Can a US citizen who is a resident of France exclude income from her US return under a tax treaty?
Taxpayer Says: Under the tax treaty with France, none of her income is subject to US tax because she is a resident of France and paid tax to France. Paying tax on the same income would amount to double taxation, for which the treaty grants relief.
Internal Revenue Service Says: The income is subject to US tax because the tax treaty with France allows for US citizens to be taxed under US law.
From Internal Revenue Code SectionSection 911(a): Allows a “qualified individual” to exclude from gross income “foreign earned income”.
From Internal Revenue Code Section 911(b)(1)(A): Foreign earned income is “the amount received by such individual from sources within a foreign country * * * which constitute earned income attributable to services performed by such individual”.
From Internal Revenue Code Section 911(d)(1): A qualified individual is a U.S. citizen whose tax home is in a foreign country if that individual is a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year.
From United States-France Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital, Aug. 31, 1994, 1963 U.N.T.S. 67, Article 15, paragraph 3: Notwithstanding the preceding provisions of this Article, remuneration derived by a resident of a Contracting State in respect of an employment exercised as a member of a regular complement of a ship or aircraft operated in international traffic shall be taxable only in that State.
From United States-France Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and Capital, Aug. 31, 1994, 1963 U.N.T.S. 67, Article 29, paragraph 2: Notwithstanding any provision of the Convention except the provisions of paragraph 3, the United States may tax its residents, as determined under Article 4 (Resident), and its citizens as if the Convention had not come into effect.
THE CAUSE OF THE DISPUTE
As a US citizen or resident, you are taxed on your worldwide income. If you’re also a resident of another country, you may be eligible for benefits under a tax treaty, which is an agreement between counties to help limit double taxation and other effects of the tax laws of both countries. Benefits under tax treaties include credits, deductions, exemptions, and reductions in tax rates.
US tax treaties generally include a “saving clause” that allows the US to tax its citizens and residents as if the treaty did not exist.
In this case, the taxpayer, a flight attendant, is a US citizen who was a bona fide resident of France. In the course of her job, she worked on airline flights from France to the US and back. She reported her wages on income tax returns for both France and the US. On her US return, she claimed an exclusion for those wages as foreign earned income.
Because the US-France tax treaty has a provision related to the taxation of international transportation income (Article 15 above), and because she paid tax to France on her wages, she believes the treaty allows her to avoid double taxation by excluding the wages from her US return.
The IRS says the income is taxable in the US due to the saving clause, which takes precedence over Article 15 of the treaty. In addition, international airspace is not a foreign country for purposes of the foreign earned income exclusion (code section 911 above). Therefore, income earned while working in international airspace is not foreign earned income and must be included on the US return.
WHAT WOULD YOU DECIDE?
Make your selection, then see “The Court’s Decision” below for a full explanation
THE COURT’S DECISION
HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.
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