Podcast | Military Tax Filings

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Read Lynn’s blog article, Tax Considerations for Military Contractors Working Abroad.

Transcript

Andrea
It’s tax season, and today, we’re talking with our international tax expert about SOFAS and military contractors. No, not that kind of sofa. I’m talking about capital S, capital O, capital F, capital A, and the status of forces agreement.

Our guest today is Lynn Eller, a PBMares International Tax Practice partner. With over 30 years of preparing tax returns for U.S. citizens and non-citizen U.S. residents, it’s safe to assume Lynn has probably seen almost everything regarding filing returns. Lynn holds an Advanced Professional Certificate in International Taxation designated by the International Bureau of Fiscal Documentation, furthering her expertise in international tax from a domestic and worldwide perspective. So, Lynn is the perfect person to help us understand tax considerations for private military contractors working abroad.

Hi, Lynn. Thanks for joining us. All right. So I had a little fun with the status of the forces agreement, but why don’t we start defining it?

Lynn Eller
Hi Andrea.

Andrea
SOFA, S-O-F-A, Status of Forces Agreement.

Lynn Eller
So that is an agreement the US government enters with a foreign country where they have military personnel.

Andrea
And it’s specific to the country. There’s not just one status of forces agreement. It’s a status of forces agreement with basically any country in which we have a military contractor.

Lynn Eller
Yeah, it’s very specific—it can be as specific as which base in that country. And they are confidential or top secret. It’s very hard to interpret those. So, if there are any questions related to that, those military contractors will usually rely on their DOD sponsor to get clarification.

Andrea
They’re classified, so you’ve probably never seen one. Can you tell us? Are you allowed to tell us if you have?

Lynn Eller
No. So we can’t really see them. But the main element of all of them is that they do provide a lot of good benefits and privileges related to military personnel and military contractors going overseas. If they are under the SOFA, they don’t have to pay in-country taxes. That’s the biggest tax benefit.

They don’t have to go out to figure out how to do a Japanese income tax return, which could be daunting. So that element is pretty much included in all the SOFAs, but you need to check on it.

Andrea
Regarding the type of person, they are military contractors who operate under a SOFA. Are there any other kinds of people, or is it just for military contractors?

Lynn Eller
You must be under SOFA because the US government is hiring you, the US Military Department of Defense. They are hiring you as a contractor, as a civilian contractor, and they allow you to have those privileges. So it is a privilege, and not everybody can be under SOFA.

The SOFA agreement itself will say who can be under it, whether it’s the military itself or a military contractor. And what about the spouse? What about the kids? So identifying and clarifying whether you fall under the SOFA is your first step to determining if you get that tax benefit.

Andrea
That’s done between the contractor and their sponsor. Is that how they determine that? Or is there another body that says okay?

Lynn Eller
Yes.

The first step is for the DOD sponsor contractor to have those answers. If they don’t, they go to the military lawyers.

Andrea
So, are these SOFAs only for US civilian contractors in a foreign country, or do foreign-country contractors who work in the US also operate under this or have their own version of an SOFA in their country?

Lynn Eller
You’re mostly talking about US bases. Regarding another foreign country with a base in our country?  I don’t know about that. Typically, they will. That’s a good question.

Lynn Eller
I don’t think it’s a base, but they definitely have, like the UN. There are definitely people who come over on VISAS, and they do have privileges.

Andrea
As you said, each country has its own tax laws and certain considerations. What are some things to watch out for? How would you advise or are there things to be aware of?

Lynn Eller
Definitely. If you are sent overseas as a military contractor, you really want to clarify if you’re under the SOFA because that greatly impacts your personal tax filings. If you’re under the SOFA, as I said, you do not have to worry about foreign country taxes, but you still pay and file your annual US 1040.

You likely are paid with a W-2 when you’re under the SOFA, just like you were still in the U.S., so compliance is easy. But if you’re not under the SOFA, you may have to find a tax preparer in that foreign country to get some assistance with income taxes.

Andrea
So what do you have to do to make sure that you are covered? Who are some people who wouldn’t be? Or are there certain levels? I know civilian contractors are in certain grades or levels. Is this level and up under an SOFA, or is this level down, or how do they determine who is operating under one and who’s not?

Lynn Eller
Yeah, so in general, you won’t be under a SOFA. And in general, if your company sends you overseas to work overseas, the general rule is that you’re not under a SOFA. You become assimilated into that country’s laws and compliance. But you will know you’re part of a SOFA because it’s a privilege, and the contractor will let you know. I mean, it’s a selling point.

So you are going to come here, and by the way, your contractors are eligible to be under the SOFA. Now the key is some people will say, am I eligible? Well, it is part, it is very unique. You have to read the contract, and you might need lawyers involved if your initial sponsor is unfamiliar.

Andrea
So if you’re not under a SOFA, do you have to pay the US and that country’s taxes?

Lynn Eller
Yeah, so there are some good tax deals. Another reason to talk to your tax preparer if you go overseas at all is that some good US tax laws help you if you go overseas and you’re not on your cell phone. Yeah, you do have to file in that other country, and you have to file in the US, but you’re not double-taxed? You get a tax credit in the US for that income being taxed in two places. So you won’t be double taxed, but you have to be aware of how your filings and your requirements and the tax rates in that foreign country can impact your overall income.

Andrea
It reminds me. We talked before we had another episode about the Amnesty Program. So maybe the Amnesty Program might kick in if you don’t know what you should do and didn’t file in the U.S. for whatever reason. Is that where that amnesty program might apply? Okay.

Lynn Eller
Yes, definitely. Folks get sent overseas, they start working, they assimilate, they feel like they’re part of that country, and they forget they need to file in the U.S. as U.S. citizens every year, even if they’re filing a U.K. tax return, a French tax return, or a German tax return. That’s a very common mistake, and the amnesty program will help you get caught up with minimal penalties.

Andrea
Lynn and I spent some time talking about the Amnesty Program in another episode. Definitely make sure you catch that, too. I am just very curious about how people find out about the DOD sponsor. Does it expire after a certain amount of time? Do you have to renew this sort of work under a SOFA? Or is it that as long as you’re there and you’re under a SOFA, then you get to keep and stay under the SOFA? It’s kind of a funny thing to say.

Lynn Eller
Right. We cannot answer those questions, in all honesty. It is difficult. We’ve advised clients to talk to military attorneys to clarify how long this will last if this person can get under it. We have tried to get a copy of it; we just thought we could read this and see. So the moral of that story is you need to get clarification from the DOD, the sponsor that hired you, and the attorneys on the base.

Andrea
Okay, so let me see if I can summarize what we discussed. Military contractors who work overseas are subject to foreign income taxes unless they work under a SOFA. Is that correct? Okay, so that SOFA is a status of forces agreement. And if you get approved or like you said, it’s a privilege, it could give you significant tax benefits and some protections, legal protections. It’s a significant advantage, almost like a military contractor’s perk. And often, when you’re a military contractor applying for work, they’ll ask, which is a selling point for going over there.

But it’s pretty complicated, and the best thing to do is talk with your sponsor and then talk with a tax advisor. Did I get all that? Okay. So, you know, shameless plug. People like Lynn know how to do this stuff.

Lynn Eller
Yeah, that’s pretty good, Andrea. I think you need to come to work with us. You need to come to work with me on this. That was a good summary.

Andrea
That is definitely a good point to bring up. You are pretty well versed in working in this area. Even though they didn’t let you see the SOFA, you know the ins and outs of it. So is there anything you’d like to add?

Lynn Eller
We just enjoy working in this space. I work with many people going overseas and coming from overseas to the US, and it’s always interesting to meet these folks.

Andrea
Well, that’s great. Lynn has an article on our website blog, AdvisoryWatch. Read more about Tax Considerations for Military Contractors Working Abroad.