J1 Short-term scholar internship in IBM -- US-China Tax Treaty

[tanwei]

Dear all, I read through the existing threads but got some conflict answer -- so I decide to post my own:

In 2007 I use J1 visa (short term scholar) to do internship in IBM Watson Research Center for 6 months. I got paid and income tax (both state and federal) deducted. I got a W-2 form from IBM Coorperation early 2007. My questions are:
1. Am I elegible for the US-China tax treaty for income tax exemption?
(considering that I work for IBM RESEARCH DIVISION)

2. In 2007 I came back to China and this year (2008) I came to US again to work in an university (also J1 visa) -- so now I think I am eligible for the treaty and exempted of income tax, right?

3. Since the income tax exemption is for 3 years -- the 3-years-limit starts to count in 2007 (my first visit) or 2008 (my second visit)?

4. I think there is no retroactive clause in US-China treaty, right?

Thank you very much in advance. After I make clear of this I can use your service to file the tax return.

[Atlanta Tax Guru]

1) Negative. The tax exemption for researchers and scholars applies ONLY IF the research is done for the general good. Research done for a for-profit organization (and IBM is as FOR-PROFIT as you can get) does NOT qualify for the income tax exemption allowed for in the tax treaty.

2 & 3) If you are doing research at the university, then you are eligible for the treaty exemption, but for only two years. The U.S.-China Tax Treaty allows for up to three years of tax exemption, but you "burned" on of your years when you can on the J-1 visa to reserach for IBM.

4) What do you mean by a "retroactive clause"??

[tanwei]

Thank you for your prompt reply.
Yesterday I called IRS for this issue (it was REALLY hard to get connected), the anwer from it was:

I'm not qualified for the treaty in 2007, but are qualified in 2008. That is coincide with your answer.

For the 3 year limit, their anwer is it should start to count in 2008 (instead of 2007). They raised the example in the "technical explanation of the treaty":
Thus, for example, a resident of China who visits the United States
to conduct research at the National Institute of Health (NIH) for two years, 1986 and 1987, returns to China for a year, and then comes back for another year of research at NIH in 1989 would be exempt from tax on his NIH remuneration for each of the three years. However, if he stayed at NIH in 1990 or returned at a later time the exemption would no longer be available.

So it is an "aggregate of 3 years" (which does not "burn") -- for me, it should be 2008 -10.
Sounds reasonable? I am a little bit confused...
BTW: the three year should be calendar year? ( I came to US this June)

For the retroactive clause, I mean, it seems that some treaty has the term that "if you stay in US for over xx years, you have go give back the tax that you had been exempted". The US-China treaty does not have that kind of clause, right?

[Atlanta Tax Guru]

As far as I can tell, there is NO return clause in the U.S.-China tax treaty.

[tanwei]

Thank you:D
BTW: the three year should be calendar year? ( I came to US this June, so I wonder if I "burned" 6 months)

[Atlanta Tax Guru]

You "burn" the entire year if you arrive in the U.S. on the J-1 visa on the 31st of December.

I actually had that happen to a client, much to her dismay!