2 FAM 260
TAX EXEMPTIONS ACCORDED U.S. REPRESENTATIVES ABROAD
(Office of Origin: L/DL)
2 FAM 261 GENERAL
The Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular Relations (“the Vienna Conventions”) provide specific exemptions from taxation from diplomatic missions and consular posts and their members. The Department seeks to ensure that these exemptions are fully honored by the receiving states in the treatment they accord United States and its personnel, as required by the Vienna Conventions.
2 FAM 262 authority to seek tax relief
a. Posts should designate an officer responsible to monitor and/or implement diplomatic tax relief. The designated officer acts in liaison with representatives of concerned U.S. government agencies.
b. Each post should make its best efforts to obtain tax relief through discussions with the receiving state.
c. Tax relief, whether through reimbursement or point-of-purchase exemption, is based on all or any of the following sources of authority:
(1) International treaties and conventions
(a) Vienna Convention on Diplomatic Relations (VCDR), Articles 23, 28, 33, 34, and 37;
(b) Vienna Convention on Consular Relations (VCCR), Articles 32, 48, 49, and 72; and/or
(c) Other applicable agreements, such as bilateral consular conventions or friendship, commerce and consular rights agreements, or those concluded under authority of the Diplomatic Relations Act, 22 U.S.C. 254a.
(2) Reciprocity, where applicable; and/or
(3) Customary international law or practice.
d. For further guidance, please contact M/OFM/PR. PR assists posts’ best efforts to ensure proper tax relief and to negotiate with foreign governments for tax relief.
2 FAM 263 taxes eligible for diplomatic tax relief
The Vienna Conventions provide broad tax relief for diplomatic and consular missions and their personnel to include an exemption from “all dues and taxes, personal or real, national, regional or municipal” with certain specified exceptions. (VCDR, Art. 34; VCCR, Art. 49). One key exception is that exemption is not provided for “charges levied for services rendered”. See VCDR Art. 34(e); VCCR Art. 49(1)(e)). The description by the receiving states of a charge as a “fee” or a “tax” is not conclusive with regard to whether such a charge is considered by the Department to be an impermissible tax under the Vienna Conventions. Some useful characteristics distinguishing taxes from fees are: that a tax raises generally revenue for a taxing jurisdiction and are not linked to the cost or value of providing a service, but instead are often stated as a percentage or an ad valorem charge. A fee, on the other hand, is a payment directly linked to a service or commodity provided and is reasonably related to the cost of that service or commodity. It may be that fees representing a charge for a service rendered are levied by the receiving state, for example, with regard to the provision of sewage or electricity service, various airport-related charges and pet licenses. In order to qualify as a permissible fee for “services rendered,” the amount charged must be itemized and directly correlate to the actual cost of the service or support the continued provision of the service, e.g., a charge related to volume such as gallons of water or kilowatts of electricity.
Whenever the issue arises, the determination of whether a charge is an impermissible tax or a fee for a service rendered should be made in consultation with M/OFM, which will consult with L/DL.
2 fam 264 comsumption taxes (value added tax & sales)
A consumption tax is a charge on the acquisition of goods and services paid by the final consumer. Common examples of consumption taxes include Value Added Tax (VAT/IVA), Goods and Services Tax (GST), and sales tax.
The United States provides foreign diplomatic missions and consular posts and their personnel broad and effective exemption from sales tax at the point of purchase. The Department takes the position that the VAT is the functional equivalent of the sales tax and requires that our diplomatic missions, consular posts and their personnel be accorded relief from the VAT. Having reviewed the records of the negotiation of the Vienna Conventions, the Department has concluded that the VAT is not the type of “indirect” tax included in the price of the goods or service for which the Vienna Conventions do not provide exemption, (VCDR, Art. 34(a); VCCR, Art. 49(1)), in large measure because it is separately stated and identified and therefore capable of exemption/reimbursement.
2 FAM 264.1 Identification of Consumption Taxes
All consumption taxes can generally be identified in the following ways:
(1) Consumption taxes are direct taxes that are ultimately borne by the final consumer.
(2) Consumption taxes are not assessed against companies. This type of taxation is charged as a percentage of a good’s price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
2 FAM 264.2 Tax on Utility Services
Purchases of utility services may be subject to consumption taxes or other forms of taxation, including local or municipal levies. Utilities services include but are not limited to, electricity, heating fuel oil, telephone/cellular services, Internet services, water, and cable/satellite television. All posts should assert their right to benefit from the relief of such taxes. However, fees or surcharges may also be imposed on such transactions. Such fees may be imposed to directly support the infrastructure the utility provider uses in the distribution of its services. In general, such fees are ineligible for relief.
2 FAM 264.3 Tax on Gasoline
Purchases of gasoline (petrol) or diesel fuels may be subject to consumption taxes or other special local or municipal levies. All posts should assert their right to benefit from the relief of such taxes.
2 FAM 264.4 Hotel and Restaurant Taxes
Purchases at hotels and restaurants may be subject to consumption taxes or other special local or municipal levies. In general, the Vienna Conventions exempt such charges. However, fees or surcharges may also be imposed on such transactions. An example of this is commonly referred to as a “tourism tax” or “tourism fee/surcharge.” In many cases, a tourism tax is essentially a service fee and is therefore generally ineligible for relief.
2 FAM 264.5 Contract Taxes
Purchases of services or materials provided by a contractor may be subject to consumption taxes or other special local or municipal levies. For example, it is common for VAT to be imposed on security guard contracts. All posts should assert their right to benefit from the relief of such taxes. Some governments may also impose a “works contract tax.” Generally, this tax is imposed directly on the contractor as a form of corporate income tax. In the majority of cases, given the indirect manner in which this tax is levied, posts will not be able to obtain relief from such charges.
2 FAM 264.6 Taxes on Construction/Renovation Projects
Purchases of goods and services associated with construction or renovation projects are generally eligible for tax relief. Such purchases may be subject to consumption taxes, “works contract tax,” or other local or municipal levies. Given that contracted agents carry out most construction or renovation projects, it is important for posts to ensure the availability of tax relief and the procedure through which such relief will be extended on construction/renovation-associated purchases in advance of any proposal requests. It is highly recommended that posts consult with M/OFM/PR while planning these projects.
2 FAM 265 REAL Property Tax Exemption
2 FAM 265.1 Real Property Owned/Leased by the U.S. Government
Posts should seek tax exemptions, to the extent possible, on taxes related to properties owned or leased by the U.S. government where there is a basis in international or domestic law to assert such an exemption. See 15 FAM 167 for tax exemptions on U.S. government-owned or -leased property.
2 FAM 265.2 Real Property Owned by Post Members
The Vienna Conventions generally do not provide relief from taxation on real property owned by individual members of diplomatic missions or consular posts.
2 FAM 266 Personal Income Tax
2 FAM 266.1 Official Wages
The Vienna Conventions generally authorize an exemption from receiving state national, state, and local income tax requirements on the wages, fees, or salary of accredited employees of a U.S. post (received as compensation for official service to the U.S. government or international organization, as long as that individual is not a citizen or permanent resident of the receiving state.
2 FAM 266.2 Non-Official Earnings
In general, accredited employees of a diplomatic mission or consular post as well as their dependents are not entitled to an exemption from federal, state, or local income tax requirements on the basis of diplomatic or consular status for non-official income or earnings received in the principal employee’s country of assignment. Such earnings include, but are not limited to, interest or investment income, capital gains, and gambling winnings. Further, the income of dependents employed in the receiving state is generally subject to local income tax requirements.
If a bilateral income tax agreement exists between the United States and a foreign country, such earnings may be exempt from taxation or eligible for reduced rates. Individuals interested in determining whether such a bilateral agreement exists should contact the Internal Revenue Service (IRS) or a tax professional.
2 FAM 267 Tracking Tax Reimbursements and Exemptions
Each post is responsible for tracking tax reimbursements and exemptions. To properly account for tax relief privileges, please review 4 FAM and 6 FAH 5 for guidance.
2 FAM 268 Misuse of tax Relief Privileges
The Department reminds all chiefs of mission, employees and contractors that they are required to comply with all applicable receiving state tax laws and regulations. Violations of these laws and regulations can constitute a serious offense and should be reported to the Inspector General.
2 FAM 269 UNASSIGNED