ARTICLE 19

Government Service

Paragraph 1

Subparagraphs (a) and (b) of paragraph 1 deal with the taxation of government compensation (other than a pension addressed in paragraph 2). Unlike the OECD Model, the paragraph applies both to government employees and to independent contractors engaged by governments to perform services for them.

Subparagraph (a) provides that remuneration paid by one of the States or its political subdivisions or local authorities to any individual who is rendering services to that State, political subdivision or local authority, is exempt from tax by the other State. Under subparagraph (b), such payments are, however, taxable exclusively in the other State (i.e., the host State) if the services are rendered in that other State and the individual is a resident of that State who is either

(i) a national of that State who is not also a national of the other State, or (ii) a person who did not become resident of that State solely for purposes of rendering the services.

For example, assume that the U.S. Embassy in Rome hires a local resident who did not become a resident of Italy solely for purposes of rendering services to the Embassy. If that individual is an Italian national and not a U.S. citizen, the salary paid to him will be taxable only

by Italy. However, if the individual is not an Italian national, or is both an Italian national and a U.S. citizen, the salary will be taxable only by the United States. In the converse situation, the rule differs because of the unilateral effect of the saving clause of paragraph 2 of Article 1 (Personal Scope). For example, assume that the Italian Embassy in Washington hires a local resident who did not become a resident of the United States solely for purposes of rendering services to the Embassy. If the individual is not a U.S. citizen, or is both a U.S. citizen and an Italian national, subparagraph (a) provides that the salary will be taxable only by Italy. Notwithstanding this provision, the United States may also tax the salary of the individual by reason of the saving clause of paragraph 2 of Article 1 (Personal Scope). In order to relieve double taxation, paragraph 5 of Article 23 (Relief from Double Taxation) provides that, in the case of a person who is a dual national of the United States and Italy, the income for services rendered to the Italian government will be treated as Italian source income for purposes of the U.S. foreign tax credit. Thus, the United States may tax the income but must allow a credit for the Italian income tax, if any, in accordance with the provisions of Article 23.

As in the prior Convention, if the spouse or dependent child of an individual who under this paragraph is taxable only in the paying State should also perform governmental functions in the other State, the remuneration for those functions is taxable only in the paying State, provided that the spouse or child is not a national of the other State. This rule is intended to benefit, for example, the spouse of a U.S. Embassy official in Rome who accepts employment at the U.S. Embassy after having already become a resident of Italy by moving there with his spouse.

Paragraph 16 of Article 1 of the Protocol provides that the competent authorities may, by mutual agreement, apply the provisions of paragraphs 1 and 2 of Article 19 to employees of organizations that perform functions of a governmental nature. For example, it is anticipated that these provisions will apply, in the case of the United States, to employees of the Federal Reserve Banks, the Export-Import Bank, and the Overseas Private Investment Corporation and, in the case of Italy, to employees of the Central Bank, the Foreign Trade Institute, and the Official Insurance Institute for Export Credits.

The phrase "functions of a governmental nature" is not defined. In general it is understood to encompass functions traditionally carried on by a government. Generally, it would not include functions that commonly are found in the private sector (e.g., education, health care, utilities). Rather, it is limited to functions that generally are carried on solely by the government (e.g., military, diplomatic service, tax administrators) and activities that directly support the carrying out of those functions.

Paragraph 2

Paragraph 2 deals with the taxation of a pension paid from the public funds of one of the States or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority. Subparagraph (a) provides that such a pension is taxable only in that State. Subparagraph (b) provides an exception under which such a pension is taxable only in the other State if the individual is a resident of, and a national of, that other State. Pensions paid to retired civilian and military employees of a Government of either State are intended to be covered under paragraph 2. When benefits paid by a State in respect of

services rendered to that State or a subdivision or authority are in the form of social security benefits, however, those payments are covered by paragraph 2 of Article 18 (Pensions, Etc.).

Paragraph 3

Paragraph 3 provides that if the services are performed in connection with a business carried on by the State or individual subdivision or local authority, then paragraphs 1 and 2 do not apply. In such cases, the ordinary rules apply: Article 15 for wages and salaries, Article 16 for directors fees and other similar payments, Article 17 for artistes and athletes, and Article 18 for pensions.

Relation to Other Articles

Under paragraph 3(b) of Article 1 (Personal Scope), the saving clause (paragraph 2 of Article 1) does not apply to the benefits conferred by one of the States under Article 19 if the recipient of the benefits is neither a citizen of that State, nor a person who has been admitted for permanent residence there (i.e., in the United States, a "green card" holder). Thus, a resident of Italy who in the course of performing functions of a governmental nature becomes a resident of the United States (but not a permanent resident), would be entitled to the benefits of this Article. However, an individual who receives a pension paid by the Government of Italy in respect of services rendered to that Government is taxable on that pension only in Italy unless the individual is a U.S. citizen or acquires a U.S. green card.