Tax Type
Withholding Taxes
Description
Foreign source income.
Topic
Persons Subject to Tax
Taxable Income
Date Issued
10-28-2002
October 28, 2002
Re: Request for Ruling: Withholding Tax
Dear *********************:
This will reply to your letter requesting a ruling concerning whether Virginia wages reported on the Wage and Tax Statements (W-2 form) should include foreign source income. I apologize for the delay in responding to your letter.
FACTS
Your agency provides payroll services for several federal agencies with federal employees whose duty stations are inside and outside the United States. Certain federal employees, who are Virginia residents, are stationed in foreign countries. They are paid a post differential, which is additional compensation, usually a specified percentage of their base salary. You are requesting a ruling on whether this post differential is considered, for Virginia tax purposes, to be foreign source income that is eligible to be claimed as a subtraction on the Virginia individual income tax return. Additionally, you want clarification on whether the Virginia wages reported on the W-2 form should exclude the post differential as foreign source income.
RULING
Foreign Source Income
Code of Virginia § 58.1-322(C)(7) provides that to the extent included in federal adjusted gross income, foreign source income, as defined in Code of Virginia § 58.1-302, may be subtracted on the Virginia individual income tax return. Foreign source income, pursuant to Code of Virginia § 58.1-302, means:
1. Interest, other than interest derived from sources within the United States;
2. Dividends, other than dividends derived from sources within the United
States;
3. Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the use of or the privilege of using without the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties;
4. Gains, profits, or other income from the sale of intangible or real property located without the United States; and
5. The amount of an individual's share of net income attributable to a foreign source qualified business unit of an electing small business corporation (S corporation). For purposes of this subsection, qualified business unit shall be defined by § 989 of the Internal Revenue Code, and the source of such income shall be determined in accordance with §§ 861, 862 and 987 of the Internal Revenue Code.
- In determining the source of "foreign source income," the provisions of §§ 861, 862, and 863 of the Internal Revenue Code shall be applied except as specifically provided in subsection 5 above.
As provided in 23 Virginia Administrative Code (VAC) 10-110-30, only the types of income specifically enumerated above would be included in the definition of "foreign source income" for Virginia tax purposes. It has been the department's longstanding policy that compensation for the performance of labor or personal services does not qualify as foreign source income for Virginia tax purposes, regardless of its source. This position has been held in several public documents published by the department. See Public Documents (P.D.) 97-12 (1/17/97) 99-128 (5/28/99), and 02-13 (2/21/02). In your letter, you reference P.D. 85-150 (7/11/85). This public document clearly indicates that the treatment of foreign source income as wages for federal and Virginia tax purposes are different. It concludes the wages and director fees received for consulting services performed for foreign corporations do not qualify as foreign source income for Virginia purposes. Similarly, compensation from a post differential would not be considered foreign source income for Virginia tax purposes.
Withholding Tax
Code of Virginia § 58.1-460, provides that:
"Wages" means wages as defined under § 3401 (a) of the Internal Revenue Code, as well as any other amounts from which federal income tax is withheld under the provisions of §§ 3402 and 3405 of the Internal Revenue Code and also includes all prizes in excess of $5,001 paid by the State Lottery Department; however, such term shall not include amounts paid pursuant to individual retirement plans and simplified employee pension plans as defined in §§ 7701 (a) (37) and 408 (c) of the Internal Revenue Code and shall not include remuneration paid for acting in or service as a member of the crew of a (i) motion picture feature film, (ii) television series, or commercial, or (iii) promotional film filmed totally or partially in the Commonwealth by an individual or corporation which conducts business in the Commonwealth for less than ninety days of the tax year and when such film, series or commercial is processed, edited and marketed outside the Commonwealth. every such individual or corporation shall, immediately subsequent to the filming of such portion of the film, series or commercial filmed in the Commonwealth, file with the Commissioner on forms furnished the Department, a list of the names and social security account numbers of each actor or crew member who is a resident of the Commonwealth and is compensated by such individual nor corporation.
Virginia's definition of wages includes amounts traditionally considered employee wages and for which a federal W-2 form would be prepared. While this definition specifically excludes certain types of income from the definition of Virginia wages, it does not exclude post differentials. As a result, a post differential paid to a Virginia resident stationed in a foreign country would be considered wages for Virginia purposes.
Based on the information provided, compensation for a post differential would not be eligible for the foreign source income subtraction pursuant to Code of Virginia § 58.1-322(C)(7). Additionally, a post differential would be reported as Virginia wages on the W-2 form.
Copies of the Code of Virginia, regulations and public documents cited are available online in the Tax Policy Library section of the Department of Taxation's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** in the Office of Policy and Administration, Policy Development, at *****.
-
-
-
-
-
-
-
- Sincerely,
Kenneth W. Thorson
Tax Commissioner
- Sincerely,
-
-
-
-
-
-
OTP/40537N
Rulings of the Tax Commissioner