Nonresident Allen Income and Tax Withheld, 1983 By Chris R. Carson* U. S. source income paid to Netherlands Antilles recipients rose dramatically (33 percent) to more than $2 billion during 1983 the final year before implementation of the ' Deficit Reduction Act of 1984. ( In contrast, U.S. source income paid in 1983 to all foreign recipients was slightly more than $11 billion.) This Act is expected to all but eliminate the use of the Antilles for future Eurobond financing. U.S. interest payments to the Antilles increased by over $500 million to nearly $2 billion during 1983, with most of this in- terest pa i d to financial subsidiaries of the paying corporation. The Deficit Reduction Act, which exempts from tax withholding most interest payments to nonresident aliens on loans made after July 18, 1984, now allows U.S. borrowers to issue debt directly to the lender, without using Antilles finance subsid- iaries as intermediaries to avoid withholding taxes. The nature of new foreign investment in the United States has shifted markedly in recent years from corporate stock to interest-bearing bonds. Comparatively high U.S. interest rates in recent years have helped increase interest's share of U.S. income paid to foreigners from 22 percent in 1978 to 53 percent in 1983. Dividends' share during the same period fell from 64 percent to 38 percent. Interest payments rose at an average compound rate of 43 percent annually during this period (33 percent in real terms) as foreign investors, taking advantage of high U.S. interest rates, loaned large amounts of money, mainly to "blue-chip" U.S. corporations. In comparison, dividend payments increased by an annual average of about 8 percent from 1978 to 1983, approximately keeping pace with inflation. Although total income paid to foreign individuals and organizations increased by 4 percent in 1983, income that was subject to tax withholding dropped by more than 6 pement from the 1982 level, causing a comparable decline i n wi thhol di ng tax revenues. As foreign investors shifted new investments toward interest-bearing bonds that were exempt from withholding (when paid to Netherlands Antilles recipients), the total tax withheld by U.S. withholding agents dropped by 8 percent from 1982 to about $698 million for 1983. BACKGROUND INFORMATION A U.S. individual or organization paying income to a nonresident alien (foreign individual, corporation, or other organiza- tion) reports this income and the U.S. tax withheld on Form 1042S. While the basic tax rate is 30 percent, certain types of income are taxed at different rates. Income paid to countries that have entered into 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 almost all instances. 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 responsibility for with- holding tax belongs to the payer or the representative (usually a financial institu- tion) of the payer rather than the recipient of the income. The basic tax rate on nonresident alien income (30 percent) differs from the graduated tax rates for U.S. individuals and cor- porations because foreign individuals and corporations may receive income from an indefinite number of sources. Since most nonresident aliens are not requi red to file U.S. 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 nonresident alien. *Foreign Returns Analysis Section. Prepared under the direction of James Hobbs, Chief. 39
Transcript
Nonresident Allen Incomeand Tax Withheld, 1983By Chris R. Carson*
U. S. source income paid to NetherlandsAntilles recipients rose dramatically (33percent) to more than $2 billion during 1983the final year before implementation of the'Deficit Reduction Act of 1984. ( In contrast,U.S. source income paid in 1983 to all foreignrecipients was slightly more than $11billion.) This Act is expected to all buteliminate the use of the Antilles for futureEurobond financing.
U.S. interest payments to the Antillesincreased by over $500 million to nearly $2billion during 1983, with most of this in-terest pa
id to financial subsidiaries of the
paying corporation. The Deficit ReductionAct, which exempts from tax withholding mostinterest payments to nonresident aliens onloans made after July 18, 1984, now allowsU.S. borrowers to issue debt directly to thelender, without using Antilles finance subsid-iaries as intermediaries to avoid withholdingtaxes.
The nature of new foreign investment in theUnited States has shifted markedly in recentyears from corporate stock to interest-bearingbonds. Comparatively high U.S. interest ratesin recent years have helped increase interest'sshare of U.S. income paid to foreigners from22 percent in 1978 to 53 percent in 1983.Dividends' share during the same period fellfrom 64 percent to 38 percent. Interestpayments rose at an average compound rate of43 percent annually during this period (33percent in real terms) as foreign investors,taking advantage of high U.S. interest rates,loaned large amounts of money, mainly to"blue-chip" U.S. corporations. In comparison,dividend payments increased by an annualaverage of about 8 percent from 1978 to 1983,approximately keeping pace with inflation.
Although total income paid to foreignindividuals and organizations increased by 4percent in 1983, income that was subject totax withholding dropped by more than 6 pement
from the 1982 level, causing a comparabledecline i n wi thhol di ng tax revenues. Asforeign investors shifted new investmentstoward interest-bearing bonds that were exemptfrom withholding (when paid to NetherlandsAntilles recipients), the total tax withheldby U.S. withholding agents dropped by 8percent from 1982 to about $698 million for1983.
BACKGROUND INFORMATION
A U.S. individual or organization payingincome to a nonresident alien (foreignindividual, corporation, or other organiza-tion) reports this income and the U.S. taxwithheld on Form 1042S. While the basic taxrate is 30 percent, certain types of incomeare taxed at different rates. Income paid tocountries that have entered into tax treatyagreements with the United States is usuallytaxed at lower rates. The tax withheldrepresents final payment of the actual taxliability in almost all instances. Incomeconnected with the recipient's U.S. trade orbusiness is exempt from withholding. TheUnited States taxes this income separately, asthough it were received by a U.S. citizen orcorporation. The responsibility for with-holding tax belongs to the payer or therepresentative (usually a financial institu-tion) of the payer rather than the recipientof the income.
The basic tax rate on nonresident alienincome (30 percent) differs from the graduatedtax rates for U.S. individuals and cor-porations because foreign individuals andcorporations may receive income from anindefinite number of sources. Since mostnonresident aliens are not requi red to fileU.S. tax returns and consolidate all U.S.income, their total income cannot be taxed ingraduated "brackets," as one payer would haveno knowledge of the amount of income otherindividuals and organizations had paid to thesame nonresident alien.
*Foreign Returns Analysis Section. Prepared under the direction ofJames Hobbs, Chief. 39
40 Nonresident Alien Income and Tax, 1983
RECENT LEGISLATION AND ITS EXPECTED IRPACT
The Deficit Reduction Act of 1984 exemptscertain interest payments from withholding.Interest on debt issued after the enactment ofthis legislation (July 18,1984) that is notpaid to a foreign individual, bank, or cor-poration owning 10 percent or more of thevoting shares of the U.S. payer generallyqualifies for this exemption.
The exemption from tax withholding on mostinterest payments is expected to increase U.S.borrowing from foreign countries. SmallerU.S. companies and the U.S. Treasury are nowmore able to issue debt to foreign lenders[1]. Smaller companies do not have to bearthe cost of setting up and maintaining financesubsidiaries. These costs might have offsetany interest savings derived by borrowingoverseas. In addition, blue-chip U.S. corpor-ations that have been borrowing money throughthe Netherlands Antilles will issue- most newdebt directly to lenders. Future statistics,especially after 1984, may show a' sharp reduc-tion 'in: interest payments to the NetherlandsAntilles [2]. Interest payments shouldincrease to major Western European countriesand Japan as new'bor'rowings are likely to come
-mainly from ;these -countries.-
DATA ANALYSIS AND TRENDS
U.S. income payments to foretgners totalled$11.1 'billion -in 1983, increasing by only 4percent, as compared to a 9 percent increasefor -1982. The total increase was, accountedfor by the Netherlands Antilles, which re-ceived $514 million more in 1983 than in 1982.The total for all other countries 'actuallydecreased by about $82 million resulting in anoverall net increa'se of about $432 million.As was mentioned -earl-ier, tax withheld by U.S.withholding agents fell ' by 8 percent to $698million.
The average income payme'nt fell by 3 percentto about $18,2OU for 1983.~ This was due to an-increase of more than 40,000 in the number ofForms 1042S fil'ed. About two-thirds of theseadditional payments were less than $lUU-Foreign government organizations -and corpora-tions received the largest -average payments($159,000 and . $150,000, respectively), whilei ndi vi-dual s 'averaged only $1 600. The averageamount of' tax withheld per payment decreased-more'-noticeably (14-percent) than income.
Type of Income
Interest continued to be the most commontype of income payment. In 1982, 48 percentof income paid represented interest while 43
Figure APercent of Total Income Paid and Percent ofTotal Tax Withheld, by Income Type, 1983
Incorne Pald Tax WlthtoW
100 50 0 0 50 100
53%
38%
Int~
DMdend
6% Rents and0 RoyaMes
ottw
18%
5%
3%
74%
Since 1978, interest!s share of all income-has incrdased 31 percentage points, from-22 to--
53 percent. The 'corresponding share fordividends f0l by '26 percentage points, from.64 to 38 percent.' The following table showsboth total and average annual increases fordividends and interest -in both constant andcurrent dollars [3].
Gross Income Paid
[Thousands of dollarsi
Interest Dividends
1978......... $ 990,949 $2,867,596
1983......... 5-9905,658 4,168,145
Percent increase:
Current:dollars:
Total ............. 496.0% 45.4%Average per year.. 42.9 7.8(Compounded)
Constant dollars:
Total ............. 316.3 1.5Average per year.. 33.0 U.3(Compounded)
I
percent represented dividends. Thi s 5 per- After making allowances for inflation, in-centage point difference increased to 15 in terest rose at a compound rate of 33 percent1983 as 53 percent of all income was interest, per year between 1978 and 1983
"Although
as is shown in Figure A. dividends rose by about 8 percent per year,
Nonresident Allen income and Tax, 1983 41
this increase barely kept pace with the rateof inflation. The real increase in dividendsafter inflation was less than 1 percentannually.
As interest payments are often exempt fromwithholding or taxed at low rates establishedby treaties (see "Tax Treaty Countries"section below), only $122 million of tax waswithheld on interest payments during 1983.This represented only 18 percent of all taxwithheld, although interest represented 53percent of all income. Dividends, which arerarely exempt from withholding, representedonly 38 percent of all income, while taxwithheld on dividends comprised 74 percent ofthe total tax withheld. Figure A shows thepercent of income paid and the percent of taxwithheld for several income types.
The type of income paid varied considerablyby the country of the recipient. As is shownin Figure B, almost all U.S. source incomepaid to the Netherlands Antilles was interestincome. Of the eight countries shown, how-ever, dividends made up a larger percentage ofall income than interest for five countries.The disparity was smaller on average (15 per-centage points) for these five countries, thanfor the three countries (Netherlands Antilles,Japan, and West Germany) that received moreinterest (65 percentage points) than divi-dends. Non-tax-haven countries received agreater portion of rents and royalties (9percent average) than the NetherlandsAntilles, the Netherlands, and Switzerland (2percent average), all of which can be con-sidered tax havens to some degree. (See thediscussion on tax haven countries later inthis article).
Country of Recipient
The same eight countries continued to re-ceive the majority of U.S. source income. Thecountries shown in Figure C received 89 percentof the total income. The Netherlands Antillessurpassed the United Kingdom as the countryreceiving the most U.S. income. Other thanthe Antilles' 1982-83 increase, there were nodramatic changes from 1982 in the amount ofincome paid to the countries shown.
Tax withheld on payments to six of the eightcountries shown in Figure C fell from 1982levels. In particular, tax withheld on pay-ments to the Netherlands Antilles fell by 30percent even though income rose by 33 percentIncreases were registered by Japan (23 percent;and West Germany (19 percent), as income alsorose for these countries.
Effective Tax Rate by Country
Although the basic U.S. withholding tax rateis 30 percent, the actual rate can differ for
a variety of reasons. Tax treaties allow forlower tax rates on certain types of paymentsto certain countries. Income paid to taxexempt or government organizations is gener-ally not taxed. Most U.S. income paid toforeign private foundations is taxed at 4percent. Finally, income that is connectedwith the recipient's U.S. trade or business istaxed as though it were received by a U.S.individual or organization, and is thereforenot subject to withholding tax. Because ofthese factors, the effective U.S. withholdingtax rate (tax withheld as a percent of grossincome) varies by country.
The following table shows the income paid,tax withheld by U.S. withholding agents, andthe effective withholding tax rates for thetwelve countries having the lowest effectivetax rates. Only countries receiving at least100 payments and $1 million or more were con-sidered.
Saudi Arabia...Taiwan.........South Korea....Poland.........Netherlands ....Singapore ......West Germany...Other countriesAll countries.
Grossi ncome
(1)
$ 1,82632,9U3
2,094,680235,469
9,429123,20913,U90
1,3431,608
1,392,09114,245
704,0126,432,096
11,056,001
Taxwi thhel d
(2)
361
9,1741,250
611,525
3465061
61,552652
35,081588,574698,390
Effectivetax rate
(3)
U. 18%0.19
U. 44U. 53
0.651.242.643.743.8U4.424.574.989.156.32
Eight of the twelve countries shown alsowere among those with the lowest effective taxrates for 1982. Egypt, Argentina, SouthKorea, and Singapore were newcomers to thislist. Antigua had the lowest effective ratefor the second year in a row. All but Argen-tina, Taiwan, Saudi Arabia, and Singapore aretax treaty countries receiving the benefit ofreduced withholding rates. Although SaudiArabia is not a treaty country, a substantialportion (42 percent) of its U.S. source income($123 million) was paid to Saudi Governmentorganizations and therefore not subject towithholding. A substantial portion (62 per-
.42 Nonresident Nien Income and Tax, 1983
Rgure'BPercent of Income Paid by Income Type, by Country of 'Recipient,190
Total - $11.056 Billion
Total - $1.392 Billion
Total - $2.095 Billion
Total - $1.215 Billion
.42.7 44.3
Netherlands Canada
Total - $833 Million
Japan.,
interest
Total - $1.987 Billion
Total - $1.042 Billion
Switzerland
Total - $551 Million
Nonresident Allen Income and Tax, 1983 43
Figure CPercent of Gross Income Paid and Percent ofTax Withhold by Domestic Withholding Agents,by Country of Recipient, 1983
IncomePaid
25 20 15 10 5 01 1 1 1 1
Tax VVIthheld
0 5 10 15 20 25
190/0
180/0
13%
11%19%[
11%
cent) of Singapore's income ($14 million) wasalso paid to government organizations andtherefore no tax was withheld on this income.
Although there are several tax havencountries listed, most tax havens do not havetax treaties with the United States allowingfor reduced withholding tax rates. Antiguaand Netherlands Antilles residents receive taxtreaty benefits through extensions of tax.treaties with the United Kingdom and theNetherlands, respectively. The tax treatywith Antigua was terminated as of January 1,1984. Some tax haven countries, including theBahamas and Bermuda have effective withholdingtax rates (26 percent and 21 percent, respec-tively) considerably above the average for allcountries (6 percent).
Tax Treaty Countries
The United States has tax treaties withforeign countries which usually reduce with-holding tax rates in both countries. Themajor reason for such treaties is to avoiddouble taxation of income earned in one of thecountries by residents of the other country.If income is earned in the United States andthe U.S. taxes are only partially creditableagainst tax in the foreign country (because oflimitations) this income may be taxed twice.This is especially true when a foreign
corporation's U.S. subsidiaries are subject toU.S. income taxes and their dividend paymentsare also subject to U.S. withholding tax.Many tax treaties allow for reduced with-holding tax rates (usually 5 percent) fordividends received from foreign subsidiaries.This lower withholding tax reduces overall taxrates on foreign investment and increases thelikelihood of full credit for taxes paid toanother country by the country of residence.
Although lower tax treaty rates may reduceU.S. withholding tax revenue, ihi.s revenueloss is at least partly offset by lowerforeign tax credits for U.S. individuals andcorporations. Since tax treaties usuallyallow for correspondingly lower foreign with-holding tax rates, 1Y. S. individuals andcorporations receiving income from tax treatycountries have less forei-gm tax withheld.This usually reduces their foreign tax creditand increases the amount of income tax paid tothe United States [4)..
Lower tax rates on payments to recipients intreaty countries are evident in the followingtable which shows the effective tax rates forboth treaty and nontrealty countries..
Country Gross Tax Effectivestatus income withheld tax rate
(2) (3)
All countries. $11,056,001 $698,390 6.3%Treatycountries..... 10,232.898 615,968 6.0
Nontreatycountries..... 823,103 82,422 10.0
Although residents in tax treaty countriestypically enjoy lower U.S. withholding taxrates, if the income is paid to a foreignnominee or fiduciary on behalf of a person notentitled to the treaty benefit, the full 30percent U.S. tax sho.uld be collected. SomeU.S. treaty partners collect the additionalamounts on behalf of the United States (seeTable 1 , Column 7).
Tax Haven Countries
A tax haven is generally considered to be acountry having tax laws favorable to foreignindividuals and organizations in an attempt toattract these investors. The tax haven coun-try typically benefits by collecting certainfees or taxes (at a low rate). Foreign indi-viduals and organizations might not invest in
44 Nonresident Alien Income and Tax, 1983
or through the tax haven if taxes comparableto those of their own country were imposed.Tax hav6n countries tend to have the followingcharacteri stics:
0 No withholding tax on most paymentsfrom the tax haven to foreign. indi-viduals and organizations,
0 Low or zero effective income tax ratesfor individuals and organizationswithin the tax haven country, and
0 Secrecy laws to prevent foreigngovernments from obtaining financialinformation about their own citizensand organizations.
Low or zero withholding tax rates usuallyattract foreign individuals and corporationsto invest' through the tax haven, rather thanexisting for the benefit of residents. How-ever, many tax havens do not have tax treatieswith the United States allowing for low orzero withholding rates on payments to the taxhaven. While treaties with non-tax-havensallow for mutual ly-reduced withholding taxrates, this lost revenue is at least partially
-recovered in income taxes due to lower foreigntax credits-cia-imed by U.S. taxpayers. -As theNetherlands Antilles was the major tax haven
country enjoying a zero withholding tax rate(on interest payments) during 1983, its treatystatus was an extension of an existing treatywith the Netherlands, rather than a treatynegotiated with an existing tax haven. As theDeficit Reduction Act of 1984 exempts mostinterest payments from withholding, regardlessof the country to which the income is paid,the Netherlands Antilles lost this interestexemption advantage in mid-1984.
Tax haven countries tend to receive far moreU.S. source income than other countries whencompared to their general level of economicactivity, measured here by Gross NationalProduct (GNP) [5]. Figure D shows the coun-tries having the highest income-to-GNP ratios.The ten highest countries are all tax havensto varying degrees. The Netherlands Antillesactually received more U.S. source income in1982 than it produced in goods and services,as measured by GNP (GNP data were not avail-able for the Netherlands Antilles for 1983).As most U.S. source income is not spent ongoods or services in the Netherlands Antilles,this portion of income does not enter theAntilles' GNP calculation. This is becausemost of the income paid-to the Antilles issimply passed through to Eurobond lenders byfinance subsidiaries of - U.-S. corporateborrowers.
ftgure D.--Gross National Product (GNP), Gross Income, Gross Income as a Percent of GNP, Size of
Average Payment, and Percent of Payments to Corporations, by Selected Country of Recipient, 1983
lWorld Bank, The World Bank Atlas, 1985.2 "Income to GNP ratio" information for the Netherlands Antilles is for 1982 as 1983 GNP information
was not available.3GNP information was not available for these countries or geographic areas.
NOTE: Only countries receiving 100 or more payments and $1 million or more were considered for
this table.
Rank
(1)123456789
103
3
Incomeas a
percent
of GNP
(2)
115.46.22.91.91.51.31.31.21.0
.1.0(I )(3 )
Grossincome
(3)
1,580 35951:86326,50519,03214,91459,5521,826
47,2331,042,4361,392,091
31,4387,961
GNP 1
(4)
1,370,000840,000900,000
1,020,000990,000
4,470,000140,000
4,070,000105,060,000142,420,000
(3
(3
I
Nonresident Allen Income and Tax, 1983
Since GNP data were not available for allcountries, an income-to-GNP average ratiocould not be calculated for all countries.Based on available data, the worldwide ratiowas less than 0.2 percent. All of the taxhavens shown in Figure D had ratios at leastsix times higher than the maximum worldwideaverage, with the Antilles' ratio being nearly750 times the maximum worldwide average. Onlycountries receiving at least 100 payments andtotalling _$l million or more were consideredfor inclusion in Figure D.
Tax haven recipients also tend to receivelarger-than-average payments. Al I but two ofthe countries shown in Figure D were above theaverage of $18,200. Once again, the Nether-lands Antilles led all countries, receivingmore than $936 thousand per payment.
As tax havens are mainly utilized bycorporations, rather than individuals or otherorganizations, payments to these tax havensare more likely to go to corporations than arepayments to non-tax-havens. There is often apredominance of financial corporations in taxhavens, often subsidiaries of U.S. corpora-tions. Figure D shows the percent of U.S.payments made to foreign corporations incertain tax haven countries. Each of thesecountries exceeded the 8.8 percent average forall countries. The Cayman Islands and Antigualed the countries listed with 62 percent ofthe total U.S. payments to these countriesgoing to corporate recipients. These coun-tries also had the highest percentages in1982, although the order was reversed.
Type of Recipient
The vast majority of U.S. source income paidto nonresident aliens (72 percent) was paid toforei?n corporations. Since much of this in-come 58 percent) was exempt from withholding,tax withheld on payments to corporations repre-sented only 54 percent of all tax collected.Although individuals received a much smallershare of all income (6 percent), they had adisproportionately high percentage of all taxwithheld (13 percent) on this income. Nomi-nees also had a disproportionately highpercentage of the total tax withheld OUpercent versus 5 percent for income), becauseonly 7 percent of nominee income was exemptfrom withholding.
Forei gn governments received the largestaverage payments ($159,200), but most of thiswas due to certain large payments to SaudiArabian Government organizations. Excludingpayments to Saudi Arabia, the average incomepaid to foreign governments was $54,000, belowthe average for corporations ($150,OOU).Individuals received the smallest averagepayments ($1,600).
45
Different types of recipients tended toreceive different types of income. IndiVidU-als were less likely to receive interest (3percent of total interest) but more likely toreceive personal service income (89 percent ofall personal service income) than other typesof recipients. As is shown in Figure E, mostcorporate income was in the form of interest(62 percent). More than half the income paidto foreign partnerships was rents and roy-alties. This is more than ten times thepercentage of rents and royalties for allrecipients. Almost all of the income paid tonominees and fiduciaries was dividend income(92 percent). The distribution of income paidto foreign government, international andtax-exempt organizations was close to theoverall distribution of income, but the taxwithheld on such income was almost completelyattributable to dividends.
SUMMARY
U.S. interest payments to the NetherlandsAntilles soared to nearly $2 billion, as theAntilles surpassed the United Kingdom as theforeign country receiving the most U.S. sourceincome in 1983. The Deficit Reduction Act of1984, which exempts from withholding mostinterest payments to nonresident aliens afterJuly 18, 1984, will eliminate the need to gothrough the Antilles to avoid U.S. withholdingtaxes on such interest.
High U.S. interest rates have encouragedshifts.of new foreign investment in the UnitedStates to interest-bearing bonds rather thancorporate stock. Interest represented 53 per-cent of U.S. source income paid to nonresidentaliens compared to 38 percent for dividends.
As in other years, while individuals re-ceived the most payments, corporations re-ceived the most U.S. source income. Forei gngovernments received the largest averagepayments. This was mainly due to certainlarge payments to Saudi Arabian Governmentorgani zati ons.
Tax-haven countries received disproportion-ately high U.S. source income when compared totheir level of economic activity (GrossNational Product). The Netherlands Antillesactually received more income than its GNP in1982 as most of this money simply flowedthrough that country without being spent ongoods or services there. Tax havens alsoreceived larger than average payments, nearly$1 million for the Antilles. The percentageof payments made to foreign corporations wasmore than twice as high for the twelve taxhaven countries shown in Figure D than for allcountries.
46 Nonresident Alien Income and Tax, 1983
'Income Paid by Income Type and Percent of TaxPer6ent-of10; tncome Ty e, by Recipient T pe, 1983Withhe jiy-" .
Govemment, International and-Exemiot Organizations
Individuals were more likely than most re-cipients to receive dividends and personalservice income. Foreign corporations receivedmostly interest income. Most partnershipincome was rents and royalties, even thoughrents and royalties represented only a smallpercentage of income for other recipients.Nominees and fiduciaries received almost ex-clusively dividend income.
DATA SOURCES AND LIMITATONS
Payers of most U.S. income to nonresidentaliens must withhold tax in accordance withChapter 3 of the Internal Revenue Code. TheForm 1042S, Income Subject to WithholdingUnder Chapter 3, Internal Revenue Code, isfiled to report this income and the U.S. taxwithheld. Often the payer has a financialinstitution act as withholding agent.
The present statistics are tabulated bycalendar year, based on all Forms 1042S filedfor 1983. The years indicated in the tablesrepresent the year in which the income waspaid and the U.S. tax withheld, except for theU.S. tax withheld by foreign governments andwithholding agents. These amounts are shownby the year the tax was remitted to the UnitedStates under treaty agreements. Tax withheldamounts and percentages shown in Table 2, texttables, and Figures A, C, and E, do not in-clude tax withheld by foreign governments andwithholding agents (except Canada). Thisadditional tax cannot be properly attributedto specific income types and years. Incomethat is "effectively connected" with a non-resident alien's U.S. trade or business is notsubject to withholding, and is thereforegenerally not included in these statistics.Definitions and other information are avail-able in the IRS Publication 515, Withholdingof Tax on Nonresident Aliens and ForeignCorporations.
As all Forms 1042S are included in thestatistics, the data are not subject tosampling error. However, the data are subjectto nonsampling errors such as computer dataentry errors and minor taxpayer reportingerrors. Forins 1042S with income greater than$500,000 were manually verified. A limitedcomputerized program was used to test the datafor certain basic numerical relationships,including the calculation of the correct taxwithheld. The results of additional testing,to be done at a later date, were not availableat the time this article was prepared. Anysubstantial changes resulting from thistesting will be discussed in the 1984Nonresident Alien Income and Tax Withheldarticle, tentatively scheduled for publicationin the Statistics of Income Bulletin, Fall1986. -
47
More detailed information on nonresidentalien income and tax is available from theStatistics of Income (SOI) Division [6). Thisincludes information for types of income andcountries not discussed in this article.
EXPLANATION OF TERMS
Income Effectively Connected With a Trade orBusiness. -- Income that is "effectivelyconnected" with the conduct of a trade orbusiness in the United States is exempt fromwi thhol di ng. This income is subject to sub-stantially the same tax rates that apply toU.S. citizens, residents, and' corporations.For example, if a foreign corporation has anunincorporated operation in the United States,a Form 1120F must be filed and appropriatetaxes paid for the income of this operation.When income is then remitted to the foreigncorporation, it is considered connected with aU.S. trade or business and not retaxed. Inall but rare (and indeterminable). cimum-stances, these amounts are not included inthese statistics.
Nominee. -- An entity chosen or appointed toaccept income for, or act on behalf of, theeventual recipient of the income. Typically afinancial institution acts as nominee.
Nonresident Alien. -- For purposes of thisarticle, a nonresident alien is defined as anindividual whose residence is not within theUnited States and who is not a U.S. citizen.Corporations and other organizations createdor organized outside the United States areal so considered nonresident aliens. Thephrase "foreign individuals and organizations"is also used in this article to mean non-resident alien.
Withholding Agent. -- Any person (individual,corporation, partnership, estate, or trust)required to withhold tax. Usually the with-holding agent is the payer of the income or a11person" (usually a financial institution)~ act-ing on behalf of the payer. A foreign nomineeor fiduciary required to withhold additionaltax under a tax treaty is also a withholdingagent.
NOTES AND kEFERENCES
[I) Carson, Chris R., "Nonresident Alien In-come and Tax Withheld, 1982," Statisticsof Income Bulletin, Vol. 4, No. 2, FallT9-84, pp. ZI-22.
[2i New borrowing by U.S. corporationsthrough finance subsidiaries in theNetherlands Antilles virtually stopped inthe fourth quarter of 1984. See R. David
48 Nonresident Alien Income and Tax, 1983
Belli and Ralph Kozlow, United States
Department of Commerce News, June 2T,_
1985, p. J.
[31 Computed using the GNP Implicit Price De-flator Economic Report of the President,Februa~ 1985, p. Z36. 1"he computationsshown consider the effects of compounding.
[41 For additional i nformation on foreignwithhol ding taxes, see States, William,01 C
-orporate Foreign Tax Credit, 1980: An
industry Focus," Statistics of Income Bul-
Aetin, Vol. 4, No. 1, Summer 1984, pp.ZT-W, and States, William, "CorporateForeign Tax Credit, 198U: A GeographicFocus," Statistics
-of Income Bulletin,
Vol. 4, No. 3, Winter 1984-85, pp. J/-63.
[5] World Bank, The World Bank Atlas, 1985.
[6) This information may be obtained bywriting to the Statistics of IncomeDivision, D:R:S, Internal RevenueService, Washington, DC 20224.
Nonresident Allen Income and Tax, 1983 49
Table l.--Number of Forms 1042S Filed, Gross Income Paid, Tax Withheld, and Other Items, by Selected Treaty andNontreaty Countries, 1983
Sweden ........................Switzerland ...................Trinidad and Tobago ...........United Kingdom................West Germany ..................Other treaty countries ........
Finland ....... .......... ..........Individual.s'.......'..'...'-~ .........CorporatZZL............ o
Number ofForms1042Sfiled
(1)606,787437,75153,391
1384785
3,8433,300
4412,99411,034
7552,9181,826
1441,687
8094762.2213553
9,1746-,975
8981,149
666252
1, 9411,648
7937819798
286,958214,030
26,104662108413
1,09393514
62551612
71662519
1,3741,188
4858750026
1,7431,551
72552493
1645437918
Taxwithheld
(2)
698,39091,649
374,264
33
1,25093786
5,5081,6233,0731,153
547428
6,81.7640
2,7282,859
551,442
12,2541,114.6,120
10, 635~481
6,2171,655
801614
1,041163
- 626108,84917J4155,858
2,603198
1,572528
.27815
29719783
34628638
46329089
249.21611
322170id
'8
123
208119
50
Total
(3)
11,056,001696,515
7,997,2121 1,826
181,806
235,4694,7801,891
34.0959,094
20-,47011,8585,1823,577
2 6,5052,718
11,84419,032'- 3959,491
104,6269,-545
57,969
1,64937,03111,1073,0557, 1227,9611,004
.5,996215, ~31136,521813,934
31,438-748
27,0452',9511,206
919108952278
13,090i,o65
11, 9132,5791.343
.66385073537
5,011,5722,649
751590116
3,0101,0681,687
Interest
(4)
5,905,657166,606
4.940.945
1,804
1,804231,442
1,7211,3699,490
6118,5652,724
813823
8,097324
4,81653849
205.33,908
-- 1,079-23,29317,250
34715,565
6,974608
5,7043,439
342,999
518,41420,737
468,70024,131
32021,9771,439
289917135
7126
12,117. 19911,904
1,188419371205184
3513113381292204
11,353
641,187
Income paid
Dividends Rents androyalftes
Personalservice
(5)
4,168,145310,916
2,379,523
1512
22,2481,812
1313,330
3,8036,3716,0182,2082,694
16,9082,1686,491
18,053246
9,28651,076
- 4,55319,56817,124
694911582,326
7341,4074,394
9472,916
538,18472,663
241,5435,567
3503,4651,221
6402
234192
1757673
51,144
729246562472
341,982
4741,236
329259
13647136480
(6)
667,05752,733
551,553
29189
1877,233
6895,503
17111350
70874
512339
15,625610
15,0065,538
13965.27718511
1212177
72,53511,63054,020
21336
1181111
1110
6161
6730311210
1,3721147514949
22I
16
(7)
71,65463,764
5,429
788783
12,6012,556
31465411
6868
1212
1,3621,271
12255250
1,1851,184
8,9056,9951,483
50
507474
1818
2222
4544
420410
3737
510436
Nonresident Alien Income and Tax, 1983 51
Table 2.--Number of Forms 1042S Filed, Tax Withheld, and Gross Income Paid by Income Type, by Selected RecipientType and Country of Recipient, 1983--Continued
Table 2.--Number of Forms 1042S Filed, Tax Withheld, and Gross Income Paid by Income Type, by Selected Recipient'Type and Country of Recipient, 1983--Continued
Table 2. -Number of Forms 1042S Filed, Tax Withheld, and Gross Income Paid by Income Type, by Selected RecipientType and Country of Recipient, 1983--Continued
