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New Treaty With Japan Poses Challenges For Taxpayers, Administrators, And The IRS

by Paula N. Singer, Esq.

On March 30, 2004 the United States and Japan entered into a new income tax treaty that replaces the treaty that had been in effect since 1973. The new treaty includes several changes that impact treaty benefits of foreign workers, scholars, and exchange visitors:

  1. Students, Trainees, and Recipients of Grants. Consistent with U.S. Treasury policy, the new treaty limits benefits for students, trainees, and grant recipients provided that the payments are made from outside the United States. Trainee benefits are limited to one year. U.S. source grants for research, training, and studying are no longer exempt from tax under the student article. (Qualified scholarships – those for tuition, and required fees, books, supplies, and equipment – of degree candidates are exempt and are not subject to tax under U.S. tax law.)

  2. Teachers and Researchers. Compensation for teaching or engaging in research at a university, college, school, or other educational institution is exempt from tax for two years from the individual’s date of arrival provided that the individual continues to be a resident of Japan.

  3. Nonresident Workers. The special rule allowing individuals from Japan to claim personal exemptions for their spouse and dependents who lived with them for a period of time in the United States has been eliminated.

  4. Independent Contractors. Treaty benefits are available for independent contractors who have no fixed place of business or permanent establishment. These terms are covered by Article 7, Business Profits and Article 5, Permanent Establishment. There is no separate article covering self-employment income in the new treaty.

  5. Artists and Athletes. The treaty limitation for gross receipts has been increased to $10,000 for artists and athletes who otherwise qualify for benefits on income from employment or self-employment.

These new treaty provisions are effective beginning January 1, 2005.

Individuals who enter the United States in 2005 may only claim benefits under the new treaty. Individuals who were in the United States in 2004 may be eligible to claim benefits under the prior treaty. The new treaty provides two provisions for claiming benefits under the prior treaty: 1) carry-over benefits under the student/trainee and teacher/researcher articles of the prior treaty and 2) a one-year election to continue benefits under the prior treaty.

Carry-over Benefits are available to individuals who were eligible for benefits under the student/trainee or teacher/researcher article of the prior treaty when the new treaty became effective on March 30. These individuals may continue to claim the benefits under the prior treaty until the end of the benefit period. Individuals are not required to have been claiming benefits in order to have been eligible for benefits. For example, a student who was in the United States on March 30 but did not receive taxable compensation or a taxable grant until after that date would still be eligible for the carry-over benefits.

A One-year Election of Benefits under the prior treaty is available to individuals who were present in the United States after March 30 and eligible for benefits under the prior treaty. These individuals may elect to continue these benefits during 2005. Benefits are not limited to student/trainee and teacher/researcher benefits. For example, nonresident alien workers who were eligible to claim additional personal exemptions on their Form 1040NR tax return for 2004 can make an election to claim the additional personal exemptions on their 2005 return.

The Challenges administrators and the IRS must face include explaining why individuals who consider themselves similarly situated to other individuals from Japan cannot claim treaty benefits because of the date that they came to the United States. Administrators and the IRS must also explain why some teachers and researchers receive benefits under Article 19 (the prior treaty) while other teachers and researchers receive benefits under Article 20 (the new treaty) in the same calendar year. Administrators have already designed a form to accompany Form 8233 claims to clarify these situations. The IRS will also have to design a procedure that allows eligible individuals to elect to claim additional personal exemptions in 2005 but prevents ineligible individuals from doing so.

About The Author

Paula Singer, Esq., CEO of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer, Newton, MA has over 25 years of experience providing advice and compliance services to employers on cross-border employment matters. For more information, visit For additional information, call 1-800-259-6398 or email:

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.