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Excerpted from the Journal of International Taxation, Vol. 17, No. 1 (January 2006) (WG&L/RIA).

by G. Christine Ballard and Wray E. Bradley

U.S.persons who work directly or indirectly for the U.S. government overseas may not be subject to host-country taxation due to international agreements such as SoFAs and USAID. 

The United States imposes income taxes on its citizens wherever they live and wherever they derive income, while most other countries tax income based on residency. Thus, a U.S. citizen deriving income from outside the United States can be subject to U.S. income taxation due to citizenship and, at the same time, be subject to host-country taxation due to residency. However, U.S. persons who work directly or indirectly for the U.S. government overseas may not be subject to host-country taxation due to international agreements such as Status of Forces agreements (SoFAs) and United States Agency for International Development (USAID) agreements. Persons covered by these agreements are generally treated, for income tax purposes, as if they had never left the United States. This treatment is different from that of U.S.citizens working overseas for employers who do not have a direct or indirect connection with the U.S. government. Employees not associated with U.S. government presence overseas can take full advantage of the foreign tax credit and the foreign earned income exclusion (Internal Revenue Code (IRC) Section 911) while persons subject to SoFAs and USAID agreements, with minor exceptions, cannot.

Thisarticle looks at the basic provisions of SoFAs and USAID agreements,which should be of particular interest for clients or potentialclients, including military personnel and government contractors, whoare closely aligned with the U.S. government operating overseas. Thediscussion focuses on the North Atlantic Treaty Organization (NATO)Italian and German SoFAs and compares them with the non-NATO SoFA withJapan, and reviews the tax provisions of a typical USAID agreement.

ChristineBallard is a Tax Director, International Tax, with RSM McGladrey,Alexandria, VA. Wray Bradley is Associate Professor of Accounting,University of Tulsa, and Faculty Advisor for the Online Masters ofTaxation program. The authors can be contacted, respectively, at chris.ballard@rsmi.com or (703) 739-1446; and wray-bradley@utulsa.edu or (918) 631-2792.

The full text of this article is available only through subscription to the Journal of International Taxation. Subscription information is available at: http://ria.thomson.com/estore/detail.aspx?ID=WJIT&SITE=/taxresearch/international.