U.S. TAXATION OF FOREIGN-
GOVERNMENT RELATED INDIVIDUALS

by Paula Singer, Esq.

The application of U.S. federal income tax rules and the availability of income exemptions under the tax law may depend for policy reasons on an individual’s immigration category. This is the case for foreign-government related individuals who may enter the United States in either “A” or “G” nonimmigrant status. A-1 and A-2 nonimmigrants are beneficiaries of employment based immigration petitions of foreign governments such as for ambassadors, ministers, diplomats, or consular officers. G-1, G-2, G-3, and G-4 nonimmigrants are beneficiaries of employment-based petitions of international organizations designated by Executive Order to be entitled to special privileges, exemptions and immunities. Dependents enter the United States in the same category as the beneficiaries (called “principals”). The personal employees of foreign-government related nonimmigrants, and their dependents, enter the United States as A-3 and G-5 nonimmigrants respectively. The special rules discussed below do not apply to these nonimmigrants.

A and G nonimmigrants may only be employed by the foreign government or international organization that sponsored them. A and G status dependents may be employed if they have obtained an Employment Authorization Document (EAD) from the immigration service. Dependents may engage in full or part-time education.

Nonresident Alien Tax Status

A nonimmigrant’s U.S. tax residency status, resident or nonresident, depends upon the individual’s immigration category and substantial presence in the United States. Nonimmigrants are substantially present in the United States if they are present for at least 31 days in the current calendar year, and their U.S. days over three calendar years equals or exceeds 183 days based on a formula.

For policy reasons, most foreign-government related individuals are nonresidents for U.S. income tax purposes. Therefore, they are subject to U.S. income tax only on their U.S. income (unless an exception applies), but not on their foreign income. This results from the fact that the U.S. days of A or G nonimmigrants do not count for purposes of determining substantial presence in the United States with two exceptions. Part-time employees of their organizations do not qualify for this special exception from counting U.S. days, and will become residents if they are substantially present. This special exception also does not apply to A or G status dependents who are 21 or over.

Special Tax Exemptions

Generally, nonresidents are subject to U.S. income taxes on U.S. source income, which includes compensation for employment services (“wages”) in the United States. Wages for U.S. services are also subject to social security and Medicare (FICA) taxes. However, unique income tax exceptions apply to exempt A and G status principals from taxes on their wages for official services to the foreign government or international organization.

Wages paid by a foreign government for official services are exempt from U.S. income tax if the following two conditions are met:

1. The services are similar to services performed by U.S. government employees in foreign countries, and

2. The U.S. State Department has certified that the foreign country grants an income tax exemption to U.S. government employees performing similar services in that country.

This tax exemption does not apply to services that are primarily in connection with commercial activity or that are performed for a controlled commercial entity.

Wages paid by an international organization designated by Executive Order as entitled to enjoy the privileges, exemptions, and immunities provided in the International Organizations Immunities Act for official services of its employees are exempt from U.S. income tax.

A blanket FICA exemption applies to wages paid by foreign governments and such international organizations without regard to any of the income tax conditions being met.

No other special tax exemptions relate to A or G immigration status. However, special tax exemptions such as for bank interest and portfolio interest are available to all nonresidents. U.S. income that is not exempt from tax under these special rules is subject to U.S. income tax under the normal rules that apply to payments to nonresidents unless an income tax treaty exemption applies.

Tax Treaty Exemptions

The United States has income tax treaties with over 60 countries. Most of these treaties include a Government Service Article stating that “salaries, wages, and remuneration…paid from the public funds of a Contracting State or a political subdivision or a local authority in the discharge of functions of a governmental nature” shall only be subject to tax in the treaty country.

Tax treaties also include articles reducing or eliminating tax on U.S. source income such as dividends, interest, royalties, etc. In order to qualify for these exemptions, the individual claiming the exemption must submit required documentation to the payor. These rules will be discussed more fully in future editions.

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 individuals, their employers, and payors on cross-border employment matters.

Watch for Volume 1, Number 5 for a discussion on “U.S. Taxation of Foreign Students.”

Q: An individual with the United Nations who is the United States in G-2 status performed a lecture at our university a few weeks ago. My university wants to pay him a $1,000 honorarium for his lecture. The foreign national does not have a SSN or ITIN. He has only a U.N. ID number. What do I do?

A: Withhold 30 percent of the honorarium for taxes and report both the income and taxes on Form 1042-S information return. The individual cannot claim a treaty benefit without providing you with a Form 8233 with an ITIN or SSN. Since almost all treaties deny benefits to independent contractors who have a fixed base in the United States (and someone working for the U.N. has such a fixed base), treaty benefits would not be available anyway.

From an immigration perspective, Linda Dodd-Major, former Director of INS’ Business Liaison Office, has stated consistently that the ONLY classification covered by the honorarium provisions in the immigration law is B (visitor).

Windstar Welcomes Aboard the Following New Clients:

Florida Community College at Jacksonville
Otis College of Art + Design
Presbyterian College
Southern Connecticut State University
Southern Polytechnic State University
The Brookings Institution
University of Colorado at Boulder

Paula Singer and Linda Dodd-Major Weigh in on Taxpayer Identification Number (TIN) Compliance

The American Immigration Lawyers Association’s (AILA) 2004-05 Immigration & Nationality Law Handbook includes an article co-authored by Paula Singer and Linda Dodd-Major, Identification Numbers and U.S. Government Compliance Initiatives. The article discusses the history of social security numbers (SSNs) and individual taxpayer identification numbers (ITINs) and how they became de facto national identification numbers, and the SSA, IRS, and legacy INS/DHS compliance initiatives to prevent misuse of these numbers.

Visit www.aila.org for more information or to order the handbook.

Alexander Haig Charts International Tax Trends with Paula Singer

General Alexander Haig, former Secretary of State for President Reagan, discusses "Tax Rules for Foreign Nationals" with Paula Singer, Esq. on World Business Review, a newsmagazine style show that provides education about the latest topics, trends and issues in a variety of industries. The segment appeared on the World Business Review website, United Airlines in-flight news magazine, and on Bravo television.

Windstar Will Dock at This Upcoming Trade Show

National Association of Tax Reporting and Payroll Management Annual Conference – August 22-25, Mystic, CT. Paula Singer and Jerri Langer will present “International Employment – Part II: Employment Taxes for Resident and Nonresident Aliens.” For more information, visit www.natrpm.org.

©Copyright 2004 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.