ARTICLE 18

Government Service

This Article concerns the taxation of remuneration and pensions paid out of public funds to individuals for services rendered in the discharge of governmental functions.

Paragraph 1 deals with remuneration other than pensions. It is based on the OECD and U.N. models. In general, payments to an individual by a Contracting State or a political

subdivision or local authority thereof for services rendered to it may be taxed only in that State. However, such remuneration may be taxed only in the other Contracting State if the services are performed in the other State by an individual who is a resident of that other State and either is a national of that other State or did not become a resident there solely for the purposes of performing those services. Thus, for example, Indonesia may not tax the remuneration of a U.S. Government employee working in Indonesia unless that employee is

(1) a resident and citizen of Indonesia, or (2) a resident of Indonesia who did not become a resident solely for the purpose of performing services for the U.S. Government there.

Certain locally hired employees might come within category 2.

Paragraph 2 deals with pensions paid out of public funds of a Contracting State or political subdivision or local authority thereof to an individual for past services rendered. Such pensions may be taxed only in the State from which they are paid.

The provisions of paragraphs 1 and 2 do not affect the right of a Contracting State to tax its own citizens or permanent residents. However, in accordance with paragraph 4 of Article 28 (General Rules of Taxation), the "saving clause" does not affect the benefits conferred by a Contracting State under this Article on individuals who are not citizens of, or residents having immigrant status in, that State. Thus, for example, a pension paid by the U.S. Government to a former employee who retires to Indonesia may not be taxed by Indonesia unless the individual is a citizen of Indonesia or is admitted as a permanent resident of Indonesia for immigration purposes. In the converse case, the U.S. would not tax S pension paid by the Government of Indonesia to an individual who retires to the United States unless the individual is a U.S. citizen or holds a “green card”.

Paragraph 3 makes it clear that remuneration or pensions paid by a Contracting State or 5 political subdivision or local authority thereof with respect to services rendered in connection with a trade or business carried on by either government or a political subdivision or local authority thereof are not covered by this Article but by the applicable provisions of Articles 15 (Independent Personal Services), 16 (Dependent Personal Services), or 21 (Private Pensions and Annuities). Each Contracting State applies the rules of its domestic law in determining whether services are rendered in connection with a trade or business. For example, the United States will apply the standards of section 892.