International taxation: a guide for academics abroad.

Author:Dhanda, Michelle
  1. INTRODUCTION

    The United States Internal Revenue Service (IRS) and Department of the Treasury have fueled the forces of globalization since the early twentieth century. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Often considerations of international tax law focus on business "tax havens" or U.S. tax policy for American entities and their employees abroad. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) American tax policies also affect individuals residing abroad, including those in academia. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Academics are one group who consistently travel to other nations, and their tax burden is relatively heavy. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Once preparation for an academic career is complete, however, academics abroad can take advantage of one very important tax benefit: income exclusion for U.S. tax purposes. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Further, academics are not required to pay foreign taxes while residing abroad under many bilateral tax treaties negotiated by the Department of Treasury. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Thus, academics may receive one particular benefit that others, even business people, may not. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The IRS has not welcomed the idea of academics working abroad, tax-free, because the purpose of this statutory exclusion in section 911 of the tax code was to assist American businesses competing abroad. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Despite the resistance from the IRS, however, public policy and equity are good grounds for continued academic tax exclusion, and the Department of Treasury's tax treaties support exclusion. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

    This Note will explain some of the tax consequences of academic sabbaticals abroad. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Specifically, Part II of this Note will provide a history of the applicable tax law, both congressional and administrative. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Part III will consider various hypothetical academic situations, and Part IV will demonstrate how academics may benefit from tax laws. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Finally, Part V will summarize the benefits and burdens of specific travel decisions. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

  2. HISTORY

    The IRS generally considers any accretion to the wealth of an American residing anywhere to be taxable. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Despite this universal claim, Congress also has excluded the income of Americans living abroad for almost as long as the tax system itself has existed. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The Department of the Treasury has strengthened this tax exclusion by negotiating a series of tax treaties around the world that specifically exempt academics from paying foreign taxes when abroad. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Corporate tax strategists embraced congressional exclusion as soon as it was available. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Academics taking sabbaticals should embrace these exclusions as well, by learning whether their sabbaticals conform to the requirements of section 911 and the applicable tax treaties. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

    1. Congressional Tax Law

      Unlike most other nations in the world, the United States taxes its citizens' income from any source. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) A glance at the congressional history of American taxation, however, demonstrates that this worldwide system of taxation has been a problem for lawmakers since its inception. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The perception of unfairness in exempting income from taxation has rankled some Americans, particularly if no foreign taxes are paid, but American businesses continue to exploit this exception. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Academics should also take advantage of this exception. NOTEREF _Ref80684203 \h \* MERGEFORMAT

      The original purpose of Congress's income tax exemption for Americans abroad was "in the interest of foreign trade, to induce Americans to accept employment abroad and put American business on an equality with foreign competitors." (NOTEREF _Ref80684203 \h \* MERGEFORMAT) That narrow purpose was "broadened by 1951 to making all citizens residing and earning income outside the United States competitive, taxwise." (NOTEREF _Ref80684203 \h \* MERGEFORMAT) More specifically, taxpayers who found themselves "earning their foreign source income as teachers, come within the legislative purpose" of Section 911. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The congressional decision to exempt income originally was motivated by a sense of fairness and a concern that Americans would otherwise be tempted to renounce their citizenship. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) As the Fifth Circuit intimated in dicta, encouraging teachers and professors to travel abroad can and should be an equally compelling reason. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

      Two U.S. statutory provisions limit double taxation of American citizens earning income abroad. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The first provision, the foreign tax credit, matches foreign taxes paid, dollar for dollar. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The second provision excludes income earned abroad up to $87,000, adjusted for inflation. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The latter exclusion is the focus of this Note: U.S. taxpayers are taxed on their income from outside the United States, but when an individual qualifies, she may elect to exclude from gross income more than $87,000 of foreign earned income. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

      1. What Constitutes Foreign Earned Income

        A taxpayer's "foreign earned income" is her earned income attributable to services she performed during a qualifying period abroad. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The source of a taxpayer's income, whether American or foreign, is immaterial unless that source is the U.S. government; income from the government may never be excluded under section 911. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Even taxpayers who are paid indirectly by an agency of the U.S. government are unable to take advantage of the exemption. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

        To exclude foreign earned income, however, the taxpayer must meet certain time requirements in her stay abroad. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) The ceiling for the section 911 exclusion is $87,600 in 2008, and it is adjusted annually for inflation based on the Consumer Price Index. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) To exclude foreign earned income, however, the taxpayer must meet certain time requirements in her stay abroad, discussed below. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

      2. Bona Fide Resident for Twelve Months or Physically Present For At Least 330 Full Days

        The taxpayer must meet at least one of two possible time requirement tests to qualify as a taxpayer abroad who may exclude income. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) These tests are the Foreign Residence Test and the Foreign Presence Test. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

        For the Foreign Residence Test, an American citizen must be a bona fide resident of one or more foreign countries for an uninterrupted period that encompasses an entire tax year. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) This is the more definitive of the two tests, meaning the taxpayer stayed abroad for an entire year, not less than 365 consecutive days. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

        The Foreign Presence Test requires that an American citizen or resident alien be physically present in one or more foreign countries for any twelve consecutive months. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Brief trips to the United States do not cancel physical presence. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Presence ceases, however, if the time abroad is suddenly interrupted by a long-term return to the United States. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

      3. "Abode Factor"

        To meet the qualifications of section 911 under either the Foreign Residence Test or the Foreign Presence Test, the taxpayer's "tax home" must be in the foreign country. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) She cannot have an abode in the United States. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) If the taxpayer is temporarily present in the United States, or if she maintains a dwelling in the United States, her tax home is not necessarily in the United States, though it makes it more difficult for her to claim a foreign one. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) In short, the taxpayer must actually live abroad for either 330 or 365 days with intent to stay there in order to claim income exclusion. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

        The only requirement necessary to satisfy section 911 is an intention to reside abroad for that length of time, and evidence of the steps taken demonstrating that intention. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Even if the taxpayer remains away for more than one year, she may be precluded from claiming a foreign tax home, if she keeps her economic, familial, and personal connections with her previous address in the United States. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) A taxpayer cannot have a tax home outside of the United States if her "abode" is the United States. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) If the taxpayer's foreign position lasts for one year or more, it is arguably of indefinite duration, and so the new, foreign place of employment can become the tax home, although this is where the IRS may object, making litigation necessary. (NOTEREF _Ref80684203 \h \* MERGEFORMAT)

        The taxpayer, however, need not permanently avoid returning to the United States. (NOTEREF _Ref80684203 \h \* MERGEFORMAT) Judge Learned Hand classified the physical presence of a taxpayer in differing degrees, ranging from 'domicil' [sic]," which is most permanent, to...

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