Availability of the foreign earned income exclusion, FTCs and combat pay exclusion for U.S. government contractors.

• Author: Ballard, Christine
• Position: Foreign tax credits

Many individuals are working abroad in quasi-governmental capacities through contracts with the U.S. Department of Defense and the U.S. Agency for International Development (USAID). Although this is hardly new, more and more practitioners must now advise individuals who have sources of income earned in Other countries as a result of being indirect members of the U.S. government. For government and USAID employees, tax treaties may be superseded or supplemented by Status of Forces Agreements (SoFAs) or USAID Bilateral Agreements. Often these agreements have a direct effect on how individuals are taxed in the host country and whether they can claim the foreign earned income exclusion and foreign tax credits (FTCs).

SoFAs

Under SOFAs, tax residency in a foreign country is prohibited. Residency treatment by the home country provides parity--individuals designated as part of the "civilian component" (often noted as "technical representatives") are extended the same benefits that U.S. Forces enjoy in a host country. In essence, taxpayers are treated as if they never left the U.S. In this situation, they are indirect employees of the U.S. and cannot take a foreign earned income exclusion. At the same time, however, they are not subjected to tax in the foreign country, which simplifies the administrative burden by not having to file in multiple countries and to track FTCs.

Each individual's circumstances must be examined carefully; not all employees assigned abroad under a given contract are part of the civilian component and extended SoFA protection. For example, under the NATO SOFA, benefits are generally limited to "white collar" positions, "blue-collar" positions of a sensitive nature and to other jobs considered indirectly linked to a U.S. military presence (e.g., teachers at a base school).

The situation becomes even more complex when individuals have other employment in the host country or marry a host-country national. Sometimes, their personal circumstances become so entangled with the host country that their SoFA benefits are lost. SoFAs only extend benefits to compensation earned in connection with a government contract; income from "moonlighting" is taxable under normal, host-country provisions and income tax treaties. When contractors who are otherwise covered by a SoFA have a second job, they may be eligible for the foreign earned income exclusion and FTCs for that employment.

USAID

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