By Lynn M. Eller, CPA, APCIT, PFS and Miriam Song, J.D, LLM
Taxation for military contractors working on foreign military bases can be complicated.
In this article from the PBMares tax team, you’ll find several key considerations for navigating tax treatment and implications.
Understanding Status of Forces Agreement (SOFA) Exemptions
When private government contractors send employees overseas, the contractors and the military personnel can be subject to taxation in the foreign country. However, exemptions exist when those contractors are working in jurisdictions with a Status of Forces Agreement (SOFA).
SOFA exemptions are complex and depend on several factors, including:
- Specific terms of the SOFA
- Tax laws of the contractor’s home country
- Tax laws of the host country
- The contractor’s status (i.e., employee vs. independent contractor)
It’s important to note that, even in situations where military contractors do not have to pay income tax, contractors may be responsible for:
- Paying other taxes like sales or property tax
- Reporting requirements like filing tax returns in their home country and/or the host country
The Importance of Consulting with an Expert
SOFA agreements can vary widely; tax laws and agreements change; and international tax issues are highly complex.
As such, military contractors working abroad are best served when they seek professional advice from international tax experts who can:
- design deployments using tax-efficient strategies;
- assess if income is taxable according to local law;
- limit your risk of being double taxed;
- help contractors determine what the tax obligation is and construct a plan to meet those obligations; and
- prepare accurate and proper tax returns to support the exemption claim of the SOFA.
By gaining a thorough understanding of the rules and laws of the host country as well as the intricate details of the SOFA agreement, military contractors can ensure compliance and take advantage of any civil and criminal protections afforded to the contractor under the SOFA agreement.
Navigating the tax requirements for military contractors involves careful examination of the specific circumstances, relevant agreements, and applicable tax laws.
Contact the PBMares International Tax Team for guidance with complying with international tax laws and optimizing tax implications.