Foreign Recipients of U.S. Income, and Tax Withheld, 1984 By Margaret P. Lewis* U.S. source income paid to foreign persons (including foreign individuals, corporations and other organizations) rose 57 percent in 1984 to a record $17.1 billion. Tax withheld on this income rose to $970 million, an in- crease of just 39 percent (since nearly two- thirds of the additional income was exempt from tax withholding). Income paid to residents of the United Kingdom (U.K.) rose by $1.1 billion, an in- crease of 55 percentage points, accounting for almost 20 percent of the total increase. U.K. residents received $3.1 billion of U.S. source income in 1984, surpassing the Netherlands Antilles ($2.8 billion) which had an increase of 34 percentage points from 1983. Almost 70 percent of the increase in U.S. source income paid to foreign persons was ac- counted for by interest payments. The Deficit Reduction Act of 1984, which became effective on July 18, 1984, exempted most types of inter- est payments to foreigners from U.S. tax with- holding. Not all of this increase can be at- tributed to the enactment of this legislation, however, since only interest paid on obliga- tions issued after July 18, 1984, was entitled to this exemption. During 1984 high U.S. in- terest rates helped make investment in the United States more attractive to foreign in- vestors who thus helped finance an expanding U.S. economy. The growing U.S. economy also attracted foreign investment as the dollar ap- preciated against major currencies. Moreover, the large U.S. trade deficits put "strong dol- lars" into the hands of foreigners who in turn invested them in the United States. BACKGROUND INFORMATION A U.S. individual or organization paying in- come to a foreign individual (who, for tax pur- poses, is not a resident or citizen of the United States), corporation, or other organiza- tion (that is not incorporated in the United States) reports this income and the U.S. tax withheld on Form 1042S, Income Subject to With- holding Under Chapter 3, Internal Revenue Code (this title changed, in 1985, to Foreign Per- sons' U.S. Source Income Subject to Withhold- ing). While the basic tax rate is 30 percent, certain types of income are taxed at different rates. Income paid to countries that have en- tered i nto tax treaty agreements with the United States is usually taxed at lower rates. The tax withheld represents final payment of the actual tax liability in most instances. The responsibility for withholding tax belongs to the payer or the representative (usually a financial institution) of the payer rather than the recipient of the income. Income connected with the recipient's U.S. trade or business is exempt from withholding. The United States taxes this income separately, as though it were received by a U.S. citizen or corporation. The basic tax rate on U.S. source income (30 percent) differs from the graduated tax rates for U.S. individuals and corporations because foreign individuals and corporations may re- ceive income from an indefinite number of sources. Since most foreign persons are not required to file U.S. income tax returns and consolidate all U.S. income, their total income cannot be taxed in graduated "brackets," as one payer would have no knowledge of the amount of income other individuals and organizations had paid to the same foreign person. RECENT LEGISLATION AND ITS IMPACT The Deficit Reduction Act of 1984, as men- tioned above, went into effect on July 18, 1984. The Act exempted from tax most types of interest payments, mainly portfolio interest, made to foreign persons [1]. The principal ex- ception to this exemption was interest paid to a foreign individual, bank or corporation that owned at least 10 percent of the voting power of the U.S. payer. The removal of withholding tax on most types of interest is expected to increase direct foreign investment in the United States and to curtail U.S. borrowing through financial affiliates and other corpora- tions in the Netherlands Antilles (and other tax.havens, which are discussed below) [2].. *Foreign Returns Analysis Section. Prepared under the direction of James Hobbs, Chief. 61
17
Embed
Foreign Recipients of U.S. Income, and Tax Withheld, 1984 · Foreign Recipients of U.S. Income, and Tax Withheld, 1984 By Margaret P. Lewis* U.S. source income paid to foreign persons
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Foreign Recipients of U.S. Income,and Tax Withheld, 1984
By Margaret P. Lewis*
U.S. source income paid to foreign persons(including foreign individuals, corporationsand other organizations) rose 57 percent in1984 to a record $17.1 billion. Tax withheldon this income rose to $970 million, an in-crease of just 39 percent (since nearly two-thirds of the additional income was exempt fromtax withholding).
Income paid to residents of the UnitedKingdom (U.K.) rose by $1.1 billion, an in-crease of 55 percentage points, accounting foralmost 20 percent of the total increase. U.K.residents received $3.1 billion of U.S. sourceincome in 1984, surpassing the NetherlandsAntilles ($2.8 billion) which had an increaseof 34 percentage points from 1983.
Almost 70 percent of the increase in U.S.source income paid to foreign persons was ac-counted for by interest payments. The DeficitReduction Act of 1984, which became effectiveon July 18, 1984, exempted most types of inter-est payments to foreigners from U.S. tax with-holding. Not all of this increase can be at-tributed to the enactment of this legislation,however, since only interest paid on obliga-tions issued after July 18, 1984, was entitledto this exemption. During 1984 high U.S. in-terest rates helped make investment in theUnited States more attractive to foreign in-vestors who thus helped finance an expandingU.S. economy. The growing U.S. economy alsoattracted foreign investment as the dollar ap-preciated against major currencies. Moreover,the large U.S. trade deficits put "strong dol-lars" into the hands of foreigners who in turninvested them in the United States.
BACKGROUND INFORMATION
A U.S. individual or organization paying in-come to a foreign individual (who, for tax pur-poses, is not a resident or citizen of theUnited States), corporation, or other organiza-tion (that is not incorporated in the UnitedStates) reports this income and the U.S. taxwithheld on Form 1042S, Income Subject to With-holding Under Chapter 3, Internal Revenue Code
(this title changed, in 1985, to Foreign Per-sons' U.S. Source Income Subject to Withhold-ing). While the basic tax rate is 30 percent,certain types of income are taxed at differentrates. Income paid to countries that have en-tered i nto tax treaty agreements with theUnited States is usually taxed at lower rates.The tax withheld represents final payment ofthe actual tax liability in most instances.The responsibility for withholding tax belongsto the payer or the representative (usually afinancial institution) of the payer rather thanthe recipient of the income. Income connectedwith the recipient's U.S. trade or business isexempt from withholding. The United Statestaxes this income separately, as though it werereceived by a U.S. citizen or corporation.
The basic tax rate on U.S. source income (30percent) differs from the graduated tax ratesfor U.S. individuals and corporations becauseforeign individuals and corporations may re-ceive income from an indefinite number ofsources. Since most foreign persons are notrequired to file U.S. income tax returns andconsolidate all U.S. income, their total incomecannot be taxed in graduated "brackets," as onepayer would have no knowledge of the amount ofincome other individuals and organizations hadpaid to the same foreign person.
RECENT LEGISLATION AND ITS IMPACT
The Deficit Reduction Act of 1984, as men-tioned above, went into effect on July 18,1984. The Act exempted from tax most types ofinterest payments, mainly portfolio interest,made to foreign persons [1]. The principal ex-ception to this exemption was interest paid toa foreign individual, bank or corporation thatowned at least 10 percent of the voting powerof the U.S. payer. The removal of withholdingtax on most types of interest is expected toincrease direct foreign investment in theUnited States and to curtail U.S. borrowingthrough financial affiliates and other corpora-tions in the Netherlands Antilles (and othertax.havens, which are discussed below) [2]..
*Foreign Returns Analysis Section. Prepared under the direction ofJames Hobbs, Chief. 61
62. Foreign Recipients of U.S. Income, 1984
U.S. bond holdings by foreigners increased by85 percent to $32.3 billion in 1984 due in partto the 1984 Act. Most of these issues were di-rect U.S. corporate Eurobond placements [3].Borrowing from financial affiliates in theNetherlands Antilles, however, remained strongin the first three quarters of 1984 but
*almost
ceased in the fourth quarter with the-advent ofthe new law [4].
Tax treaty benefits that had been extendedunder the U.S.-U.K. treaty to British "terri-tories" and former "territories" were cancelledas of January 'l, 1984 [5]. As a result, taxwithheld on payments to these "territories"rose by 22 percent, while income paid remainedvirtually unchanged from 1983. The effectivetax rate (tax withheld as a percent of totalincome) for these "territories" rose from 16percent to 19 percent.
As of 1986, only one of the "territories"signed a separate treaty* agreement with theUnited States [6]. Many of the U.K. "terri-tories" are generally considered to be taxhavens, to some extent. Therefore, they may bereluctant to enter into' agreements with theUnited States which would work against thosevery characteristics -that make these "terri-
--tor tax avens (see the discussion of taxtreaty countries later in this article).
Also cancelled in 1984, were benefits for-merly extended under the U.~.-Belgium treaty toformer Belgian territories [7]. While both in-come and tax withheld of these countries 'de-clined by more than half, the percentage of in-come exempt from withholding more than dou-bled. This caused the effective tax rate forthese three countries combined to decline from14.4 percent to 9.6 percent.
The Social Security Amendment Act of 1983 re-quired withholding on benefits paid to foreignpersons beginning in 1984. At the same time, arevision was made to the Railroad RetirementAct of 1931 to require withholding on certainpayments to foreigners. The first completedata on these payments will be available forCalendar Year 1985.
DATA HIGHLIGHTS AND TRENDS
As previously mentioned, U.S. income paymentsto foreigners totalled $17.1 billion in 1984,increasing by 57 percent. The increase in1983, in contrast, was only 4 percent. Between1983 and 1984, income subject to withholdingrose by 39 percent, while exempt income in-creased by 71 percent. The greater rise.in ex-empt income was reflected in a comparativelysmall increase in tax withheld of 39 percent.
The average income payment rose by 21 percentto nearly $22,000, as indicated by a 57 percentincrease in income paid with only a 29 percentincrease in the number of Forms '1042S filed.The average amount of tax withheld per paymentrose by only 8 percent (due to the large in-crease in exempt payments mentioned above) to$1,200. The average effective tax rate (taxwithheld as a percent of total income for allcountries) for 1984 was 5.7 percent.
Type of Income
Interest as a percent of total income paidcontinued to rise in 1984. Interest accountedfor 59 percent of income paid (an increase of 6percentage points) while dividends represented33 percent, a 5 percentage point drop from1983. Figure A shows that the gap between in-terest and dividends as a percentage of totalincome widened to 26 percentage points in1984. For 1983, the percentage was 15.
"IF_cFm_-eJPqid
1 011fl; ~ 7814~qlll
59%
33%
ntere~l
Since 1980, interest's share of all incomeincreased .19 percentage points, from 40 to 59percent. The correspond
'ing share for dividends
fell by 15 percentage points, from 48 to 33percent. Figure B shows both total and averageannual increases for dividends and interest inboth constant and current dollars [8].
I
Foreign Recipients of U.S. Income, 1984 63
Figure B.--Interest and Dividends Paid, 1980and 1984
[Thousands of dollars]
Year and percentageincrease
Interest Dividends
Calendar year
1980 ...............1984 ...............
$ 2,604,30710,035,675
$3,147,7525,617,707
Percentage increase
Current dollars:
Total ............Average per year(compounded)....
285.3%
40.1
78.5%
15.6
Constant dollars:
Total ............Average per year(compounded) ....
205.8
32.3
41.6
9.1
Interest payments are often exempt from with-holding or taxed at low rates established bytreaties. With the passage of the Deficit Re-duction Act of 1984, certain types of interestincome, mainly portfolio interest, previouslytaxable, became exempt regardless of the coun-try to which it was paid. As a result, only$214 million of tax was withheld on interest in1984. This represented only 21 percent of alltax withheld, even though interest represented59 percent of all income. Dividends, which arerarely exempt from the withholding tax, repre-sented only 33 percent of all income, while taxwithheld on dividends comprised 68 percent ofthe total tax withheld. Figure A shows thepercentage of total income paid and the per-centage of total tax withheld for several in-come types.
Interest made up the largest percentage ofincome paid to all recipients in seven of thenine countries shown in Figure C. Only coun-tries receiving more than $500 million in U.S.source income were considered for inclusion inFigure C. As Figure C indicates, onlySwitzerland and France had a larger percentageof dividends than interest. This is in con-trast to 1983 when dividends made up a largerpercentage of income paid than interest formore than half of the top countries.
As in 1983, non-tax haven countries shown inFigure C received a greater portion of rentsand royalties (7 percent average) than theNetherlands Antilles, the Netherlands andSwitzerland (2.5 percent average), all of whichmay be considered, by some, to be tax havens to
some degree. More than half of all rents androyalties paid were industrial royalties. Thelatter include royalties for the use of, or theprivilege of using, trademarks, patents, secretprocesses and formulas, goodwill, franchises,and similar rights. One would not expect thesetypes of payments to be made to non-industrialcountries and most tax havens have a narrow in-dustial base. Switzerland and the Netherlands,tax haven countries which receive all types ofincome, are exceptions. Also, some U.S. corpo-rations may use tax haven countries to set upforeign companies that license royalties,therefore, resulting in rents, royalties andlicense fees paid to tax haven countries. Incontrast, rents and royalties accounted for 14and 12 percent of all income paid to France andJapan, respectively, non-tax haven countries.The Japanese payments were mainly payments by"high-tech" U.S. firms to "high-tech" Japanesefirms.
Country of Recipient
As is shown in Figure D, recipients in ninecountries accounted for nearly 90 percent ofall U.S. source income paid to foreigners in1984. All of these countries showed signifi-cant increases in income received over 1983,and six of these nine received income of over$1 billion.
The United Kingdom regained its position asrecipient of the most U.S. source income, sur-passing the Netherlands Antilles. Belgiumposted an exceptionally large rise in income,pushing it for the first time into the positionheld by France in 1983, as the eighth largestrecipient of U.S. source income. The nearly700 percent rise in U.S. source income paid toBelgium may be somewhat misleading since 90percent of the income paid to Belgium was re-ceived by Belgian nominees who may not havebeen the final recipients of the income. (Fora further discussion of nominees, see the sec-tion on recipient types later in this article.)
Tax withheld on payments to all of the coun-tries shown * in Figure D also rose from 1983levels. However, the rise in tax withheld wasgenerally less than the rise in total incomesince there was a large rise in exempt incomein 1984 (due, in part, to the 1984 Act whichhelped cause increases in total interest paidand, therefore, increases in total income paidto tax treaty countries).
The Netherlands Antilles was an exception tothe above generality. It showed a greater risein tax withheld than in income, thus narrowingthe gap between its percentage of income paidand the percentage of tax withheld from 18 per-cent to 14 percent. However, this was stillthe largest discrepancy of the countriesshown. Income paid to the Netherlands Antilles
64 Foreign Recipients of U.S. Income, 1984
Figure C
Percentage of Income Paid bySelected Income Type, .Selected Recipient Type, andSelected Country of Recipient,1984
Interest
Dividends
Rents andRoyalties
United Kingdom
AllReciplents Individuals Corporations$11 135 2.0
Billion Million Billion
$1.8 183 1.2Billion Million Billion
AllRecipients Individuals Corporations
I West Germany
56
L30 9
Canada
47
L, 0All Recipients Individual
~ $963 1 - 150million Million
61
L2810
All Countries
All Re6plents Individuals$17.1 1.2Billion Billion
j
All Recipients Individuals Corporations$2Z 49 2~13
Percentage of Total Income Paid and TaxVVIthheld by Domestic Withholding Agents, byCountry of Recipient, 1984
Income PaW$17,1 billion15 10 6 0
IM-
16%
11%
11%1
9%1
8%1
6%1
5%
1M
I
Unftd Kingdom
Netherlands Antilles
Netiverlands
Clinada
SWItZedand
West Glarmany
Belgium
France
01tier Countries
Tax WtthheldS1,0 oillion
5 10 Is 20
2%
7%
13%
15%
14%
4%
2%
6%
1E
rose by 34 percent while the rise in tax with-held on payments to Netherlands Antilles resi-dents was 105 percent. This was a reflectionof the greater relative rise in taxable in-come.
Effective Tax Rate by Country
Although the basic U.S. withholding tax rateis 30 percent, the actual rate can differ for avariety of reasons. First, tax treaties allowfor lower tax rates on certain types of pay-ments to certain countries. Second, as men-tioned previously, the Deficit Reduction Act of1984 exempted most types of interest from with-holding tax. Third, income paid to tax exemptor governmental organizations is generally nottaxed. Fourth, most U.S. income paid to for-eign private foundations is taxed at only a 4percent rate. Finally, income that is con-nected with the recipient's U.S. trade or busi-ness is taxed as though it were received by aU.S. individual or organization, and is there-fore not subject to withholding tax (althoughit is subject to the regular rates of U.S. in-come tax on net income and may be additionallyreported on Form 1042S). Because of these fac-tors, the effective U.S. withholding tax rate(tax withheld as a percent of total income)varies by country.
Figure E shows the income paid, tax withheldby U.S. withholding agents, and the effective
withholding tax rates for the twelve countrieshaving the lowest effective tax rates. Taxwithheld by foreign governments and withholdingagents is not included in this table becausethe tax cannot be properly attributed to incomefor a particular year. Only countries re-ceiving at least 100 payments and $1 million ormore of income were considered for ranking.
Figure E.--Ranking of Countries by EffectiveTax Rates, 1984
I/Includes all other countries, regardless ofnumber of payments or amount of income paid.
Newcomers to this list are the United ArabEmirates, Belgium, Norway, Finland andPortugal. Four of the previously listed coun-tries, United Arab Emirates, Saudi Arabia,Portugal and Singapore, are not tax treatycountries that received the benefits of reducedtax withholding rates. A substantial portion(78 percent) of Saudi Arabia's U.S. source in-come ($352 million) was paid to Saudi Govern-ment organizations and therefore not subject tothe withholding tax. More than 50 percent ofU.S. source income paid to Portugal ($29 mil-lion) was paid to private foundations andtherefore was subject only to the 4-percentwithholding rate. Former leader, Antigua, lostits position due to the cancellation of its taxtreaty with the United States. In 1984,Antigua's effective tax rate rose to 2.0 per-cent from 0.2 percent in 1983. (Antigua wasnot included in Figure E because it receivedless than $1 million in payments in 1984.)
66 Foreign Recipients of U.S. Income, 1984
Tax Treaty Countries
In order to avoid double taxation of incomeearned in one country by residents of anothercountry, the United States has negotiated taxtreaties with foreign countries that usuallyreduce the withholding rates in both countries[9]. It is generally believed that any U.S.withholding-tax revenue loss due to the taxtreaty rate reduction will be at least partlyoffset by a decline in the foreign tax creditsagainst U.S. income tax claimed by U.S. indi-viduals and corporations on income from thosecountries enjoying reciprocal benefits.
Since tax treaties generally provide for areduced withholding rate for U.S. individualsand corporations receiving foreign income andfor foreign recipients receiving U.S. income,U.S. individuals and corporations will haveless foreign tax withheld. This, in turn,should lessen their foreign tax credit claimedand consequently raise their U.S. tax liability.
Figure F shows the lower effective tax rateson payments to recipients in treaty countriesas compared to payments to recipients in non-treaty countries. Table 1 lists the tax treatyand nontreaty countries and provides corre-sponding Form 1042S data.
Figure F.--Total Income, Tax Withheld andEffective Tax Rate for Treaty and NontreatyCountries, 1984
[Thousands of dollars]
Countrystatus
Allcountries ...
Treatycountries .....Nontreatycountries .....
Totali ncome
$17,106,632
15,607,203
I , 499,429
Taxwithheld
(2)
,$969,553
822,655
146,897
Effectivetax rate
(3)
5.67%
5.27
9.80
Although residents in tax treaty countriestypically enjoyed lower U.S. withholding taxrates, if the income were paid to a foreignnominee or fiduciary on behalf of a person notentitled to the treaty benefit, the full 30-percent U.S. tax shou
'Id be imposed. Those U.S.
treaty partners that collected the additionalamounts on behalf of the United States arelisted in Table 1, Column 7.
Tax Haven Countries
A tax haven is generally considered to be acountry having tax laws favorable to foreign
individuals and organizations in an attempt toattract these investors. The tax haven countrytypically benefits by collecting certain feesor taxes (at a low rate). Foreign individualsand organizations might not invest in orthrough the. tax haven if taxes comparable tothose of their own country were imposed. Taxhaven countries tend to have the followingcharacteristics:
4 No withholding tax on most paymentsfrom the tax haven country to foreignindividuals and organizations,
0 Low or zero effective income tax ratesfor foreign individuals and organiza-tions operating within the tax havencountry, or performing certain activi-ties, and
0 Secrecy laws. to prevent foreigngovernments from obtaining financialinformation about their own citizensand organizations.
Low or zero withholding tax rates are usuallydesigned to attract foreign individuals andcorporations to invest through.the tax haven,rather than to provide a tax- benefit for theirown residents, although a number of tax haven-countr-ies-have-low-tax-rates--in--an-effort-to-attract real productive investment into thecountry also. However, many tax haven coun-tries do not have tax treaties with the UnitedStates that allow for low or zero withholdingrates on payments to the tax haven. Whiletreaties with non-tax haven countries allow formutually-reduced withholding tax rates, thelost tax revenue on U.S. source income paid toforeigners is, as mentioned above, at leastpartially recovered in income taxes due tolower foreign tax credits claimed by U.S. tax-payers. The lower credits are a result of lessforeign taxes being paid by U.S. taxpayers ontheir foreign source income.
Figure G shows the percentage. of paymentsmade to corpo rations, along with their effec-tive tax rate, for selected tax haven countries[101. Only countries which received more than$1 million of income and 100 payments were con-sidered for Figure G.
As evidence that tax haven countries attractcorporations to them, note that the averagepercentage of payments to corporations in taxhaven countries is greater than the average fornon-tax haven countries. The effective taxrate for all but three tax haven countries isgreater than the total aver'age effective taxrate of 4.7 percent. For these three 'coun-tries, the Cayman Islands, the Netherlands andthe Netherlands Antilles, as well as forLiberia and Luxembourg, at least 50 percent ofincome paid was interest which typically wassubject to a lower tax withholding rate and was
Foreign Recipients of U.S. Income, 1984
affected by the Deficit Reduction Act of 1984.Also, two of the three countries with lowerthan average rates, the Netherlands and theNetherlands Antilles, are countries that bene-fit from reduced treaty rates.
Figure G.--Corporate Recipients in Selected TaxHaven Countries, 1984
Corporations received 68 percent of all in-come paid to foreign persons in 1984, while in-dividuals, and nominees, and fiduciaries (thenext largest recipients of income) receivedonly 7 percent and 9 percent, respectively. In
contrast, the percentage of tax withheld onpayments to individuals and to nominees andfiduciaries was disproportionately large rela-tive to the income received (15 and 12 percent,respectively), while the percentage of taxwithheld on corporations was a comparativelylow 56 percent of all tax withheld.
This latter discrepancy is reflected in theeffective tax rate for corporations of 4.7 per-cent, which may be compared to an effective taxrate of 7.8 percent for all other types of re-cipients combined. The effective tax rate forcorporations remained unchanged from 1983 buthas shown a steady decline after 1979 when therate was 9.2 percent. The decline has been aresult of a steady increase in payments of in-terest, caused by increasing U.S. interestrates, to foreign corporations which are gener-ally subject to lower withholding tax rates.
Nominees and fiduciaries received 9 percentof all income paid in 1984 making them the sec-
67
ond largest recipients of income. This may besomewhat misleading due to unusually largeamounts of income paid to Belgian nominees in1984, discussed earlier. If the payments toBelgian nominees were removed, the income paidto nominees would be halved and would representan amount in proportion to previous years'data. Without nominee payments to Belgium,nominees and fiduciaries would have received5.7 percent of all income paid in 1983 and 4.3percent of all income paid in 1984.
Governmental, international and tax-exemptorganizations received 2 percent of income paidyet accounted for only 0.4 percent of tax with-held because more than 92 percent of incomepaid to government, international and exemptorganizations was exemAt from withholding [11].
The largest average payment ($301,413) wasreceived by foreign governments; 77 percent oftotal payments to foreign governments were madeto the Government of Saudi Arabia. If SaudiArabia were excluded, the average payment toforeign governments would have fallen to$71,253. In contrast, the average payment bycorporations was $193,808, while individualsreceived by far the smallest average payment,$2,138.
On the average,- most recipient types receivedmore interest than any other type of income,the two exceptions being individuals and pri-vate foundations, which received more dividendsthan interest. Partnerships were more likelyto receive rents and royalties, while individ-uals received over 80 percent of all personalservice income [12]. For every recipient type,tax withheld on dividends far exceeded taxwithheld on any other income type. Figure Hshows the percentages of income paid and taxwithheld on various types of income for thedifferent recipient types.
U.S. and Foreign Withholding Taxes on Corpora-tions
Most foreign countries impose withholdingtaxes similar to those of the United States.U.S. individuals and organizations that receiveincome from foreign countries can usually takea tax credit for the foreign taxes withheld onthis income. Although foreign withholding taxrates tend to be similar to the U.S. tax rates,foreign countries, in general, withhold farmore total tax on payments to U.S. corporationsthan the United States withholds on similarpayments to foreign corporations. Althoughsimilar data dealing with the amount of incomepaid are not available, this withholding taxdisparity is probably due to U.S. corporationsreceiving more foreign income than foreign cor-porations receive U.S. income.
While this article is primarily concernedwith 1984 data, 1982 is the most recent yearfor which complete foreign tax credit data also
68
Figure H
Foreign Recipients of U.S. Income, 1984
Percentage of Income Paid and Tax Withheld, by Income and RecipientTypes, 1984
Individuals
Income $1.2 billion
361/6
Tax - $144 million
18% -541/6
FVZ~
5%
Partnerships
Government, Internationaland Exempt Organizations
Corporabons
Income - $11.7 billion
62%
Tax - $545 million
28% 64%
30%
6% 2%
7% 1%
Private Foundations
Income - $16 million
--1a0% 5%
5%Tax - $1 million
90/4 - 82% - 1190/9
Interest Dividends Rents and OtherRoyaftiei
Foreign Recipients of U.S. Income, 1984
are available for comparison purposes. For1982, $3.2 billion of foreign tax was withheldby foreign governments on the combined totalfor interest, dividends, rents, royalties andlicense fees received by U.S. corporationsclaiming a foreign tax credit [13]. Thisamount increased by 23 percent from 1980 andwas almost eight times the amount of U.S. taxwithheld in 1982 ($0.4 billion) on similar pay-ments to foreign corporations. The latter roseby only 13 percent over the 2-year period.
Figure I shows, for 1982, U.S. tax withheldon certain payments to foreign corporations andforeign taxes withheld on similar foreign pay-ments to those U.S. corporations claiming aforeign tax credit, by income type and coun-try. More tax was withheld by foreign coun-
69
tries than by the United States for each of theincome categories (dividends, interest, andrents, royalties and license fees) shown.
Foreign tax withheld on rents, royalties andlicense fees paid to U.S. corporations exceededthe U.S. tax withheld on rents, royalties andlicense fees paid to foreign corporations bymore than $1.1 billion. More than 60 percentof this difference can be accounted for byNorway, which taxed the large oil production-related royalties paid to U.S. corporations.
Foreign tax withheld on dividends paid toU.S. corporations exceeded U.S. tax withheld ondividends paid to foreign corporations by al-most $0.9 billion in 1982. This may have beencaused by the excess volume of U.S. investment
Figure I--U.S. Tax Withheld on Certain Payments to Foreign Corporations, Foreign Tax Withheld on Cer-tain Payments to U.S. Corporations Claiming a Foreign Tax Credit, by Income Type and Country, 1982
[Money amounts are in thousands]
Tax withheld on dividends Tax withheld on interest Tax withheld on rents,royalties and license fees
U.S. Foreign U.S. Foreign U.S. Foreign
Country payments payments Column 1 payments payments Column 4 payments payments Column 7to to U.S. minus to to U.S. minus to to U.S. minus
I/Does not include tax remitted by foreign governments and withholding agents since these amountscannot be allocated to specific years.
2/Does not include tax withheld on income received by U.S. corporations not claiming a foreign taxcredit. The amounts shown are for corporation tax returns having accounting periods which ended be-tween July 1982 and June 1983.
70 Foreign Recipients of U.S. Income, 1984
in foreign corporations over the volume of for-eign investment in U.S. corporations. In 1982,U.S. private direct investment abroad ($221billion) was more than twice foreign privatedirect investment in the'- United States ($102billion) [14].
Another factor contributing to this differ-ence may have been that foreigh'markets in mostdeveloping countries tend to be less stablethan U.S. markets. Thus U.S. corporations re-quire a greater return on their investment inthese countries than foreign corporations ex-pect on their investment in the United States.Because of
'the larger amount of dividends re-
ceived by U.S. corporations,. the foreign taxwithheld on them far exceeded the correspondingamount withheld by the U.S. government on divi-dends paid to foreign corporations. However,the difference in tax withheld on dividends de-clined from $1.1 billion for 1980 to $0.9 bil-lion for 1982 and possibly reflected growinginvestment by foreigners in the United States[15].
di vidends, foreign partnerships were morelikely to receive rents and royalties than anyother type of income.
Foreign governments once again received thelargest average payments, over $300,000 (duemainly to large payments to Saudi Arabia). Incontrast, payments to individuals~were smaller.
Nine countries, all having tax treaties withthe United States, received almost 90 percentof all U.S. source income. The United Kingdomwas the largest recipient, receiving $3.1 bil-lion in 1984. The past leader, the NetherlandsAntilles, received $2.8 billion. Tax havencountries continued to receive mostly interestand to have a greater-than -average percentageof payments to corporations.
DATA SOURCES-AND LIMITATIONS
Payers of most U.S. income to foreign, personsmust withhold tax in accordance. with theInternal Revenue Code. "The Form 1042S, Income
For 1982, tax withheld by foreign govern- Subject to Withholding Under Chapter 3,ments on interest payments to U.S. corporations Internal Revenue Code (now entitled, Foreign.also exceeded U.S. tax withheld on interest Persons' U.S. Source Income Subject to With-payments to foreign corporations. The differ- holding), is filed to report this income anden-ce increased by 26 ~percent. from .1980 ($607 , -the U.S. tax withheld. oft-en the p-a er-has amillion) to, 1982 ($762million). Most of t s financial institution act as the withholdingincrease was accounted for by increases in -for- agent.eign taxes withheld by Brazi I and Mexico.These two countries alone accounted for 67 per-cent of the difference for 1982. Both 'areheavily indebted to-U.S. banks and, therefore,made large interest payments whicti were subjectto foreign tax withholding. For 1982, over 90percent of all tax withheld by Brazil and'Mexico on interest payments to U.S. corpora-tions was withheld on interest paid -to U.S.banks ($461 million).
SUMMARY
High U.S. interest rates, a'.growing U.S.economy and enactment of the Deficit Reduct-ionAct of 1984, which exempted most types of in-terest from tax withholding, all contributed toa 57.pprcent rise in U.S. source income paid toforeign persons in 1984. Interest remained themost common type of income, 'rising to 59 per-cent of total income even though it only ac-counted for 21 percent of tax withheld.
Foreign corporations remained- the biggest re-cipients of U.S. source income, receiving 68percent of all income paid in 1984. Individ-uals received only 7 percent of income yet ac-counted for 15 percent of tax withheld. Thi swas because individuals received more dividendincome (which is rarely tax-exempt) than in--terest or any other income type.
Unlike corporations, which received mainlyinterest, and individuals, who received mainly
The present statistics are tabulated by cal-endar year, based on all Forms 1042S filed for1984. The years indicated in the tables repre-sent the year in which the income was paid andthe U.S. tax withheld, except for U.S. taxwithheld by foreign governments and withholding
.agents. These latter amounts are shown by th'e
year the, tax was remitted to the United -Statesunder treaty agreements. This additional tax'cannot be properly attributed to specific in-come types and years.
Tax withheld amounts and percentages shown inTable 2 and Figures A, B, and D through 1, donot include- tax withheld by foreign governmentsand withholding agents (except for Canada whichremitted its payments during the same calendaryear). Income that is "effectively connected"with a foreign person's U.S. trade or businessis not subject to withholding, and is thereforegenerally not included in these statistics [16,17].
Since all Forms 1042S are included in- thestatistics, 'the data are not subject to sam-pling error. However, the data are subject tononsampling error such as computer data entryerrors and minor taxpayer reporting errors.Forms 1042S with income greater than $500,000were manually ve'rified. A limited computerizedprogram was used to test the data for certain
.basic numerical relationships, including thecalculation of the correct tax withheld.
Foreign Recipients of U.S. Income, 1984 71
EXPLANATION OF SELECTED TERMS
Foreign Person.--For purposes of this arti-cle, a foreign person is an individual whoseresidence (for tax purposes) is not within theUnited States and who is not a U.S. citizen.Corporations and other organizations created ororganized outside the United States are alsoconsidered foreign persons.
Resident (of a jurisdiction other than theUnited States).--A resident is a foreign "per-son" as described above.
Income Effectively Connected With a Trade orBusiness. --Income that is "effectively connec!_-eTw__Oif~ the conduct of a trade or business inthe United States is exempt from withholding.This income is subject to substantially thesame tax rates that apply to U.S. citizens,residents, and corporations. Even if a foreigncorporation has an unincorporated operation inthe United States, a Form 1120F must be filedand appropriate taxes paid for the income ofthis operation. When income is then remittedto the foreign corporation, it is consideredconnected with a U.S. trade or business and notretaxed. In all but rare (and indeterminable)circumstances, these amounts are not includedin these statistics.
Nominee and Fiduciary.--An entity chosen orappointed to accept income for, or act on be-half of, the eventual recipient of the income.Typically a financial institution acts as anominee or fiduciary.
Withholding Agent.--Any person (individual,co-rporation, partnership, estate, or trust) re-quired to withhold tax. Usually the withhold-ing agent is the payer of the income or a "per-son" (usually a financial institution) actingon behalf of the payer. A foreign nominee orfiduciary required to withhold additional taxunder a tax treaty is also a withholdingagent.
NOTES AND REFERENCES
[1] For an explanation of portfolio interestand other types of interest that are ex-empt from tax, see U.S. Department of theTreasury, Internal Revenue Service, Pub-lication 515, Withholding of Tax on Non-resident Aliens and Foreign Corporations,November 1985.
2] Senate Report 99-130, "Crime andSecrecy: The Use of Offshore Banks andCompanies," Report by the Permanent Sub-committee on Investigations of the Com-mittee on Governmental Affairs, U.S.Senate., August 28, 1985, pp. 100, 101and 145.
[31 Eurobond placements are U.S. corporatebonds placed in foreign markets that aredenominated and sold in dollars and alsoyield dollar interest. See Scholl,Russell B., "The International InvestmentPosition of the United States in 1984,11Survey of Current Business, U.S. Depart-ment of Commerce, June TTI~5_, p. 29.
[41 Ibid., P. 31.
5] The term "territories" is used here toidentify jurisdictions associated with(or formerly associated with) the BritishCommonwealth as republics, dominions, in-dependent members and republics, associ-ated states, British crown colonies andindependent nations. "Territories" af-fected were Antigua, Belize, Dominica,Falkland Islands, Montserrat, St. Lucia,St. Chri stop her -Nevis, and St. Vincent.Former "territories" affected areBarbados, Gambia, Grenada, Malawi,Seychelles, Sierra Leone and Zambia.
[61 A new treaty with Barbados became effec-tive on April 1, 1986.
[ 71 Former Belgian territories affected wereBurundi, Rwanda and Zaire. As of 1986,none of these countries has signed a newtreaty agreement with the United States.
[8] Computed using the GNP Implicit PriceDeflator. See Economic Report of the
- rF_President, February 1986, p. 256. ecomputations shown consider the effectsof compounding.
E 91 IRS Publication 515, op.cit., includes adiscussion of specific treaty countriesand their appropriate rates.
[10] See Senate Report 99-130,.pp. 33 and 34,for a list of tax haven countries used inthis figure.
[11] Tax-exempt organizations may be taxed on"unrelated business income". See IRSPublication 515, op.cit.
[1 2] Business services are generally not in-cluded in these data si nce they areassumed to be "effecti vely connected"with a U.S. trade or business and, there-fore, are not subject to withholding tax.
[13] The $3.2 billion of foreign taxes with-held does not include tax withheld onpayments to U.S. corporations that didnot claim a foreign tax credit. No
measurement of the excluded tax withheld
is available. For additional information
72 Foreign Recipients of U.S. Income, 1984
on foreign withholding taxes by incometype and country, see the article en-titled "Corporate Foreign Tax Credit,1982: A Geographic Focus" by Chris R.Carson in this issue of the Statistics ofIncome Bulletin.
[14] Scholl, Russell B., "The InternationalInvestment Position of the United Statesin 1982," Survey of Current Business,U S. Department of Commerce, August 983,p. 44.
[151 Ibid.
[161 Data for foreign corporations with"effectively connected" income derivedfrom U.S. sources are presented inStatistics of Income--1979-1983,Compendium of Studies of InternationalIncome and Taxes.
[171 IRS Publication 515, op.cit., containsadditional information ibout income paidto and tax withheld on foreign persons.
Foreign Recipients of U.S. Income, 1984
Table 1.--Forms 1042S for 1984: Number of Returns, Total Income Paid, Tax Withheld, by Selected Treaty and Non-treaty Countries, 1984
[Money amounts are in thousands of dollars]
73
Income paid Tax withheld
Country or Number By foreigngeographic area of Exempt from Subject to By domestic government
Forms Total withholding withholding Total withholding and1042S agents withholding
Iagents
(1) (2) (3) (4) (5) (6) (7)
Total ............. 780,708 17,106,632 9,368,142 7,738,490 1,057,453 969,553 87v9OO
Table 2.--Forms 1042S for 1984: Number of Returns, Tax Withheld, and Total Income Paid by Income Type, bySelected Recipient Type and Country of Recipient, 1984
[Money amounts are in thousands of dollars]
Country orgeographic area
Number ofForms1042S
(1)
All countries, total ... 780,708Individuals ......... ::1 572,259Corporations .......... 60,256
Columbia .....................Individuals.................Corporations ...............
6646
65,7494,497
8915,50813,109
6813,4112,218,
1222,4301,098
630598487
28374
-200-109
12,2648,717
881887011
1,9021,006
341550472
113,4402,846
130432192101252226
10.310,976232,092
25,4641,023
229427
1,9701,567
861,152
97128
1,5721,376
202,5902,150
114
Taxwithheld
(2)
969,553143,611545,401
1331
2,1851,267
5877,5442,4563,1201,556
732310
9,0721,1174,148
624223281
3,749-1-39-
3,50216,8961,713
11,2831,070
61,037
19,1032,224
13,378131116
32,5271,322
803
3221.,916
126122
1124,05522,09161,763
3,765690
1',415970570222813374335738528
53746541
72
Total
(3)
17,106,6321,223,373
11,678,090
63020
58115,8797,8562,081
60,85614,35330,23024,6356,5539,378
.46,2804,797
22,3883,532
8002,150
19,317771-
17,551826,995
13,300106,701
3,96550
3,46488,3478,280
53,5271,228
76329
20,830.6,808
12,22614,393
1,3579,740
444431
41,814,713
183,2041,218,893
58,9534,563
35,3264,1942,622
7434,1572,6451,116
11,1312,431
7173,7982,468
595
Interest
(4)
10,035,675429,163
7,220,590
Income paid
Dividends Rents androyalties
Personalservice
(5)
5,617,707436,739
3,490,617
5142
5009,4732,8991,591
15,516.1,334
11,91813,615
1,1967,203
14,210867
6,1102,470
3691,9073,857
265--3,263
746,1653,039
56,0843,794
23,393
27,6211,200
17,37486042928
14,8132,477
11,4812,569
772,003
109105
1842,49129,386
690,51248,515
3,52330,827
1.~, 16059631627518122
8,150624674
1,550803355
3210
53,6142,589
1792394054,5949,9397,9522,6961,914
25,3142,425
11,3151,007
396239
15,388-459-
53,1156,010
27,972-155
3372
48,8615,900
26,277354318
12,4741,378
31511,5411,2287,578
2524
715,6 5793,247
349,7019,042
9153,3662,2491,528
2141,714
4311,0882,3841 234
331,7571,255
154
(6)
899,427100,000725,928
804
76397125257
14,4151 7877:886
469121250
2,826690
2,1281313
14,242291
13,815
4,39434
4,3541
66420740025228
1511 /T/
130,40013,910
108,6581,039
43991290
43212261257
22520
.1 /129112
15
(7)
155,629124,695
19,778
799759
354,7904,677
73850836
10317185
44
7,7621,9115,813
1,572763
6133
2,2282,173
193.193
18,87513,6413,327
948113
278268
135109
293288
5217164
23
I
Footnote at end of table.
Foreign Recipients of U.S. Income, 1984
Table 2-Forms 1042S for 1984: Number of Returns, Tax Withheld, and Total Income Paid by Income Type, bySelected Recipient Type and Country of Recipient, 1984--Continued
[Money amounts are in thousands of dollars]
Country orgeographic area
Costa Rica...................Individuals ................Corporations ...............
Table 2.--Forms 1042S for 1984: Number of Returns, Tax Withheld, and Total Income Paid by Income Type, bySelected Recipient Type and Country of Recipient, 1984--Continued
Table 2.--Forms 1042S for 1984: Number of Returns, Tax Withheld, and Total Income Paid by Income Type, bySelected Recipient Type and Country of Recipient, 1984--Continued
[Money amounts are in thousands of dollars]
Country orgeographic area
Saudi Arabia.................Individuals ................Corporations ...............