Jerald Davis August, Fox Rothchild
LLP, Italy, USA
In CCA 20122008, the Chief Counsel’s
Office ruled that compensation earned by green card workers while working for
the Italian government in the United States is not exempt from the federal
income tax pursuant to an 1878 U.S.-Italy consular convention on the basis that
greencard holders can not be consular offices, nor under the 1984 U.S.-Italy
income tax convention if Italy has the primary right to tax the worker, since
the U.S. provides for foreign tax credits. Finally, § 893(a) does not exempt
the compensation of green card holders who are working for the Italian
government in the United States and have not signed the USCIS Form I-508
waiver, unless such green card holders establish, under the facts and
circumstances, that the enumerated conditions of § 893(a) are met.
The CCA is noteworthy in its
announcing that it will invoke the savings clause under bilateral tax treaties
to tax foreign workers who are not consular officials or who meet the
requirements of §893. Individuals who are citizens or residents of the U.S. and
tax residents of another country working for their home government need to be aware
of the Chief Counsel’s office position on this subject.
Background Facts.
Certain individuals, who were tax
residents of both Italy and the U.S. under each respective country's domestic
law, worked in the U.S. for the Italian government. The individuals were U.S.
green card holders. The Service was asked to rule on the taxability of their
income under three different authorities—a consular convention dating back to
1878, an income tax treaty currently in effect with Italy, and §893 of the
Internal Revenue Code.
Section 893(a) exempts from federal
income tax the compensation of employees of foreign governments received for
official services if certain enumerated conditions are met. However, the
exemption is not applicable to green card holder foreign government employees
who have signed the waiver (USCIS Form I-508) provided under §247(b) of
the Immigration and Nationality Act (8 U.S.C. § 1257(b)). A green card holder
employee is no longer entitled to the tax exemption conferred by § 893(a) from
the date of signing the USCIS Form I-508 waiver. See Treas. Reg. §
1.893-1(a)(5).
CCA Analysis
On the first issue, the U.S.-Italy
Convention Concerning the Rights, Privileges, and Immunities of Consular
Officers, May 8, 1878 ("U.S.-Italy Consular Convention"), which remains
in force today, provides tax exemptions for "consular officers" who
are "citizens of the state by which they were appointed." Under a
State Department note issued in 1986, the State Department stated that
"[i]n order to be eligible for recognition as a career consular officer, an
individual must ... be the holder of an A-1 non-immigrant visa." A
green card is not an A-1 non-immigrant visa. Therefore, the IRS held that the
U.S.-Italy Consular Convention did not apply to exempt the income of the green
card holder from U.S. tax.
On the next argument, that made
under the 1984 U.S.-Italy Income Tax Treaty, which applied to the years at
issue, Article 19(1)(a) of the U.S.-Italy Income Tax Treaty provides in general
that remuneration paid by Italy to an individual in respect of services
rendered to Italy is taxable only in Italy. Article 19(1)(b)(ii) provides,
however, that such remuneration is taxable only in the U.S. if the services
are rendered in the U.S. and the individual is a resident of the U.S. who did
not become a resident of the U.S. solely for the purpose of rendering the
services. The Service did not resolve which clause governed.
The CCA concludes that if only
Article 19(1)(a) applied, then under the "saving clause" in Article
1, the embassy remuneration also would likely be taxable in the U.S. Under the
saving clause, the U.S. is permitted to tax its residents as if there were no
Treaty. The Service noted that Article 1(3)(b) lists Article 19 as an exception
to the saving clause, but this exception is available only to individuals who
are neither U.S. citizens nor green card holders. Thus, according to the IRS,
even if Article 19(1)(a) applied (and not Article 19(1)(b)(ii)), the U.S. also
can tax the green card holders' embassy remuneration.
The Service did note that double
taxation would be alleviated by Article 23(2) of the U.S. Italy Tax Treaty,
which provides that the U.S. will provide a credit against U.S. tax based on
the amount of tax paid to Italy on the embassy remuneration and subject to the
limitations of U.S. law.
Finally, the IRS also concluded that
§893 did not apply. Section 893 exempts from federal income tax the
compensation of employees of foreign governments received for official services
if certain enumerated conditions are met. According to the Service, the
exemption is not applicable to green card holder foreign government employees
who have signed the waiver (USCIS Form I-508) provided under §247(b) of the
Immigration and Nationality Act (8 U.S.C. section 1257(b)).
