May 2, 2018
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2013. I apologize for the delay in responding to your appeal.
FACTS
The Department received information from the Internal Revenue Service (IRS) that the Taxpayer may have income subject to Virginia income tax. Because no return was on file, the Department requested additional information. Upon review of the documentation sent by the Taxpayer, the Department issued an assessment. The Taxpayer appeals, contending she was not liable for Virginia income tax based on the Convention between the Government Of The United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Convention”).
DETERMINATION
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with FAGI. Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.
The Taxpayer contends that because she was exempt from federal income tax under the Convention, she had no FAGI. Thus, there was no Virginia income tax due.
Article 2 of the Convention states in pertinent part, “The existing taxes to which the Convention shall apply are ... in the United States, the Federal income taxes imposed by the Internal Revenue Code ....” Pursuant to this article, the Convention applies only to certain taxes imposed at the federal level by the United States and Japanese national governments. Taxes imposed by state and local governments, including Virginia, are unaffected by the Convention. See Public Document (P.D.) 96228 (9/9/1996), P.D. 07-39 (4/20/2007) and P.D. 13-232 (12/18/2013).
Under Article 18 of the Convention, salaries paid by a contracting state, political subdivision or local authority for services rendered to that contracting state, political subdivision or local authority for functions of a governmental nature are taxable only by the contracting state. The Taxpayer was a Japanese resident working in Virginia for the ***** (the “Cooperation”), an institution wholly owned by the Japanese government. The Cooperation was considered to be part of the Japanese government. Because she was essentially employed by the Japanese government, the Taxpayer was rendering services of a governmental nature to a contracting state and would have been exempt from federal income tax. Under these circumstances, the Taxpayer would not have had FAGI and, therefore, no starting point on which to compute a Virginia income tax liability. Accordingly, the assessment of additional tax for the taxable year ended December 31, 2013 is abated.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1358.B