Tax Law Notes
Tax Law Note:
How Should Income of Local Employees of Nonresident NGOs, Embassies, International Organizations and the Like Be Taxed?
Last Updated: May 01, 2006
This document describes alternatives for the income taxation of resident employees of non-resident NGOs, embassies, and international organizations. It also discusses whether the mentioned entities are (or can be) treated as withholding agents with respect to income tax obligations on the salaries paid by them.
Local resident personnel employed by either resident or foreign NGOs are generally not exempted from the income taxes applicable to employment income of residents. The same is true for social security contributions. In the case of non-resident NGOs the question arises whether such taxes should be paid by way of withholding by the foreign NGO (as it would generally be done in the case of a resident employer) or whether the employee should declare and pay the corresponding taxes.
Embassies and Consulates
Fiscal privileges of members of diplomatic missions or consular posts are based on the Vienna Convention on Diplomatic Relations1 and the Vienna Convention on Consular Relations2 with respect to countries which are parties to these treaties. In the case of countries that are not parties, the preferential tax treament granted is based on customary international law and may be less extensive than that required under the above conventions. However, under both the above conventions and customary international law, tax immunity is granted to the staff of diplomatic missions and consulates only if they are neither nationals nor residents of the receiving country.3 Exemptions may, however, be extended to employees who are nationals or residents of the receiving country, based on reciprocity or bilateral agreements.4
Tax privileges of employees of international organizations are based on the respective founding conventions of the international organizations, as well as other relevant conventions.5 The tax privileges and immunities of these employees are similar to those granted to employees of foreign embassies, except that they usually also apply to employees who are nationals or residents of the country of employment. The standards laid down in the statutes of these organizations are typically implemented in the domestic tax laws.6 A general definition of wages is given in most conventions; however it may be vague, and the national definitions of wages may differ from country to country.7 Certain international organizations are also relieved by virtue of their statutes from the burden of withholding and payment of taxes with respect to any item of income that would become taxable in a given country.8
Employees of Non-Resident NGOs
Resident employees of non-resident NGOs are generally subject to tax, unless there is a specific bilateral agreement providing a relief from taxes, or a specific provision in tax law. Non-resident NGOs are generally obliged to withhold income taxes with respect to the income of their local employees.9 This requires establishing a system under which a non-resident may apply for a limited tax identification number only for purposes of declarations and tax payments to be made with respect to the income of the employee.
Employees of Embassies and Consulates
Employees of embassies and consulates that are not covered by the immunities granted to the diplomatic and technical staff of the diplomatic missions (generally, employees who are nationals or residents of the country where the embassy or consulate is located) are usually subject to income taxes with respect to their wages paid by the embassy or consulate. Where tax obligations with respect to the income of local national or resident employees exist, embassies and consulates are generally not obliged to withhold the income taxes due on these wages, as exemption from the obligation to collect taxes is regarded as part of their immunities.10
Employees of International Organizations
It is a common practice of countries to exempt from income taxation the local national and resident employees of qualifying international organizations, where such exemption is called for by an international agreement that the country has entered into. But this is not universal. For example, the United States taxes the income of its citizens working for the IMF and the World Bank, since it is not a party to the Convention on Privileges and Immunities of the Specialized Agencies. Even if there are payments to employees that are subject to tax, because of their privileges the international organizations generally do not have the obligation to withhold and pay the income taxes due; payment of tax is the responsibility of the employee.11
Choosing the Right Solution
If there is no specific bilateral agreement to the contrary, the taxation of the local employees of non-resident NGOs in the same manner as other employees seems to be preferable. Withholding and payment obligation with respect to such taxes may be imposed on the employer non-resident NGO; in such a case it should be considered to implement an administrative mechanism under which the non-resident NGO can obtain a tax identification number for the limited purpose of declaring and paying the income taxes due on the salaries of its local employees. Also, due to the fact that it may be impractical and difficult to enforce the collection of tax from non-resident entities, it may be considered to explicitly establish the joint liability of the employee for the taxes due.
Embassies and Consulates
One option is to exempt local national or resident employees under reciprocal treatment. If, however, no such exemption is granted and local national or resident employees are taxed on their salaries from the embassies or consulates, under the customary interpretation of the concept of their privileges and immunities, they are also relieved from the obligation to collect and pay taxes. Thus it is recommended to establish the responsibility of the employees for the payment of the income taxes in question (and the corresponding declaration and payment mechanism).
Which international organizations qualify for tax preferences and the extent of those preferences are generally determined by the international conventions relating to such organisations to which the country is a party. In cases where international organizations pay salaries that are taxable in the local country, generally their immunity covers their exemption from the duties of collection and payment of taxes on salaries; thus the employees would have to be made responsible for the declaration and payment of such taxes.
For Further Reference
Sam Muller: International Organizations and their Officials: to Tax or not to Tax?, Leiden Journal of International Law, Vol. 6, No.1, April 1993, pp. 47-72.
Dick, B.R., Ryan, J.C., Jarchow, S.P.: U.S. Income Taxation of Foreign Governments, International Organizations and Their Employees, Foreign Income Portfolios, Tax Management (BNA, 1990)
Vienna Convention on Diplomatic Relations (1961)
Vienna Convention on Consular Relations (1963)
Klaus Vogel on Double Taxation Conventions (Kluwer International, 1997) pp. 1453 - 1469
The series of Tax Law Notes has been prepared by the IMF staff as a resource for use by government officials and members of the public. The notes have not been considered by the IMF Executive Board and, hence, should not be reported or described as representing the views of the IMF or IMF policy.
1500 UNTS 95 (1961).
2596 UNTS 262 (1963).
3Vienna Convention on Diplomatic Relations, articles 37, 38; Vienna Convention on Consular Relations, article 71.
4Klaus Vogel on Double Taxation Conventions (Kluwer International, 1997) pp. 1453 - 1469.
5See e.g. Convention on the Privileges and Immunities of the United Nations, 1 U.N.T.S. 15 (Feb. 13, 1946), art. V, sec. 18(b), (g); http://www.unog.ch/archives/un_priv.htm.
Convention on the Privileges and Immunities of the Specialized Agencies, sec. 19(b), (f) (Nov. 21, 1947). http://www.austlii.edu.au/au/other/dfat/treaties/1988/41.html.
6Sam Muller: International Organizations and their Officials: to Tax or not to Tax?, Leiden Journal of International Law, Vol. 6, No.1, April 1993, pp. 47-72.
7Some countries may, for example, consider that pensions relating to employment at international organizations constitute part of "wages and other emoluments"; others may take a different standpoint. Id.
8E.g., Articles of Agreement of the International Monetary Fund, Article IX, Section 9(a). http://www.imf.org/external/pubs/ft/aa/index.htm.
9However, in practice foreign employers may seek ways of planning around this obligation (e.g. contracting the employee for personal services instead of actually employing him or her).
10BIR Rules on Compensation Paid to Filipino Employees by International Organizations, BIR Ruling No. UN 194-94 (July 1, 1994), Tax Notes International, March 20, 1995.
11Under the U.S. Federal income tax rules remuneration for services provided to foreign governments and international organizations does not qualify as wages with respect to which income taxes should be withheld and paid by the employer. (US Internal Revenue Code Sec. 3401, Sec. 3402) The Mexican income tax law takes a similar approach.( Mexican Income Tax Law Art. 113, 118).