especially if you file on-line.   

[NancyL]

I know at least half a dozen people who have filed under the Thai-U.S. Tax Treaty, either with American International Tax Advisers or with American Asia Tax, both located in Bangkok and everyone has been successful.  Some have been "audited" in the sense that they've received letters with questions from the IRS and both firms have handled the IRS inquiries at no extra cost and resolved the concerns in the taxpayers' favor.

 

Hubby and I have filed under the Thai-U.S. Tax Treaty since the 2014 tax year and received one or two letters from the IRS.  One simply has to realize this is part of the "process" and not freak out.  As I said, in every case, both these firms resolved the IRS concerns in the taxpayers' favor.

[Wandr]

While I appreciate the effort made by Gambooler in his replies, I was not looking for a theoretical discussion of the treaty. The above two replies tell me what is actually happening.

If some government decides to collect tax later I will give it to them.

I just have to convince myself now to fork out what these firms are charging - which is about 3 times what is common in Los Angeles.

[Dante99]

10 hours ago, Wandr said:

I just have to convince myself now to fork out what these firms are charging - which is about 3 times what is common in Los Angeles.

How much are the Bangkok firms charging, approximately?

 

Can you really compare that to what the LA firms charge?

[JimGant]

On 2/20/2022 at 9:42 PM, Wandr said:

I just have to convince myself now to fork out what these firms are charging - which is about 3 times what is common in Los Angeles.

I guess you're not sitting on a traditional IRA, say, one of $200,000 (about average, for a "boomer") which, if cashed in, would normally owe around $40,000 in taxes (more, if filing singly, not  jointly). So, why not pay yourself $40,000 for the mere pittance of, say, $750 in fees to the green eye shade sharpies in Bangkok? From the reports we're reading here, the GS-11's at IRS are dazzled by the language of the sharpies, in their Form 8833 presentations, that Thailand is apparently unique in having IRA's as exceptions to the "saving clause" restriction. Yes, the language in each double taxation agreement (DTA) can -- and does -- vary from the boilerplate OECD model; so I guess the sharpies found a way to have the Thai-US DTA language trump the intent of the saving clause, namely: Preventing not paying any contract nation taxes, not just preventing double taxation. The US is unique with this concept, although there's a movement afoot by the EU to copy the US in having their citizens pay someone, somewhere, taxes.

 

Anyway, back to Thailand. If the sharpies can bamboozle the IRS, why not take advantage of it? If you get audited, you're not on a legal hook -- just the sharpies. Worst case -- they're told to 'cease and desist,' and you're told to repay the ilgotten gains. Maybe not even any interest due..... So, why not go for it. Win win.

 

And tell your retired neighbors to plan on a 180 day holiday in Thailand and unload their traditional IRAs/401ks tax free -- the only country in the world where you can do this (apparently due to a loosely worded DTA). And these tax savings can pay for the whole holiday! TAT should take note.

 

I guess if you unloaded a big bundle of your IRA, maybe somebody higher than a GS 11 would take note at the IRS.......like M Grace Fleeman, the lawyer, SES3 at Treasury, who ruled that IRAs are, indeed, subject to the saving clause -- at least in particular with the US-Swiss DTA.

 

Anyway, sounds like the risk is worth it. Besides, GREED IS GOOD!

[JimGant]

On 2/20/2022 at 9:42 PM, Wandr said:

which is about 3 times what is common in Los Angeles.

Is LA offering IRA -- and other private pension -- tax avoidance?

[Gottfrid]

No problem! Last time I heard, it´s alive and well.

[JimGant]

On 2/20/2022 at 1:05 PM, jschorr said:

I have filed or revised returns for 4 years and I have survived 2 IRS audits (AI handles this as part of their fee), and in both cases the IRS accepted AI's interpretation of the treaty.

Any chance of sharing AI's interpretation of the treaty? I guess if you agreed not to divulge AI's Form 8833 language, then that's that. However, if you made no such handshake, I'm sure a lot of folks, in addition to me (as a retired CPA), would like to see how solid AI's argument is that Thailand is the only country in the world where you, as a US citizen, can retire, live for over 180 days of the tax year, and not pay one iota of tax to either Thailand or the US -- on your IRA, SEP, or 401k withdrawals, and on your Ford, GM, Boeing, whatever private pension pqyments (as long as not remitted to Thailand in year of payment).

 

There's another thread currently running, asking for, 'What's the best country to retire in?' If, indeed, Thailand is unique in the world in having an exception to the saving clause in its DTA with the US, covering private pensions, annuities, IRAs, etc -- then Thailand should should go to the head of the line. Heck, you don't even need to retire -- just spend two 90 day vacations per tax year in

Thailand -- then have AI file your taxes. (Does AI have that on their advertising brochure?)

 

Anyway, would love to see the AI interpretation of State Dept legalese on the DTA. I would imagine it's as interesting a trip as I've had over the years in dealing with the US Tax Code legalese. PM me, if you want, and I'll not let it go outside of that. Thanx.

[jeffandgop]

I was part of that discussion back in 2019 as I too was considering filing amended returns to recover taxes I had paid on my 401K withdrawals.  I made the decision to proceed with filing to recover those taxes on the basis of the Thailand-US Tax Treaty and engaged AITA and filed 4 years worth of amended returns.

 

Two of the amended returns were rejected; one for "You did not provide a correct treaty"; and the other because "You did not indicate an inappropriate Tax Treaty".  Both explanations were nonsense since my returns absolutely included a full and complete Form 8833 and supporting documentation.  I did not receive at that time any letters from the IRS regarding the other two amended returns.

 

I decided to try to call the IRS and 3 days after receiving those two letters reached a supervisor of the tax office handling these types of amended returns.  On a Saturday in the U.S. no less.  After checking my amended returns in the system, the supervisor acknowledged that the agents who issued those rejection letters were in error and that all 4 amended returns were complete and that she would re-assign all 4 amended returns to her desk for processing.

 

I received all 4 refunds within the following 4 weeks.  I have never received any other requests or followups from the IRS. I've never been audited.

 

The best authority is NOT the tax treaty itself.  The best authority is how the IRS APPLIES the tax treaty to tax filers.  To say that those taxpayers who have been successful only because a junior IRS agent made a mistake is argumentative and not in evidence.

[NancyL]

Unlike the previous poster, when we received rejection letters from the IRS, we simply let AI handle it.  No point in taking the time to call the IRS ourselves.  AI and the other firm in Bangkok handle these IRS rejections as part of their fee.  I've known others who panic when they receive IRS rejection letters and get angry when they spend hours on the phone with the IRS without satisfaction because they don't know what they're doing.  Let the professionals handle it.  As I said in my post, everyone I know who has filed under the treaty has had satisfaction eventually.

[Dante99]

On 2/23/2022 at 3:07 PM, JimGant said:

would like to see how solid AI's argument is that Thailand is the only country in the world where you, as a US citizen, can retire, live for over 180 days of the tax year, and not pay one iota of tax to either Thailand or the US -- on your IRA, SEP, or 401k withdrawals, and on your Ford, GM, Boeing, whatever private pension pqyments (as long as not remitted to Thailand in year of payment).

"the only country in the world," where does that come from?  Why would that be any part of the argument set forth for a Thai situation?

 

On 2/23/2022 at 3:07 PM, JimGant said:

There's another thread currently running, asking for, 'What's the best country to retire in?'

Is that thread only for/about US citizens who pay taxes on the relevant gains?  Or does it include others?

[gamb00ler]

1 hour ago, Dante99 said:

"the only country in the world," where does that come from?  Why would that be any part of the argument set forth for a Thai situation?

It was clear to me that @JimGantwas referring to the "saving clause" that is included in all US-XXX tax treaties.  If other jurisdictions that follow the same template tax treaty became tax havens, that could be interpreted to support the capricious interpretation of the US-Thai tax treaty at hand.   I have not heard of any such countries being tax havens based on an equivalent interpretation.  Since pretty much everyone, everywhere doesn't like paying taxes, I interpret that lack of support to lend credence to JimGant's view of the US-Thai tax treaty.

1 hour ago, Dante99 said:

Is that thread only for/about US citizens who pay taxes on the relevant gains?  Or does it include others?

That thread does contain information on how US citizens can expect to be taxed during their retirement as expats.  Those interested in this thread may find something of interest in the other topic as well.

Edited February 26, 2022 by gamb00ler

[JimGant]

4 hours ago, Dante99 said:

"the only country in the world," where does that come from?  Why would that be any part of the argument set forth for a Thai situation?

Well, maybe because it sounds too good to be true if, the only country in the world where you can retire and not pay any US (or Thai) taxes on the proceeds of your traditional IRA (401k, SEP), is Thailand....

... due to some dedicated folks' unique interpretation of treaty language.

 

Having said that, why not take advantage of AI's interpretation of the tax treaty -- get rid of that 5-figure tax bill on your 6-figure traditional IRA. Suggest you not cash out the entire IRA, but take the 'required minimum distribution' (if over 72) to stay under the radar. But, keep the money handy, should the IRS finally wake up and realize the treaty was not meant to allow tax avoidance -- and they come knocking for past taxes due, plus interest (but no penalty). Seems worth the risk. Hey, if you can't trust your local Enrolled Agent, who can you trust.....

 

 

 

 

[jeffandgop]

4 hours ago, gamb00ler said:

If other jurisdictions that follow the same template tax treaty became tax havens, that could be interpreted to support the capricious interpretation of the US-Thai tax treaty at hand.   I have not heard of any such countries being tax havens based on an equivalent interpretation

No one is asserting that the successful application by some tax filers to not be required to pay U.S. tax based on their justification per the U.S. Thailand Tax treaty represents as a "tax haven"; and that you have "not heard" that there are- or are not- tax filers doing the same in other foreign countries with a similar tax treaty does not lend any credence to Thailand necessarily being the only foreign country where US citizens may enjoy this limited benefit.

[jeffandgop]

1 hour ago, JimGant said:

Well, maybe because it sounds too good to be true if, the only country in the world where you can retire and not pay any US (or Thai) taxes on the proceeds of your traditional IRA (401k, SEP), is Thailand....

What proof can you furnish that no other U.S. tax filer in any of the other foreign countries with similar tax treaties haven't filed similar exemptions and have been rejected- or not rejected?

Edited February 26, 2022 by jeffandgop

[gamb00ler]

For those interested in the IRS interpretation of the USA-Thailand tax treaty:

https://www.irs.gov/pub/irs-trty/thaitech.pdf

[NancyL]

If anyone is likely to shutdown the savings granted to U.S. retirees as a result of this treaty, it is the Thai government not the U.S. government.  According to the treaty, since we live in Thailand for the majority of the year, the affected retirement income is to be taxed by Thailand.  However, Thailand doesn't tax retirement income.  This is probably because they realize they have a big problem with an ageing population and lack of savings by their people for their own care in retirement.

 

 So, in the future, Thailand may decide to tax the retirement income of those of us who are filing IRS Form 8833 for the Thai-U.S. Tax treaty.  

 

 

[ujong]

So the treaty allows you to opt for Thailand to tax distributions from your US pre-tax retirement accounts. And, since Thailand doesn’t levy a tax on retirement accounts, the entire distribution can be tax free?

 

Am I understanding this correctly?

 

It sure sounds too good to be true.

Edited February 27, 2022 by ujongjoe

[OneZero]

So, it seems that those who opened a ROTH IRA, and paid tax up-front on the Basis - Principle which was earned while living within & benefitting from US systems / amenities, could now be labeled -- "Sucker".

Ah so.  Hmmm?

 

 

[JimGant]

On 2/27/2022 at 3:41 PM, NancyL said:

However, Thailand doesn't tax retirement income. 

They do, at least the non governmental variety. But what's at play here is Thailand's choice to not tax any income brought into the country -- officially, if it's income paid in a prior year, but unofficially, any income brought in, since they don't have the resources, or inclination, to determine whether or not this is a previous year's income.

 

But having said that, the one fact remains: Thailand is opting to NOT take advantage of the US-Thai tax treaty that gives them exclusive tax authority, i.e., first dibs, on taxing US private pensions, IRAs, 401ks, and SEPs of US tax residents of Thailand. If this were the Swiss-Thai tax treaty (and most others), where Thailand also has such exclusive tax authority, Swiss expats here would have total tax avoidance, since Switzerland doesn't have an equivalent of the saving clause.

 

Quote

...for the Avoidance of Double Taxation and the Prevention
 of Fiscal Evasion with Respect to Taxes on Income 

https://www.congress.gov/congressional-report/105th-congress/executive-report/9/1

Most seem to think tax treaties are solely for the prevention of double taxation -- in fact, they're called Double Tax Agreements (DTAs). But, they're also written with the intent to prevent tax avoidance -- although many countries don't seem too concerned about this, since the treaty language says the other country has exclusive tax authority, so, hey, we're not in the loop for any tax revenue, based on the exclusivity of the treaty language. Let it go.

 

The US, on the other hand, said: If you're not going to use your exclusive tax authority under the treaty -- and thus become a tax haven -- then we'll invent the saving clause and use it to collect those taxes you're not collecting. As you might imagine, those potential tax havens squawked loudly about inserting the saving clause into treaties with the US -- but they lost.

 

And today, an OECD committee is looking at re-writing their model tax treaty to plug this tax avoidance loophole, namely, if you're not going to use your exclusivity right to taxation, then we'll return this right to the other contracting country. Pretty much what the saving clause does. Some other countries, like Norway, have already modified their tax codes to only give a tax break to their expat citizens in Thailand -- if they can prove they've paid taxes to Thailand. Pretty much the same effect as the saving clause.

 

Anyway, this thread is about how one tax firm (or is it two now?) that has a unique interpretation of the treaty language that somehow exempts private pensions and IRAs from the saving clause. That this hasn't become a ground swell amongst other tax prep firms and AARP retirement blogs -- is probably because the intent of this tax treaty is much easier to interpret than the arcane treaty language.

 

For those still scratching their heads about the saving clause, check out this link:

https://www.irsstreamlinedprocedures.com/tax-treay-saving-clause-impact/

[gamb00ler]

On 2/26/2022 at 4:26 PM, jeffandgop said:

What proof can you furnish that no other U.S. tax filer in any of the other foreign countries with similar tax treaties haven't filed similar exemptions and have been rejected- or not rejected?

Many sets of professional taxation experts have worked on the OECD model Tax treaty upon which the US bases its treaties.  In order for your dream of no taxation on IRA/SEP withdrawals to come to fruition, a whole lot of OECD, IRS and Congressional staff have to be wrong.  Do you think that is likely?

Edited March 1, 2022 by gamb00ler

[NancyL]

On 3/1/2022 at 2:11 PM, JimGant said:

...........................

 

For those still scratching their heads about the saving clause, check out this link:

https://www.irsstreamlinedprocedures.com/tax-treay-saving-clause-impact/

All the examples presented are for India, Australia, the UK, Switzerland, Korea, etc, etc and never is Thailand mentioned.  And yes, there are now two firms in Bangkok who are interpreting the Thai-U.S. Tax Treaty this way.   And I think that by now, we can assume that none of their customers have had a problem with the IRS because of their interpretation of the treaty.

[ujong]

A lot of people get away with a lot of things when it comes to the IRS, especially when it comes to the application of the US tax code overseas. This is because the IRS systems are mainly designed to sniff out bread and butter filing incongruities and the more common red flags areas.

 

Everyone hopes they won’t get caught or hauled into court for a ruling if it’s a gray area. At the moment, give the current state of affairs in the IRS, it’s probably not a bad time in history to roll the dice… but that doesn’t mean they won’t catch up with you. 
 

You’ve got to ask yourself one question… do I feel lucky. Well… do ya punk? - Dirty Harry.

[gamb00ler]

8 hours ago, NancyL said:

All the examples presented are for India, Australia, the UK, Switzerland, Korea, etc, etc and never is Thailand mentioned.  And yes, there are now two firms in Bangkok who are interpreting the Thai-U.S. Tax Treaty this way.   And I think that by now, we can assume that none of their customers have had a problem with the IRS because of their interpretation of the treaty.

You have conveniently overlooked the USA Internal Revenue Service Technical Interpretation which is very specific and refers to only the USA-Thai treaty.  I would call that source the proverbial "horse's mouth".

 

I linked to that document in an earlier post.

https://www.irs.gov/pub/irs-trty/thaitech.pdf

[OneZero]

"...conveniently ...".    "...conveniently ...".    For sure.  Properly italicized.

[NancyL]

On 3/3/2022 at 9:30 PM, gamb00ler said:

You have conveniently overlooked the USA Internal Revenue Service Technical Interpretation which is very specific and refers to only the USA-Thai treaty.  I would call that source the proverbial "horse's mouth".

 

I linked to that document in an earlier post.

https://www.irs.gov/pub/irs-trty/thaitech.pdf

No, I haven't overlooked the IRS's technical interpretation, nor has my U.S. financial adviser, accountant and a lawyer here in Thailand.  As I wrote earlier, the real "danger" of utilizing this tax treaty is if the Thai gov't decides to collect tax from resident foreigners' pensions.  And, as this you've learned in this thread, no one reports any difficulty nor do they know of anyone who has had difficulty, aside from some random nastygrams from the IRS that have been resolved in the taxpayers' favor by the tax preparers at no charge as part of their fee.  

 

I think the best course of action is to move on and check back with everyone in a year or two to see if we're all still out of the IRS's clutches.  Meanwhile, Hubby and I and others I know are using the tax savings to drastically increase our charitable giving in Thailand.