Tax treaty saving clause question - Please help

Hi everyone,

I wonder if anyone could help 

My wife is a US and UK dual citizen, living in the UK (for the past 40 years). She is a government employee.

My wife recently approached a new accountant. They advised that she can use Article 19 of the treaty to avoid having to report any government employee income or pension distributions. They say this is because Article 1(5)(b) of the treaty stops the saving clause from affecting Article 19.

However, my understanding is that Article 1(5)(b) wouldn't apply in her situation. She is both a UK citizen, and a UK resident. The Treaty says Article 1(5)(b) only applies "upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State". Am i interpreting this correctly by saying my wife definitely does not fall into that category, and therefore cannot rely on the Article 1(5)(b) saving clause exemption, and thereafter Article 19?

I appreciate any help that can be offered!

I'm replying because no one else has . I have no background or experience in this area.

Before reading up on the issue (i.e. going just by the text in your post), I'd say your reading was correct. In your shoes, I would definitely ask the accountant to put their advice in writing!

[BTW, it's not clear from your post which government your wife has been working for (i.e. is she working for the US government in the UK, or the UK government in the UK?). I'm going to presume UK government though as that seems most likely.]

You've probably searched the internet yourself already for any high level article covering this issue. The best I could find on Article 19 (source) says

(Subject to other articles in the treaty) Any income paid by the public funds of a contracting state (U.K. government) for services rendered to the U.K. shall be taxable only in the U.K. Several Exceptions and limitations apply.

Which has so many caveats who knows?

So we're forced to turn to the tax treaty itself (https://home.treasury.gov/system/files/131/Treaty-UK-7-24-2001.pdf), the savings clause is defined in Article 1, section 4 and modified for Government Service (Article 19) in section 5 (bold highlighting added by me):

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.

As your wife if a citizen of both contracting states, I would say the saving clause is not voided for her Article 19 work, that the income is taxable by both states (and therefore must be reported to both), mitigated in the usual way by Article 24 (Double Taxation).

i.e. I've independently came to the same conclusion you have. I think the accountant is wrong as well.

TL;DR: Another layman recreated your work, and came to the same conclusion you did. Hope that helps.