German tax authorities have demanded a Ramstein-based US airman pay income tax because he is married to a German citizen.
According to US military media reports, there are currently 387 similar cases against US Defence personnel residing in the Kaiserslautern area in southwest Germany – which is home to a significant number of American troops.
Members of US forces already pay income tax to the United States, and if the cases were to go ahead in Germany, this could result in a potential double-taxation risk for those living in the country.
International treaty issue
Under Nato’s Status of Forces Agreement (Sofa), members of the US military are generally exempt from paying foreign income tax.
But the German tax office informed the US airman, sergeant Matthew Larsen, in December 2019, that his Sofa exemption was no longer recognised.
“It seems that the German authorities are acting as ‘bullies’ and being discriminators,” Carl Mir, managing director at Brussels-based Mir Taxes, told International Adviser.
“The tax treaty strongly states that all US military and civilian contractors are exempted, per Sofa.
“The proposed protocol provides that the dispute resolution procedures under its mutual agreement article (article 25) take precedence over the corresponding provisions of any other agreement, to which the United States and Germany are parties, in the event of a question as to the interpretation or application of the proposed protocol, and particularly in determining whether a taxation measure is within the scope of the proposed protocol,” he added.
Payment ‘bully’
Mir, who works with US clients and specialises in US tax, said that this is never the case for spouses of American citizens, but Germany is trying to impose its regime on American troops.
“Their interpretation is essentially trying to bully US personnel into paying double taxes in two countries. The German spouses would be subject to the German tax and not to US taxes, unless they take up US citizenship or green-card status.
“Most of my US clients married to non-US persons file as married separately because their spouse would not be subject to reporting their income and would not possess a US tax ID number.
“The German authorities may or may not be acting as a federal entity toward their actions, or perhaps as individual offices dictating their own interpretations into bullying foreigners into paying more taxes than necessary,” Mir added.
He believes that the United States should intervene in the situation and that Germany should reconsider its stance on double taxation.
Mir continued: “The US military and government leadership need to take a more active role in criticising and negotiating these actions. It is not fair that these military personnel, on a low-income, enter into expensive legal expenses.
“The federal German authorities should also take a hand and stop this action.”
Taxation payback?
Many American citizens living abroad, however, took to social media to criticise the US’ “hypocrisy”, since the country is one of two in the whole world which has a taxation system based on citizenship, instead of residency.
The Foreign Account Tax Compliance Act (Fatca) requires US expats to submit their tax returns every year, and if needed, pay taxes on foreign income, as well as binding foreign financial institutions into sharing information related to their US clients.
But according to Mir, Fatca has no role to play in this case.
“It is not so much that Fatca is in effect, because this does not have anything to do with Fatca,” he said.
“This has to do with treaties between the nations and the armed forces personnel. Germany must be made to stop the harassment with American personnel protected under two other treaties: Sofa and the tax treaty.”
Reporting tactics
Germany isn’t the only nation trying to bend international tax agreements either, Mir added.
“Other countries have also tried or succeeded in other ways.
“For example, they may require you to include all global income, even though they will not tax you directly on that income, but only on the country of residence income.
“However, by including all income, they push the taxpayer to a higher tax bracket so, in essence, double taxation.
“However, this occurs more often with US expat civilians living long-term in the foreign country,” he said.
