Reimbursement of taxes to staff

(1)     At the 12th session (April 1952: CO-ORDINATION/R.124) UN undertook to compile and circulate a summary of the income tax position of staff members of various agencies in different countries.

It was also asked to make a comparative study of host country agreements, with a view to developing a standard text covering, inter alia, tax questions. CCAQ recorded its opinion that organizations making tax reimbursements should calculate the amount only on the basis of income received from the organizations. At the 13th session (September 1952: CO-ORDINATION/R.132) the Committee took note of the UN study.

(2)     At the 24th session (March 1963: CO-ORDINATION/R.430, para. 91(d)) CCAQ noted that UN, but no other organization, reimbursed national taxes on the grant paid in case of death (see CO-ORDINATION/CC.24/19). Most organizations thought there should be no tax reimbursement unless it was clearly established that the grant was regarded by the law of the country concerned as income of the deceased official.

(3)     At the 30th session (March 1969: CO-ORDINATION/R.733, para. 91) WHO informed CCAQ that a former staff member was claiming reimbursement of income (capital gains) tax on the taxable portion of a full lump-sum withdrawal settlement by JSPF. Organizations recognized the potential repercussions of the question and agreed that information on tax cases should be exchanged on a systematic basis.

(4)     At the 31st session (March 1970: CO-ORDINATION/R.799, paras. 37-43) CCAQ noted that UN had, despite the views of a CCAQ working party which had considered the matter in January 1970, revised the basis on which it reimbursed US income tax levied on its staff. It would henceforth reimburse the difference between the total tax paid with UN salary included in total income, and the tax payable if UN earnings had been excluded (instead of reimbursing the tax which would have been payable if the UN income had been the only income). The latter basis had been agreed by CCAQ in 1952, and the specialized agencies felt that in unilaterally departing from that agreement the UN had not given sufficient attention to the problems which might arise with staff of other than US nationality in duty stations outside the USA. CCAQ recognized that in the interests of equity all organizations would now have to consider whether to change their reimbursement procedures to those adopted by the UN. In this context it was agreed to study the possible application of the procedure to all aspects of the salary and allowances system, including pensions, particularly as regards cash withdrawals.

(5)     At the 32nd session (August 1970: CO-ORDINATION/R.828, paras. 32 and 33) UN agreed to act as co-ordinator for the organizations having headquarters in Switzerland in any discussions with the Swiss authorities concerning the levying of taxes on staff members of the organizations.

(6)     At the 34th session (October 1971: CO-ORDINATION/R.903, paras. 32-34) CCAQ noted that UNDP, FAO, UNESCO, WHO, WMO, IAEA and GATT had decided to apply the revised UN basis for reimbursement (see para. 4 above). ILO and ITU continued to feel that there were still differences of practice among the organizations and that no true common system had emerged. ICAO reserved its position. CCAQ took note of the UN intention to introduce a change in the procedure by which staff reported taxable UN income to the US tax authorities; it was intended to eliminate the problem of tax on tax reimbursements.

(7)     At the 36th session (September 1972: CO-ORDINATION/R.960, paras. 45-47) FAO recalled that certain exemptions applied to US nationals if they had been outside the USA for 510 days during 18 consecutive months (the "physical presence" rule), or if they were bona fide residents of a foreign country for an interrupted period which included an entire tax year. In some cases staff members who visited the USA on leave or duty lost their right to exemption under the "physical presence" rule and had to rely on being regarded as bona fide residents of the country of their duty station. In 1970, it was decided in the US Court of Claims, on appeal by two FAO staff members serving in Argentina, that although they paid no tax in Argentina, they were exempt from United States income tax under the bona fide residence provisions. Notwithstanding this judgement, the IRS had maintained that, where an individual was exempt from local income taxes as an employee of an international organization, bona fide residence for the purposes of US income tax did not exist. FAO considered that the matter could affect all organizations. CCAQ agreed that the UN should pursue this question with the US authorities. Organizations were subsequently informed that the UN intervention had been successful and that the IRS had reversed its position.

(8)     At the same session (CO-ORDINATION/R.960, paras. 48 and 49) WHO informed CCAQ that it had received a claim from a staff member for reimbursement of the tax paid on the difference between the amount of the full lump-sum JSPF withdrawal benefit and the amount of the staff member's own contributions. WHO understood that UN practice allowed reimbursement in such cases. Since tax exemption under the Convention on Privileges and Immunities contained no provision for exemption from tax on retirement and analogous benefits, and WHO's statutory regulations limited tax reimbursement to WHO emoluments, WHO considered that it had no authority for reimbursements of tax except on such WHO emoluments. UN confirmed to CCAQ that it would reimburse tax paid on the difference between the full lump sum and the staff member's own contributions. In the ensuing discussion it was revealed that this practice had started during the time when pensions were based on net salary. As no other organization applied such a practice, CCAQ requested the UN to reconsider its practice.

(9)     UN having decided to maintain this practice, the Committee held a further exchange of views at the 46th session (March 1977: CO-ORDINATION/R. 1211, paras. 62-64) on the possibility of reaching a common position. It was agreed that this subject should be pursued at an informal inter-organization meeting to be held later in the year. Depending on the results, the subject might again be discussed by CCAQ.

(10)     CCAQ took up the question again at its 48th session (March 1978). It was noted that for the specialized agencies to be in a position to reimburse tax on the taxable portion of lump-sum benefits, a legal interpretation and determination would be needed of the scope of article VI, section 19(b) of the Convention on the Privileges and Immunities of the specialized agencies. The Committee requested UN to provide such a determination (CO-ORDINATION/R.1279, paras. 43 and 44). Further developments relating to this question, including the suspension of the UN practice, were reported at CCAQ's 49th session (September 1978: CO-ORDINATION/R.1307, paras. 45 and 46). At the 50th session (March 1979) the Committee was informed that following a judgement by the UN Administrative Tribunal the Secretary-General had authorized the resumption of the reimbursements. This, it was noted, restored the former inequality of treatment of staff (ACC/1979/R.11, para. 50).

(11)     At the 50th session (March 1979) UN agreed to study on behalf of CCAQ (a) the possibility of making a common approach to the US Government to secure reimbursement of the administrative cost of handling claims for tax reimbursement, and (b) the question of the salary to be declared for the purposes of US income tax (ACC/1979/R.11, paras. 51 and 52). These matters were further discussed, as were recent developments relevant to the taxation of lump-sum pension benefits, at CCAQ'S 51st session (September 1979: ACC/1979/R.69, paras. 29 and 30).

(12)     At the 52nd session (January-February-March 1980: ACC/1980/4, paras. 68-72, and ACC/1980/10, paras. 32-34) CCAQ(PER) considered a proposal that all organizations should adopt the pre-1980 UN practice of reimbursing taxes levied on lump-sum withdrawal payments from the JSPF, on the basis of information about the practice of Member States with regard to such taxation. For various legal, administrative and budgetary reasons, CCAQ agreed that it could not support the proposal.

(13)     In its resolution 34/165 the General Assembly decided that no staff member joining the UN secretariat on or after 1 January 1980 would be entitled to reimbursement of taxes paid on lump-sum pension payments from UNJSPF; this decision was not to affect staff members serving with UN prior to January 1980. The resolution was noted at the 52nd session (March 1980) of CCAQ(FB), together with action taken by CCAQ(PER) in relation to ACC decision 1979/25, which had called for a review of the different policies and practices of the organizations regarding the reimbursement of taxes on full or partial lump-sum payments from JSPF. CCAQ(PER) having found that the majority of its members were not able to support a proposal that the other organizations should adopt the present UN practice under the General Assembly resolution, CCAQ(FB) concluded that it need no longer pursue the subject (ACC/1980/16, para. 36).

(14)     At the same session the Committee agreed that it could not at the time profitably pursue a recommendation from the Panel of External Auditors concerning the repayment of administrative costs relating to tax reimbursements (ACC/1980/16, para. 37).

(15)     Also at the 52nd session CCAQ agreed that problems regarding the sharing of tax reimbursements between organizations following transfer or secondment of staff were too rare to warrant a special provision in the Inter-Agency Transfer Agreement, and that the releasing and receiving organizations should arrange directly for a settlement (ACC/1980/16, para. 42).

(16)     In its decision 1981/19, taken at its third regular session of 1981, ACC noted an approach made by a Member State (the USA) to several organizations with a view to amending the terms of its existing agreements with them on the reimbursement of income taxes levied on its nationals serving on their staff, and asked CCAQ(FB) for its recommendations for a common position. At the 56th session (March 1981) the Committee agreed that this matter was of interest to all organizations of the system and a subject for serious concern, since the change envisaged raised fundamental questions about the equality of treatment of officials of different nationalities and the financial responsibilities of Members of the organizations. The Committee prepared a memorandum (annex IV to ACC/1982/6) which explained the issues in detail and a statement (annex V to the same document), which it recommended for transmission by the Secretary-General of UN, as Chairman of ACC, to the Secretary of State of the USA. CCAQ also recommended that ACC should authorize its Chairman to constitute a team of senior participants to conduct discussions with the US Government if necessary or appropriate (this authority was subsequently given in ACC decision 1982/12). Organizations were expected to be guided by ACC's action in related future correspondence with the US Government (ACC/1982/6, paras. 30-33).

(17)     At a special session held in June 1982 the Committee reviewed a revision of the draft statement drawn up at the previous session, and the text of a letter by which it would be transmitted, both of which had been prepared by UN. It was agreed that the statement should be strengthened in line with the CCAQ text (ACC/1982/17, paras. 7-9). The statement was sent, in accordance with the authorization in ACC decision 1982/12, on 21 June 1982.

(18)     Given the negative reaction of the US Government, it was agreed at the 57th session (September 1982) that the Chairman should constitute the discussion team as authorized by ACC and suggest a meeting with the US authorities. It was regarded as important that no organization should enter into a new tax-reimbursement agreement with the US Government until, following this meeting, ACC had agreed on a position (ACC/1982/25, paras. 37 and 40).

(19)     In its decision 1982/33 ACC strongly reiterated the position expressed in decision 1982/12 and asked the discussion team to report on the results of its negotiations with the US Government. At the 58th session (March 1983) CCAQ was informed of the results of a meeting held on 12 November 1982, and of those of a preliminary meeting, where the organizations had been represented by legal officers, held on 12 October 1982. It appeared from the report made to the Committee that agreement with the Government might be reached without great difficulty on a number of points, but that differences subsisted on others, notably the reimbursement of state and local taxes, the treatment of institutional income as "last income", the reimbursement of tax paid by staff financed by voluntary contributions and the reimbursement of administrative costs incurred in the organizations in connection with tax reimbursements.

(20)     In the period preceding the meeting of 12 November 1982 the US Government had offered to contract provisional tax-reimbursement agreements with interested organizations. Its view was that the existing agreements would expire at the end of 1982, although they would continue in force in 1983 as regards 1982 income. The Government would require, for the reimbursement of taxes for 1982 or previous years, certain types of data on the staff concerned. Organizations had responded by pointing to the position taken in the discussions under way, and the problems involved in agreeing to changes while the discussions were in course.

(21)     After discussion of several related questions, the Committee agreed at the 58th session that the discussion team, composed of representatives of UN, UNDP, FAO, UNESCO, WHO, ICAO and WIPO, should continue its efforts and report back at the next session; that executive heads might wish to apprise their governing bodies of developments, bearing in mind the position of ACC and in particular the need to maintain a common front; and that the possibility of requesting an advisory opinion from ICJ should be kept in mind (ACC/1983/11, paras. 25-38).

(22)     At the 59th session (September 1983) CCAQ was informed that the discussion team had met since the last session and had agreed on a draft model tax-reimbursement agreement for communication to the US Government. The latter had indicated its willingness to continue discussions, which might be resumed shortly (ACC/1983/21, paras. 32-37).

(23)     At the 60th session (March 1984) the Committee considered a written reaction from the US Government to the draft model tax-reimbursement agreement, which indicated that there were differences which might be difficult to reconcile between its approach and that of the organizations, but suggested that the resolution of the question was worthy of further efforts, if only to settle matters concerning organizations and persons not covered by the overseas income exclusion, and with a view to substituting tax-reimbursement agreements for tax-equalization funds. The Government's letter also suggested that a recent tax-reimbursement agreement with OAS contained elements which might provide workable solutions for organizations of the UN system. The Committee studied this agreement, noting that it met many points of concern to the organizations but also contained certain unsatisfactory features, notably a requirement to apply a "first-income" rule in reimbursing tax on institutional income. The OAS agreement could thus not be regarded as a fully adequate model. The Committee also disagreed with the Government's position on tax-equalization funds; but the abolition of these would in any case require decisions by the governing bodies of the organizations concerned. The views of the Committee on these matters were to be made known to the Government in the reply to be sent by the Chairman of the discussion team (ACC/1984/10, paras. 27-36).

(24)     At the 61st session (September 1984) the Committee reviewed correspondence since the last session between the Chairman of the discussion team and the US Government; the latter left open the possibility of further discussions and suggested that they be based on a provisional tax-reimbursement agreement signed by ILO. CCAQ studied this agreement, recognizing that in several respects the circumstances of ILO had been different from those of other organizations. The Chairman of the discussion team was requested to inform the Government that the team was ready to pursue discussions and looked forward to receiving a detailed reply to proposals agreed by it (see para. 22 above). The team's position would continue to be based on the principles in the ACC statement (see para. 17 above). Pending conclusion of the discussions, it was agreed that individual organizations should take such measures as seemed appropriate in their circumstances to deal with financial questions related to income tax, while refraining from signing new tax-reimbursement agreements (ACC/1984/13, paras. 43-47).

(25)     At the 62nd session (March 1985) CCAQ took note of correspondence between the Chairman of the discussion team and the US Government, concerning a possible resumption of their discussions, and between the Chairman of ICSC and the Chairman of the discussion team, retracing the history of past discussions and the events surrounding them. Considering that it would be desirable for the organizations to indicate their willingness to continue their collective dialogue with the US Government, the Committee also discussed elements that might be included in a further communication to this effect to be sent by the Chairman of the discussion team; such a letter would be drafted by the secretariat for his signature. Finally, the Committee held an exchange of information on the position with regard to taxation by other countries of staff income derived from the organizations and requested the organizations to keep it informed, through its secretariat, of any significant developments in this area (ACC/1985/7, paras. 40-43).

(26)     At the 63rd session (September 1985) it was noted that no reply had been received to the letter sent to the United States authorities, but that the latter had maintained their position during informal contacts, notably as regards the "first income" principle. The Executive Council of one organization had adopted a resolution requesting its executive head to enter into bilateral negotiations with a view to concluding tax-reimbursement agreements with the US and other Member States as necessary. The Committee reiterated its desire to be kept informed of developments through its secretariat (ACC/1985/17, paras. 33 and 34).

(27)     Further exchanges of information on developments relating to arrangements for the reimbursement of US income tax were held at the 64th (March 1986) and 65th (September 1986) sessions, with the participation of OAS as an observer (ACC/1986/4, para. 24; ACC/1986/12, para. 39).

(28)     At the 66th session (March-April 1987) the Committee took note of a new tax-reimbursement agreement negotiated by WMO with the US Government. It was also given information on the operation of tax-reimbursement arrangements pursuant to the agreement between OAS and that Government (ACC/1987/6, para. 16). A further exchange of information took place at the 67th session (September 1987) (ACC/1987/12, para. 23).

(29)     At the 69th session (September 1988) the Committee asked its secretariat for a study of the types of taxes and other charges levied by certain governments on staff employed in the system - particularly local staff - as well as relevant legal issues and action that might be taken by the organizations. It supported plans by UNDP to continue negotiations with governments which imposed or planned to impose income tax on locally-recruited staff (ACC/1988/13, paras. 39-41). A confidential discussion was subsequently held (September 1990) on the reimbursement of income taxes and related charges levied by governments (73rd session: ACC/1990/12, para. 35).

(30)     At the same session, the Committee also noted a tax reimbursement agreement recently concluded between ICITO/GATT and the United States Government (ACC/1988/13, para. 39). At the 70th and 72nd sessions respectively (March 1989 and March 1990) it noted similar agreements concluded with that Government by WIPO (ACC/1989/7, para. 42) and by ITU and IAEA (ACC/1990/5, para 33). At the 79th session (August-September 1993) it noted an agreement concluded by UNIDO (ACC/1993/23, para. 44).

(31)     At its 83rd session (August - September 1995), CCAQ(FB) took note of the text of a tax-reimbursement agreement recently concluded between IMO and the United States Government (ACC/1995/20, para. 58).

(32)     At its 91st session (August-September 2000: ACC/2000/6, para. 39) the Committee reviewed information on agreements that some organizations had reached with a Member State covering reimbursement of income tax payments that it assessed on any of their staff members. The Committee discussed the question of whether or not there was equitable treatment of staff throughout the UN system and agreed that there were some important differences between organizations. ACC and CCAQ(FB) had long considered this issue but there had been no satisfactory resolution to these problems. It was decided to refer to CCAQ(PER) the question of non-equitable treatment of staff members due to income tax assessment by any Member State. CCAQ(PER) would also be requested to ensure that organizations adequately inform prospective staff members of any tax or other financial aspects associated with their salaries or entitlements. The Committee also discussed the processing and administration of tax reimbursement including opportunities for reducing costs and the possibility of common service arrangements. Finally, the Committee discussed how tax reimbursement was handled by voluntary-funded organizations.

(33)     At its March 2002 session (CEB/2002/3, para. 31) HLCM took note of the different practices in respect of arrangements for the reimbursement of US taxes as reported upon in document R.6 and in particular of arrangements arrived at between the US government and NATO by which income from the organization was not included in the tax return made by US nationals working there. The Committee decided to invite its Chairman to pursue with the US authorities the extent to which the introduction of arrangements similar to those at NATO might be foreseen for the UN system and to report to the Committee accordingly.

(34)     At its February 2004 meeting (CEB/2004/HLCM/12/Rev.1, paras. 27-29) the FB Network was informed that two recent ILO Tribunal judgments (2255 and 2256) had ruled that it was illegal for Organizations to reimburse their staff members on anything other than the "last income" method. These Tribunal cases had found in favour of staff members who were or had been reimbursed on the "first income" method and had awarded them costs and damages as well as the monetary difference between the two methods. Those Organizations that had previously reimbursed their staff using the "first income" method had or were now in the process of changing to the "last income" method. The Network noted that recovery by the Organizations of US tax reimbursement costs from the Member State was made in two ways. The first way involved the use of a tax equalization account, which generally enabled the concerned Organizations to recover the totality of the tax they had reimbursed to their staff. The second involved a specific agreement with the Member State, which limited the recovery to the "first income" method.

(35)     At the same meeting (ibid, paras. 30-31) UNESCO reported on the progress in its negotiations with one national government to conclude an agreement for the recovery of tax reimbursed to its staff members. The Network suggested that Organizations, which were negotiating such agreements, might submit them to their respective governing body for consideration. The Network (a) requested the Convenor of the Network to raise this matter in his oral report of the meeting at the HLCM in March and to indicate to the HLCM that the FB Network would produce a paper on the issue for the autumn 2004 HLCM session; and (b) agreed that the HLCM’s Working Group on inter-agency mobility should be kept abreast of this matter since it could impact on the willingness of staff to move to an organization which followed the "first income" method.

(36)     At its September 2004 video-conference (CEB/2004/HLCM/28, paras. 13-15) the FB Network considered the issue of taxation of salary and emoluments of UN staff members who had to pay income taxes, which had been on the agendas of the FB Network and HLCM for some time and had been described in detail in previous documents (ACC/2000/FB/91/CRP.3 and CEB/2002/HLCM/R.6). The Network was informed that the two recent ILO Administrative Tribunal rulings, that the "last income" method was the only one to be used for calculating income tax reimbursements, was problematic for those organizations that had agreements with the United States government based on the "first income" method. While the UN and some specialized agencies used the "last income" method of tax reimbursement, most specialized agencies had, since 1981, signed and implemented "first income" tax reimbursement agreements with the United States Government. The Network noted that IAEA, as lead agency, would present a document for consideration by HLCM at its eighth session on the need for a coordinated and centralized negotiation mechanism with the US government on behalf of all UN system organizations.

(37)     At its 8th session (October 2004: CEB/2004/6, paras. 55-58) HLCM considered a document submitted by IAEA on the decisions issued by the ILO/AT regarding reimbursement of national income taxes on UN salaries. In each case, the ILO/AT ruled that: "the Organization is under a duty to protect its employees from national taxation of their earnings as international civil servants, it cannot rely on the tax reimbursement agreement and the provisions of its Staff Regulations as an excuse for abdicating its responsibilities to its staff members under international law;" and "the last income method is the only appropriate method for determining tax reimbursement". While the issue concerned more than one Member State, the United States was of particular concern. Some organizations had already adopted the last income method and had contacted the US authorities with a view to negotiating a new tax agreement in light of these ILO/AT decisions. So far the US authorities had not responded to these requests, or had refused to enter into new negotiations. The US had also not agreed to reimburse those organizations on the basis of last income method for calculating tax liability. The Committee decided that interested organizations should meet with a view to determining how best to move forward.

(38)      At its March 2005 video-conference (CEB/2005/HLCM/8, paras. 30-32) the FB Network was presented with a brief survey that IAEA planned to conduct among organizations that had a “first income” Tax Reimbursement Agreement (TRA) with the United States Government, to verify their reaction to the ILOAT decisions which essentially declared that the “first income” method of tax reimbursement, based on TRAs between various organizations and the US Government, were no longer valid for the organizations concerned. IAEA and the CEB secretariat would compile results and prepare a report for submission and discussion at HLCM meeting in April 2005.

(39)     At its July 2005 meeting (CEB/2005/HLCM/26, para. 123) the FB Network was informed by IAEA that it was providing tax reimbursement services for US staff members for another organization and was in negotiation with an additional organization to provide these services. IAEA indicated that it was prepared to consider further requests from other organizations for these services and could eventually become the center of expertise in the UN system in the form of a common service for tax reimbursement.

(40)     At its 10th Session (October 2005: CEB/2005/5, para. 60) HLCM considered once more the ILOAT judgment establishing that the “last income” method was the only acceptable method for determining US tax reimbursement levels and the hope was expressed that the Under Secretary-General for Management of the United Nations would take the lead in coordinating the UN system negotiations with the Government of the United States to achieve a common approach towards all organizations of the UN system.