By: Salem Hafez & Jawad Salman


1. Introduction

      Usually, the largest world economics tries to add revenues as much as possible in their budget. One of the different ways that governments use to achieve this goal is to tax individuals and corporations in high tax rates, but because the tax code is restricted by the legislative branch, governments could not tax the individuals nor corporations in very high rates, so instead, they try to extend the taxpayers range. For instance, some governments will tax foreign individuals and corporations, even if they were not reside or have branches on those governments territories.

The United States has an advanced tax legal system, especially in the cases of foreign investment, as it taxes individuals (citizens or aliens) who have taxable activity in the United States. Also, the United States taxes foreign and domestic corporations and taxes the investment of the foreign corporation which has a connection of business in the United States.

The United States has a worldwide tax system. For instance, the corporation which has its headquartered in the U.S. will be taxed in all source of its income from the U.S. government, no matter if this income occurred in or out of the United States. “The corporation pays this tax when the foreign earnings are “repatriated” by bringing the income back to the U.S. This is known as “deferral,” because the income tax owed can be deferred until a later date when the income is repatriated”. U.S. House of Senate Publications.

2. Legal Status for aliens reside in the United States

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Dr. Salem Hafez
International Lawyer
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Jawad Nabhan Salman
Tax Advisor
Lecturer, Faculty of Law
An-Najah National University

Under the Immigration and Nationality Act (INA) of the United States, "the term 'alien' means any person not a citizen or national of the United States." Every foreign national, including a refugee, an asylum seeker or a person who reside in the United States under Temporary Protection Status (TPS), is considered as an alien unless his or her status has been lawfully upgraded. 
A lawful permanent resident (LPR) of the United States is not a foreign national but explicitly referred to as a legal immigrant, Longtime LPRs can at any time claim to be nationals of the United States, which requires a case-by-case analysis and depends mainly on the number of continuous years such LPRs have physically spent in the United States.

3. U.S. Income Tax for Individuals
3.1. U.S. Income Tax for Americans and Foreign Residents

      The income tax for United States citizens is paid by those individuals to the United States government for all their taxable source of income that they earned from all over the world. They also pay estate, gift, and generation-skipping transfer taxes for their assets all over the world.
      Foreign residents in the United States also pay income tax for their taxable activities that occurred in the United States and all over the world as well. Thus, they do pay taxes for their other income outside the United States. They also pay estate, gift, and generation-skipping transfer taxes for their U.S. assets.
      As a result, U.S. citizens and U.S. foreign resident will be taxed with the same tax rates and rules.

3.2. U.S. Income Tax for Foreign Non-Residents

      A nonresident individual is taxed by the United States government only on her source of income which occurred in the United States, which is connected with U.S. trade or business, but she will not be taxed on her NON-U.S. income.
      An important question arises here, who is U.S. foreign resident and who is U.S. foreign non-resident, for tax matters?
      We absolutely now know that the importance of this question is that the U.S. foreign resident will be taxed as U.S. citizen. But U.S. foreign non-resident will only be taxed on their investment income from U.S. sources and on certain other income that is treated as “effectively connected” with a trade or business connected in the United States.
      The answer to this question is that the individual will be considered as a foreign resident if:
A. She hold a green card.
B. If she fulfilled the “Substantial Presence Test”: an individual will be considered as United States resident for tax purposes “if she meet the substantial presence test for the calendar year. To meet this test, she must be physically present in the United States on at least: 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting: All the days you were present in the current year, and 1/3 of the days you were present in the first year before the current year, and 1/6 of the days you were present in the second year before the current year.” IRS Publications. 

4. U.S. Income Tax for Refugees, Immigrants, Asylum Seekers, and Temporary status

Discussed above is when U.S. people, residents, and non-residents have to pay taxes to the United States government. Nevertheless, there are more categories still have to pay U.S. taxes. 

Figuring out who should pay U.S. taxes of immigrants, refugees, and asylum seekers is not an easy process. That’s why we came up with a new legal expression to describe this case of study “Immigrantax Law”. 

The Internal Revenue Code of 1986 (26 U.S. Code) did not refer to those categories, it’s just referred to resident and non-resident aliens, but the “Substantial Presence Test” did not differ between immigrants and non-immigrants, legal and illegal documented people reside in the U.S., as one of the important purposes of this tax rule is to avoid some kind of tax evasion when non-residents works in the United States. 

Thus, an important question should arise here: do governments really had to care about the source of income if it was connected with their trade or business? If the answer is no, so why do they had to care about the legal status of the person who resides in their lands and fulfill the “Substantial Presence Test”? It is totally right that this person will not has the advantages of social security and Medicare, but she got much more important advantage, residing and working in a country like the United States is an advantage itself. 

Undocumented immigrants in the United States pay their taxes by filing their tax returns using Individual Tax Identification Numbers (ITINs) which could allow them to do so. A report of the Institute on Taxation and Economic Policy (ITEP) shows that “Undocumented immigrants contribute significantly to state and local taxes, collectively paying an estimated $11.64 billion a year.” https://itep.org/wp-content/uploads/immigration2016.pdf 

The case here is not discussing any legal situation of those people in the United States, it is really discussing what is the tax situation of them? And why the tax code should refer to those people. The economic benefits of those people took its role in numbers as the previous report shows. The undocumented person won’t ever be legally resident in the U.S. if she did not follow the law and certain procedures. So why we do not have a detailed tax sections to organize tax filing and paying for such people where they have the benefit of job opportunity in the country?

As a result, immigrants and other undocumented persons residing in the United States should be subjected to pay taxes on their territorial income gained in the U.S. and should be treated for tax matters as non-resident aliens, although this way of imposing taxes will not, alone, make those people legally residents in the United States, but that should not have effects on their obligation of paying taxes on their income gained in the U.S. or connected within U.S. trade or business. 

5. Conclusion

Tax policy of imposing taxes on non-resident's income usually takes place according to country's  economics, as high economics country can easily impose high tax rates on trade or business transactions connected with its trade or business, and the policy of imposing such tax is the benefit that the taxpayer had from such transaction when connecting her own business with this strong economy. 

When talking about those country's interest of gaining taxes from such transactions, there is no advantage to take into consideration the legal status of taxpayer, as the real interest here is to tax the benefit, when this taxpayer worked or trade in such country, not to avoid imposing taxes nor dealing with this taxpayer because of a case of her legal status in the country.

Tax codes could go with the same system of non-resident taxpayers to impose taxes on undocumented taxpayers, and let other country departments take care of her legal status even if they will deport her after that.

April 20, 2019


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