Foreign recipients of U.S. income, 2000 - Illustration

Statistics of Income Bulletin, Summer, 2003

Data Release

United States-source income payments to "foreign persons" totaled $139.7 billion in 2000. This represents a decrease of 12 percent from 1999 levels, following a 27-percent increase from 1998 to 1999. A precipitous decrease in the income paid to Japanese recipients accounted for more than half of the decline. Tax withheld on U.S.-source income payments fell 38.4 percent, to $2.3 billion, while the effective U.S. tax rate on payments made to foreign recipients (U.S. tax withheld divided by total U.S.-source income) fell from 2.3 percent to 1.6 percent for Tax Year 2000. Meanwhile, the total number of payments reported on Forms 1042S rose to an all-time high of 2.53 million.

The United Kingdom surpassed Japan as the recipient of the most U.S.-source income, accounting for nearly $24 billion, despite a decline of $1.7 billion from 1999. Japanese recipients collected the second-largest share of U.S.-source income with $19.2 billion, a decrease of 35.8 percent from 1999. Interest payments remained the most significant category of U.S.-source income by far. Nearly 88 percent ($122.3 billion) of all income paid to foreign persons came from interest payments, an increase of 18.5 percentage points. Dividends, second among income categories, fell from $25.7 billion in 1999 to $12.5 billion in 2000. Corporations remained the most significant entity in terms of total U.S.-source income received and tax withheld, accounting for 65.1 percent and 58.4 percent, respectively.

Background

U.S.-source income of nonresident alien individuals and other foreign persons is reported on Form 1042S, Foreign Persons' U.S.-Source Income Subject to Withholding. This income is subject to a flat, statutory tax rate of 30 percent. However, this rate is frequently reduced or eliminated by way of an income tax treaty or statutory exemption (see Table 1 for the amount of income exempt from taxation). Income that is exempt from taxation because of a tax treaty is still required to be reported. The principal types of income are interest (other than that from bank deposits), dividends, rents, royalties, Social Security and railroad retirement payments, and personal services income, shown separately in Table 2. Other types of income include capital gains, scholarships, pensions and annuities, and certain real estate distributions. Certain types of income that are "effectively connected" with a U.S. trade or business, as well as bank deposit interest, are not subject to the withholding tax and are generally not reported on Form 1042S. The tax liability on effectively connected income is reported on other forms (see Explanation of Selected Terms).

U.S. individuals or businesses distributing U.S.-source income to foreign persons are required to withhold taxes on this income (except where statutory or treaty exemptions apply), or to appoint a withholding agent (normally a financial institution) to do so. A payer or designated agent is fully liable for all taxes owed by a recipient and also reports the income paid to each recipient on a Form 1042S. Without this withholding requirement, there would be no effective way to enforce taxpayer compliance because foreign recipients are generally not required to file U.S. tax returns to report this income.

During 2000, the United States had tax treaties in force with 61 of its trading partners (Table 1) [1]. For 2000, persons in treaty countries received 68.1 percent of total U.S.-source income payments to foreign persons, while accounting for 68.3 percent of the total U.S. tax withheld on these payments. There were ten non-treaty countries which received over $1 billion of U.S.-source income in 2000: Argentina, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Hong Kong, Jersey, Netherlands Antilles, Singapore, and Taiwan (Table 2).

Data Highlights

More than $139.7 billion in U. S.-source income payments were made to foreign persons in 2000. Although this represents a decrease of 12 percent from the all-time high in 1999, it is the second-highest amount ever paid in a single year. The total number of Forms 1042S filed for 2000 reached 2.53 million, a slight increase from 1999 (2.40 million). The average income payment and the average U.S. tax withheld per payment, not including tax withheld by foreign governments and foreign withholding agents (see Data Sources and Limitations), were $55,157 and $893, respectively.

Of the $139.7 billion of total U.S.-source income reported on Forms 1042S, 91.6 percent was exempt from taxation, as compared to 80.9 percent in 1999. This increase caused the effective withholding rate (tax withheld as a percentage of total U.S.-source income paid) to dip from 2.3 percent to 1.6 percent. The effective withholding rate on the $11.8 billion of income subject to withholding tax was 19.2 percent; substantially less than the 30-percent statutory rate. Because of tax treaties and statutory exemptions, only $3.2 billion of the $11.8 billion of income subject to taxation were taxed at the statutory rate. This represents just 2.3 percent of the total U.S.-source income paid to foreign persons.