US withholding on lump-sum pension payment - periodic?

[crossbordernut]

Re NRA withholding on FDAP income, IRS rule 1.1441-2(b)(ii) says that it is immaterial whether the payment is made in a series of payments or in a single lump sum.

According to this logic, for US source pension withdrawals made by NRAs, both lump sum AND periodic withdrawals should fall under Treaty XVIII 2(a) for the 15% Treaty "periodic" rate. (Not referring here to the well-understood Canadian periodic definition of twice the minimum/10%, only talking about the US interpretation of periodic.)

I called the IRS international line and the agent I spoke to said that a lump-sum withdrawal from a pension to an NRA should be subject to 30% rate as per Pub. 515 since it doesn't meet the Treaty XVIII definition of "periodic." But I think she's wrong because of the inclusion of lump-sum payments in the FDAP definition above.

Thoughts?

[nelsona]

I agree that if the amount is considered periodic, it doesn't matter of it is withdrawn in one or in several withdrawals during the year.

Since you are referring to the US definition of "periodic", what do you understand that definition to be? There is no treaty definition of periodic. US uses there wersion, Canada uses theres.

In any event, withholding and tax are two separate issues, even for non-residents, so if you are over withheld, you will get it back when filing your 1040NR.

But, I'd still like to know what you are basing your
"periodic" amount on.

[crossbordernut]

Nelsona, you're absolutely right. I was conflating the IRS reg. on FDAP with the (lack of) Treaty definition of "periodic." Reg. language obviously has no bearing on treaties.

I first came across this conflation in this author's seemingly authoritative article on IRA/401k wdls. which may be a widely held view (see the page numbered 2, third paragraph from bottom with footnote #11):
https://www.sunnet.sunlife.com/files/ad ... o_RRSP.pdf

I find it interesting that there's no officially accepted US interpretive comment on the undefined "periodic" from the treaty as we have with the ITCIA in Canada; looked through the Treasury's technical explanations of the various protocols and couldn't find it ever addressed, maybe it was chosen to be left deliberately vague.

Well, on the approach that you might as well try to get 15% withholding on lump sum US IRA/401k wdls for an NRA in absence of a treaty definition, I have an NRA client who inherited her deceased husband's TIAA retirement plans and I'm trying to get 15% withholding on a lump sum wdl she's making. I filled out "Article XVIII" on line 10 of her W8-BEN, and then in the reasons section below I added the IRC 1.1441-2(b)(ii) reference (based on a faulty conflation of IRS reg. with treaty) to try to convince the issuer to withhold only 15% on this one-time lump sum withdrawal. We'll see what the issuer does. I guess if it's ever determined that they should have withheld 30, then it's on them for agreeing to withhold at 15.

[ND]

I am mutli-tasking and am not entirely focused on your facts and findings but did want to point out these two links to you, let us know if helps.
https://www.irs.gov/individuals/interna ... ithholding
https://www.irs.gov/businesses/the-taxa ... tributions