In February, the U.S. State Department published budget requests for the next fiscal year. They estimate that in the current FY 2016 (which ends in September), they will spend US$27.4 million on reimbursing international organisations for those organisations’ reimbursements to their U.S. citizen employees for the U.S. taxes paid by those employees — $9.8 million (56%) more than they did ten years ago.
This is a fast-growing budget item in an area where Congresscritters have been trying to cut back after period of high spending growth in the late 2000s: State officials estimate that their total spending on “Contributions to International Organizations” (CIO) will be only about 12% higher in 2016 than in 2007, and have only requested 7.5% more than 2007 in the 2017 budget.
Table and explanations
|Total CIO budget
(% of CIO budget)
|FY 2007||17,595||1,201,307||1.46%||CBJ 2009: 613, 620|
|FY 2008||19,053||1,409,429||1.35%||CBJ 2010: 573, 580|
|FY 2009||20,283||1,604,400||1.26%||CBJ 2011: 537, 544|
|FY 2010||20,280||1,682,500||1.20%||CBJ 2012: 539, 545|
|FY 2011||22,321||1,578,651||1.41%||CBJ 2013: 577, 582|
|FY 2012||22,379||1,449,700||1.54%||CBJ 2014: 482, 493|
|FY 2013||23,367||1,376,338||1.70%||CBJ 2015: 439, 451|
|FY 2014||25,891||1,265,762||2.05%||CBJ 2016: 433, 440|
|FY 2015||25,729||1,422,159||1.81%||CBJ 2017: 473, 478|
|FY 2016||27,378||1,344,458||2.04%||CBJ 2017: 473, 478|
|FY 2017||26,845||1,290,891||2.08%||CBJ 2017: 473, 478|
Each value comes from the “Contributions to International Organizations” chapter of the Department of State Operations Congressional Budget Justification (CBJ). The table does not include amounts contributed to groups like the Food and Agriculture Organization which, instead of having a reimbursement agreement, maintain an internal fund for tax equalisation (to which State also contribute under other budget headings). For years up to 2015, the table shows the actual amount State claims to have spent for that year (contained in the CBJ two years later); for 2016 and 2017, the table uses the estimated or requested amount respectively. Links in the table go to archive.org, in case State randomly decide to reorganise their website and break all old links, as they’ve recently done with the Foreign Affairs Manual and as the IRS did as well four years ago.
The US$27 million to be spent on tax reimbursements is more than twice the American Citizens Services budget of $13.5 million aimed at the rest of diaspora who enjoy no such reimbursements for their U.S. taxes — and that $13.5 million includes items like repatriation assistance, which is far more likely to be extended to Homelanders abroad who have got themselves into trouble in a country they are visiting, not to emigrants who can rely on family, friends, and other support structures in the country where they ordinarily reside and who have no need to be “repatriated” to a country where they don’t.
A 2001 aide-mémoire from the Organization of American States gives a brief history of U.S. tax reimbursement agreements with international organisations:
Most Member States of both the United Nations (“UN”) and the OAS exempt their nationals who are employees in those organizations from taxes on their income from those organizations (“institutional income”). The objectives underlying the policy of exempting staff members of international organizations from taxes on their institutional income, which is endorsed in Article 18(b) of the Vienna Convention on Privileges and Immunities of the UN of 1946 (“the UN Convention”) and the Article 10(b) of the OAS Multilateral Agreement on Privileges and Immunities of 1951 (“the OAS Convention”), are twofold. The first is to assure equal pay for equal work within the organization by providing that employees at the same grade and step will receive the same “net of tax” or “after tax” salary, regardless of their nationality. The second is to prevent Member States from receiving an indirect rebate of their quotas in the form of the tax revenues they would receive from the taxing the institutional income of international organizations’ staff members. …
Article 18(b) of the UN Convention on Privileges and Immunities exempts staff members from taxes on their UN income. In ratifying that convention, however, both the United States of America and Mexico submitted reservations to that provision. The United States specified that the Article 18(b) tax exemption shall not apply to its nationals. Mexico’s reservation was narrower. It specified that Mexican nationals “who exercise their functions in Mexican Territory” are excluded from the exemption and thus must pay taxes on their institutional income. Like Article 18(b) of the UN Convention, Article 10(b) of the OAS Convention on Privileges and Immunities exempts OAS staff members from taxes on their OAS income. Neither Mexico nor the United States of America are parties to that Convention. …
In 1981, the United States Government adopted a uniform tax reimbursement policy for its nationals in all international organizations and asked international organizations to adopt that policy as a condition for receiving future tax reimbursement payments. One of the central elements of that policy was the requirement of a signed agreement between the receiving organization and the United States Government governing reimbursements to United States taxpayers. The United States Government threatened to discontinue tax reimbursement payments to any organization that refused to sign such an Agreement.
Accordingly, the OAS General Secretariat entered into protracted negotiations with the United States Government over the contents of such an agreement. The primary purpose of those negotiations was to assure that the methodology of tax reimbursement adopted under the Agreement would respect the acquired labor rights of the affected staff members.
In short, in this Rube Goldberg budgetary exercise, the State Department requests an appropriation to cover these reimbursements, pays the reimbursement to each international organisation, which then pays it to its employees (after they prove how much U.S. tax they owe), which then pays it to the IRS, so that there will be money available for Congress to appropriate so they can pay for next year’s reimbursements. It’s certainly a nice little jobs program for tax preparation firms — but the actual employees, and the U.S. government, are no better off than they would be if the U.S. were not so “exceptional” and just didn’t tax this income in the first place.
How does the U.S. government as a whole (as opposed to U.S. accountants making campaign contributions to individual Congresscritters) benefit from this arrangement, rather than requiring U.S. citizen employees of international organisations to pay U.S. taxes? Well, as State said in the 2014 CBJ:
The request also includes $26 million for reimbursing U.S. citizens who have paid U.S. Federal, state, or local taxes on income earned at an international organization with which the United States has a tax reimbursement agreement. International organizations typically set salary levels on the assumption that their employees will not be subject to these taxes. The United States is one of very few nations that tax this income, creating a financial disadvantage for U.S. citizens. Reimbursing U.S. citizens in accordance with these agreements helps to address this disadvantage.
The website of the United States Mission to the OECD also notes: “Ensuring that Americans are well represented at international organizations is a U.S. Government priority”. (Ensuring that Americans are well-represented and do not face financial disadvantage in private organisations is clearly less of a priority.)
Do as we say, not as we do
Most international organisations — whether famous ones like the World Health Organization, or far more obscure ones such as the International Pacific Halibut Commission — aren’t doing anything in particular to harm U.S. persons abroad, so you might feel some sympathy for their employees who are caught up in this mess, especially if they have another citizenship, live abroad, and got stuck with U.S. citizenship through no fault of their own. However, I would understand if Brock readers instead feel some schadenfreude upon reading the complaints of certain other international organisations. For example, an OECD request for tenders (i.e. something which they thought only suppliers, not the media or the general public, would ever read) disingenuously whines:
OECD officials of US nationality are themselves responsible for complying with the income tax laws applicable to them. These officials are responsible for preparing tax reporting documentation for the OECD tax reimbursement scheme and for US tax authorities. Penalties and interest resulting from non-compliance with such laws are the responsibility of these officials and are not reimbursed by the OECD. The OECD does not provide its staff with tax report preparation services. The OECD only provides limited information to concerned staff including a list of tax preparation firms. US tax reporting on foreign earned income is highly complex and most US staff are required to use the services of external tax firms to comply with their obligations. These firms charge fees depending on the complexity of the individual reporting. US staff pay these fees which are not reimbursed by the OECD.
See? Even the OECD admits the absurd complexity of US tax compliance — at least when it’s biting them in the hindquarters and they think no one’s listening. Meanwhile they cheer it on when it’s biting us taxpaying peons in the hindquarters, and do their best to exclude us from any discussion of it. Of course, there’s a reason the OECD won’t dare complain too loudly about U.S. exceptionalism, as Bloomberg reported just yesterday (hat tip: iota):
“The U.S. doesn’t follow a lot of the international standards, and because of its political power, it’s able to continue,” said Bruce Zagaris an attorney at Berliner Corcoran & Rowe LLP who specializes in international tax and money laundering regulations. “It’s basically the only country that can continue to do that. Others like Panama have tried, but Panama can’t punch as high as the U.S.”
Indeed, in a statement issued Monday by OECD secretary general Angel Gurria, the OECD said “Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law-enforcement authorities.”
The statement didn’t mention the U.S., which is the OECD’s largest funder.
Similarly, a few weeks ago we discussed the spectacle of James H. Freis, Jr., former Bank for International Settlements employee and later Financial “Crimes” Enforcement Network director, arguing that living in another country and banking there is inherently suspicious and gives FinCEN sufficient grounds to demand a general warrant to search through your papers at any time he wants. The fear of FinCEN’s FBAR requirement sent thousands of scared minnows running to the various IRS offshore disclosure initiatives. In the 2009 OVD alone, the IRS extracted from the poorest 10% minnows median penalties of nearly $13,000 — 129 times the tax they owed.
Assuming the median penalty for that group was close to the average penalty, the amount of penalty revenue from those bottom thousand of the minnows in the 2009 OVDP would be just enough to pay half of the tax reimbursements for U.S. citizen employees of international organisations in any given year.