W8-BEN Form and US Tax

I agree with you nun.

When you move money from one IRA trustee to another IRA trustee;  you need to know if this transaction becomes taxable in the UK. HMRCs view is that this transaction would fall within 18(1); so would be taxable.

My etrade account is being forced closed down (for the sin of having a UK address) so I have no choice but to move my IRA.  Its a full-account, lump sum movement from one US IRA account to another US IRA account (Schwab who have a London office) that should be only taxable according to the US rules (i.e. "not taxed") and not taxed under this rule by the UK?  I understand that UK only taxes periodic withdrawals from IRAs (not lump sums)?  I don't see how the DTT could be abused this way.  And what I am doing is not even a withdrawal - it's a rollover.  No financial benefit to me.  And I have absolutely no choice.

https://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf
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ARTICLE 18 Pension Schemes
1. Where an individual who is a resident of a Contracting State is a member or beneficiary of, or participant in, a pension scheme established in the other Contracting State, income earned by the pension scheme may be taxed as income of that individual only when, and, subject to paragraphs 1 and 2 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support) of this Convention, to the extent that, it is paid to, or for the benefit of, that individual from the pension scheme (and not transferred to another pension scheme).
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There's an argument to be made that the IRA rollover would not be UK taxable under 17(1)(b) as well.......if it's US tax free then it's UK tax free too. You might also use 17(2) as it's a lump sum rollover, although HMRC could point to the saving clause there. In any event with a treaty claim it seems completely wrong headed for HMRC to consider a direct IRA to IRA rollover as a taxable event.

Maybe Guya can explain HMRC's reasoning on this...........

These minutes contain HMRCs published view: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/455369/Minutes_8_July_2015.pdf

There is nothing to stop you taking a different view; but you would be disclosing this in the white space; which might lead to an HMRC enquiry.

I don't see anything in HMRCs view that would make a transfer from one IRA to another by a UK resident a UK taxable event. I agree with them and would declare any IRA rollover as not taxable precisely because it is covered under 18(1).

I wouldn't even declare this in the UK. It's not income because if done correctly it is never paid to the beneficiary and never becomes available to him.
 
It's simply moving existing money from one location to another and that is not a taxable event in either state.

I wouldn't even declare this in the UK. It's not income because if done correctly it is never paid to the beneficiary and never becomes available to him.
 
It's simply moving existing money from one location to another and that is not a taxable event in either state.

Yes I agree.

Just an update that I have received a message (interestingly, a direct email rather than a secure message on the TIAA-CREF page), that at least is a bit more considered than the rote "blah, blah, blah, 30%, tough luck" messages we all seem to have been given.

I will paste it below, identities removed, just as an FYI for everyone.

[bottom line is that the outcome still seems to be the same but at least it was a longer response and actually referred to aspects of tax law and the treaty).

"Dear Mr. XXX:

I am responding to your email dated November 4, 2016, in reply to an email sent by TIAA on  November 3rd from Mr. XXX XXX, Customer Resolution Manager.  Mr. XXX's email commented on the taxation of payments made to a non-US citizen residing in the United Kingdom.

A key issue at hand is the distinction between how periodic and non-periodic payments are treated under the U.S. – United Kingdom Income Tax Treaty.  Since you are not a U.S. citizen and reside in the UK, your payments are subject to Non-Resident Alien (NRA) taxation. Internal Revenue Code Section 1441 and the regulations there under provide for withholding when a payment is made to a foreign person. Generally, payments made to a foreign person are taxed at 30%. However, under Regulation Section 1.1441-6(a), a foreign person may claim a reduced rate of withholding to the extent that it is provided for under an income tax treaty in effect between the United States and a foreign country.

It is our understanding the U.S.- United  Kingdom Income Tax Treaty is currently in effect and pension distributions are covered under Article 18 – Pension and Annuities. The provisions under this article state that pensions may be taxed in the State (U.S.) in which they arise and according to the laws of the State (U.S.), but if the beneficial owner receives a periodic pension payment then the treaty provides a reduced rate of withholding of 15%. Simply, a foreign person who is a beneficial owner can receive either a lump sum pension distribution (e.g., a single cash payment or systematic withdrawals) or a periodic distribution (e.g., annuity income). The treaty only provides a reduced rate of withholding for periodic pensions, thus lump sum distributions will be taxed at 30% as provided for in Section 1441.

Your Retirement Annuity (RA) contracts provide the option to receive lifetime annuity income. However, in order to receive lifetime annuity income payments, you must make an irrevocable decision to convert a given accumulation to a payout contract that provides lifetime payments, periodic payments, under specific actuarial assumptions.

Allow me to elaborate on our position, counsel has found that when a treaty is silent on the definition of periodic and non-periodic payments (as the U.S.- UK treaty is), it reverts back to the country of source (where the payments originated) to make this determination. Since the treaty does not specifically define “periodic payment,” we are correct in our interpretation that lump sum payments are non-periodic and we therefore do withhold 30% from these payments.

We regret inconvenience you may have experienced in this matter. However, we have determined after careful consideration and research that our current position is in accordance with the applicable statutes governing this issue.  Although previously suggested, if further clarification is needed - any general and or specific questions should be directed to a tax professional.

Sincerely, 

XXXX XXXX

Customer Resolution Manager / Customer Care Team"

I wonder where they got that 15% reduce rate of withholding? I will ask them the withholding rates for an NRA living in the UK on annuities and systematic withdrawals from a TIAA-Traditional account

Also they don't even mention Article 17.  Vanguard seems to have a better understanding of this and claims that there would be zero withholding in your circumstances. However, that still has to be seem in practice. Bottomline here is that TIAA-CREF is being conservative and making sure it does nothing that could get them in trouble with the IRS.

Interesting letter you received dunroving.

So is the following the likely process for a USA NRA but resident in the UK receiving IRA payments after age 59-1/2 (with a W8-BEN on file):

 1) if retiree takes lump-sum IRA amount (including the whole amount) then TIAA-CREF (and perhaps other brokers at a "worse-case") will withhold 30% US tax.  US actually have the only tax rights (per US-UK DTT).  But if you've overpaid based on the incremental tax rate in US for that tax year then taxpayer must file 1040NR (one-time only) requesting a refund.  e.g. 5% refund is you're in 25% US tax bracket.  Does the US give any personal allowances etc to a NRA here?

 2) if retiree takes a regular periodic payment from the IRA (e.g. an annuity, paid monthly) then TIAA-CREF will withhold 15% US tax. (I think this rate was specified in the US-UK DTT)  In this case the UK (not the US) actually have the only tax rights (per US-UK DTT).  In this case retiree would need to annually file 1040NR to claim the entire 15% back from the US.  20% (or 40/45% perhaps) payable to UK.

 2b) Is it correct to say that in case#2 that US will only refund the 15% tax if more than this has been paid abroad (as in the case of the UK)?  What if the retiree is in a country like Cyprus where such periodic retirement payments may be at 0% or 5% tax?  Would the US still refund the entire 15%?  (Perhaps this is based on the relevant DTT?)  I'd expect the US would refund the 15% here?  (and does UK tax residency affect this situation e.g. do you have to be 5 years Non Resident UK)?

For the NRA resident in the UK there is no US tax due on IRA or other pension type payments or withdrawals. The NRA files a 1040NR and claims back any withholding.

The 15% tax is on dividends....I don't know where its application to pensions comes from.

For the NRA resident in the UK there is no US tax due on IRA or other pension type payments or withdrawals.

Is this true for both lump-sums as well as regular monthly payments from an IRA? I thought there were different rules for each?

Yeah sorry the US would be able to tax a lump sum withdrawal.

Every message I receive from TIAA-CREF says something different. The 15% figure in the message I just posted is entirely new - previously, they were saying they would withhold zero tax on periodic payments.

I'm minded to copy and paste sections of each of the messages I have received over the past 24 months, illustrating their turnaround in opinion and advice every time someone new responds to my messages.

They still haven't responded to the question I have asked them repeatedly, is why they are defining "lump sum" differently than the IRS.

Just out of interest, is there a higher body to complain to, if only about their completely inconsistent (and on many occasions, inappropriate) responses?

This is very interesting.

God knows where TIAA-CREF got 15% from. This doesn't seem to exist in the tax treaty between the UK and the US, and simply looking up the table on the IRS site (these tables used to be in publication 901, but they have since moved them)

https://www.irs.gov/PUP/individuals/international/Tax_Treaty_Table_1.pdf

gives under pensions and annuities: United Kingdom, a withholding of 0%, and refers to 17(1) as the tax treaty reference. I agree that 17(2) excludes lump sum payments from 0% but the table doesn't mention this.

At least TIAA-CREF seem to have some people who know what the tax treaty is and have looked at it, and have a position on it.

I have found Fidelity to be almost comically unaware of the existence of the tax treaty and what it means. In any case Fidelity, for reasons of their own, deny NRAs the option for choosing to be paid regular periodic payments from their IRAs, saying that the necessity to withhold tax somehow makes these payments impossible(?), even though according to the tax treaty these are exactly the payments from which NO tax needs to be withheld!

In addition Fidelity seem to have no idea how to do a simple international wire, being utterly baffled by the concept of a correspondent bank and what it's for (even though space exists on the distribution form to put in the correspondent bank information). 

They altered all the information on my lump sum distribution request (that I actually delivered in person at a Fidelity Center in the US to positively ID myself), putting all the correspondent bank information into the final recipient bank box, causing the wire to be refused.

I had to call them, dictate each section of the wire instructions again and forbid them to alter anything in any way. That wire went through and I am now free of them for good.

My advice to anyone from the UK intending to set up any retirement plan with Fidelity: DON'T.

Here is my question and TIAA's answer:

Dear TIAA,
Can you tell me the withholding tax on payments from a TIAA-Traditional account sent to a non-resident alien living in the UK in these circumstances.

1) the payment is part of a ten year transfer payout annuity
2) TIAA-Traditional is converted to an annuity and the payment is annuity income.
3) the payment is interest only
4) the payment is an ongoing  systematic withdrawal made every quarter.

A treaty claim will be made on a W-8BEN claiming 0% withholding as per Article 17 and 18 of the US/UK tax treaty.

TIAA's answer

Thank you for your email. I appreciate this opportunity to assist you.

I have provided a response to your questions below.

If you provide an IRS W-8 BEN form is provided confirming your U.K. citizenship, the U.S. federal withholding, if any, is listed below:

“1) the payment is part of a ten year transfer payout annuity”

This payment would be considered a non-periodic payment of less than 10 years in length and would be subject to 30% federal tax withholding based on the tax treaty between the United States and the United Kingdom. Transfer Payout Annuity payments are distributed in 10 essentially equal payments over a nine year period.

“2) TIAA-Traditional is converted to an annuity and the payment is annuity income.”

This payment would be considered a periodic payment and would not be subject to mandatory federal tax withholding based on the tax treaty between the United States and the United Kingdom.

“3) the payment is interest only”

This payment would be considered a non-periodic payment and would be subject to 30% federal tax withholding based on the tax treaty between the United States and the United Kingdom.

“4) the payment is an ongoing  systematic withdrawal made every quarter.”

This payment would be considered a non-periodic payment and would be subject to 30% federal tax withholding based on the tax treaty between the United States and the United Kingdom.

As an important note, TIAA does not provide tax or tax-filing advice.  Please consult with a qualified, professional tax advisor regarding your specific situation.