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Taxation of U.S. government employees working in Japan

Taxation of U.S. government employees working in Japan

U.S. government employees working in Japan need to be aware of the tax allocation of their wages. According to the U.S./Japan tax treaty, income received by government employees is taxed in the country that paid the salary, which for them is the U.S. This income is exempt in the country where services are performed (Japan).

For certain categories of taxpayers, such as residents of Japan, the power to levy income tax on this income lies exclusively within Japan.

However, U.S. citizens and green card holders pay tax on U.S. wages for work performed in Japan, regardless of their residency status in Japan.

Every tax treaty has a so-called "saving clause" for U.S. citizens and green card holders that exempts them from the tax benefits available to others. When a national or resident of Japan receives salary from the U.S. federal or local government, this income is taxed in Japan and exempt in the U.S. But, if this person is also a U.S. citizen or green card holder, they owe tax on this income to both countries because the treaty provisions do not apply to them. To avoid double taxation, they can claim a foreign tax credit in the U.S. that will offset a portion of U.S. tax equal to the tax paid in Japan.

In the IRS technical explanation subparagraph (a) of paragraph 4 contains the traditional saving clause found in U.S. tax treaties:

The Contracting States reserve their rights, except as provided in paragraph 5, to tax their residents and, in the case of the United States, its citizens, as provided in their internal laws, notwithstanding any provisions of the Convention to the contrary. For example, if a resident of Japan performs professional services in the United States and the income from the services is not attributable to a permanent establishment in the United States, Article 7 would by its terms prevent the United States from taxing the income. If, however, the resident of Japan is also a citizen of the United States, the saving clause permits the United States to include the remuneration in the worldwide income of the citizen and subject it to tax under the normal Code rules without regard to Code section 894(a).

In other words, benefits conferred by Article 18 of the treaty are not for U.S. citizens and not for green card holders.

NOTE! Often individuals who are not U.S. citizens or green card holders may be exempt from the saving clause by a special provision in some treaties. However, income of U.S. citizens working for the U.S. federal government is never exempt from U.S. taxation, regardless of any tax treaty or convention.