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Discussion Starter #1
Hi everyone. I am looking for opinion, advice or real life experience in relation to the following circumstances for my pending 2020 US Tax filing.

I am a UK citizen by birth and subsequent US citizen through the immigration process.

Having returned to the UK a few years ago, I am now a permanent resident back in the UK.

I am receiving a UK authority Gov service pension that I earned before I became a USC.

My question is :- Am I meant to report and pay US tax on this UK service pension or is it exempt?



Article 19 of the US/UK Treaty (Government Service).

Section 2.
Notwithstanding the provisions of paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention:

a) any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall, subject to the provisions of subparagraph b) of this paragraph, be taxable only in that State;

b) such pension, however, shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.
 

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It isn't actually "exempt" however you can probably safely just omit it from your US tax filing since it isn't "taxable" in the US. That's not exactly how they intend you to do things - but they really don't bother with things like this that don't affect your US taxes due.
 

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My question is :- Am I meant to report and pay US tax on this UK service pension or is it exempt?
While you have found the right part of the US/UK tax treaty for this pension, I am not sure that you have taken into account the US's execrable 'saving clause', which has the effect of neutering much of the treaty for US citizens. From elsewhere in the treaty:

4. Notwithstanding any provision of this Convention except paragraph 5 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 this Convention had not come into effect.​
5. The provisions of paragraph 4 of this Article shall not affect:​
a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraph 1 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (Non-discrimination), and 26 (Mutual Agreement Procedure) of this Convention; and​
b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes) and Articles 19 (Government Service), 20 (Students), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.​

The treaty technical explanation decodes this as (final sentence emphasis is mine):

Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for permanent residence there (i.e., in the United States, a "green card" holder). Thus, for example, a resident of the United Kingdom who, in the course of rendering services to the government of the United Kingdom becomes a resident of the United States (but not a permanent resident), would be entitled to the exemption from source State taxation provided by paragraph 1. In addition, an individual who receives a pension paid by the Government of the United Kingdom in respect of services rendered to that Government is taxable on that pension only in the United Kingdom unless the individual is a U.S. citizen or acquires a U.S. green card.
 

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Discussion Starter #5 (Edited)
Rather than use the word 'may' in the clause, why on earth don't they just take a more objective stance that 'this person can use the treaty and this person cant'. Its that one word that causes so much ambiguity!
One thing I am undecided on is either to file and pay taxes as if I did not take the Treaty position then later submit a 1040x amendment with the Treaty position and hoping they accept my position and refund my tax paid.
Or, submit the Treaty position from the start and withhold my tax payment with the added risk of late penalty fees and interest.
 

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Words like "may" are diplomatic niceties that allow both parties to do what ever it likes to its own citizens according to domestic tax law.

The thing to remember is that the purpose of a tax treaty is not to protect the taxpayer from double taxation.

Its purpose is to divide the spoils.
 

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What do the tax people you've talked to think about the possible outcomes of taking a controversial treaty position (form 8833)?

Overall my impression has been that the IRS doesn't have the personnel to parse detailed arguments on form 8833, so they accept almost anything where the form appears to have completed correctly and the numbers add up. But that doesn't mean their position won't change later if they have an "invalid treaty position" compliance campaign.
 

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Discussion Starter #9 (Edited)
What do the tax people you've talked to think about the possible outcomes of taking a controversial treaty position (form 8833)?

Overall my impression has been that the IRS doesn't have the personnel to parse detailed arguments on form 8833, so they accept almost anything where the form appears to have completed correctly and the numbers add up. But that doesn't mean their position won't change later if they have an "invalid treaty position" compliance campaign.
The tax people I have spoken to seem indifferent. One of the larger ones seems very confident in regards to 17 1(b) and would argue the case for free if the 8833 was declined.
 

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What do the tax people you've talked to think about the possible outcomes of taking a controversial treaty position (form 8833)?

Overall my impression has been that the IRS doesn't have the personnel to parse detailed arguments on form 8833, so they accept almost anything where the form appears to have completed correctly and the numbers add up. But that doesn't mean their position won't change later if they have an "invalid treaty position" compliance campaign.
I am not a "tax people" but as a dilettante and quasi intellectual who, enjoys reading treaties, tax policy, regulations and the like, I suspect that one does not want to take a treaty position using form 8833 as an individual taxpayer. Particularly where there is no ambiguity in the treaty text and the text of the treaty is reinforced by the explanatory memorandum.

If you look at the regulations (26 CFR § 301.6114-1), Form 8833 is required primarily required for ambiguous treaty terms covering corporate positions, think income splitting, transfer payments and the like of controlled foreign corporations and branch offices. However for the ordinary individual and human taxpayer, there is rarely ambiguity in treaty terms and as a consequence reporting is waived in many common instances. Pensions are one of those common instances..

An individual filing Form 8833 is putting up a flag saying, I am doing something that requires legal interpretation both of the IRC and of the treaty, and therefore my return warrants attention. It also introduces the taint of willfulness because you end up arguing that a treaty does not say what it clearly says.

Personally I think there would be less risk accidentally mis-characterising the income than there would be filing form 8833 but then again the difference in risk between the two is probably negligible.

But yes, you are right, the IRS has very limited resources at the moment, and may deem the ROI isn't worth it based on the dollar value of the return. If you are outside the US, with no US situ assets, the analysis I have done in the past on overseas taxpayer audits suggests the chance is zero if your taxable income is less that 250k USD. The problem is that when you get to pension distributions, particularly lump sum distributions, they can exceed that. Yes, the risk remains close to zero,


The tax people I have spoken to seem indifferent. One of the larger ones seems very confident in regards to 17 1(b) and would argue the case for free if the 8833 was declined. That may be the benefit of having a large tax advisory business submitting 8833 and fighting your corner.
Of course they are indifferent. There is no risk to them. You are the one that signs your tax return.

Treaties typically cover three types of pension payments. In the case of the UK treaty the three types are located...

Private Employer Pensions (Article 17 para 1(a))
Public Social Welfare Pensions like social security (Article 17 para 1(b))
Public Employer Pensions (Article 19 para 2)

Only Social Welfare Pensions are fully protected by the savings clause.
From what you describe yours is a pension for prior work with a government authority and thus is covered by Article 19 not Article 17 1(b).

But if you (or your tax adviser) can argue that your UK authority Gov service pension is in fact a social security type payment then all power to you.
 
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