Taxation of Foreign Students in Texas Universities Sankaran Venkateswar and John Rice Trinity University

Transcription

1 Taxation of Foreign Students in Texas Universities Sankaran Venkateswar and John Rice Trinity University Introduction In recent years, U.S. colleges have been making an effort to attract more and more foreign-born students. In the class year, 237,211 international students were admitted to U.S. colleges and universities. International students account for about 2.7 % of college students (Marcus & Hartigan, 2000). Students from abroad are not eligible for federal and state loans. In the past, foreign students came mostly from wealthy families and self-financed their own education. However, in recent times, faced with growing competition for the attractive international student market from countries like Britain and Australia, colleges and universities in the U.S. have begun to offer merit and need based scholarships to foreign students. Of the more than 250,000 foreign undergraduate students, only 8%receive financial aid compared to about one-third for U.S. born students. However, the picture is brighter at the graduate level where about 40% of the 240,000 foreign students receive financial aid (Golden, 2002). Foreign students primarily support themselves and their families through scholarships, fellowships, financial aid, part-time work, internships, and other forms of support. Further, foreign students families send various forms of support to their family members studying in the U.S. The taxation of such income is not uniform and consistent across all foreign students. International Club Student-Faculty Potluck Dinner. Trinity University, 2003 This paper explores the tax issues, rules, and regulations pertaining to foreign students attending Texas colleges and universities. The same issues may be applicable to foreign students attending colleges and universities in other states. The paper is organized as follows: The first part of the paper surveys various Texas colleges and universities to determine the percentage of foreign students in the student body, the percentage of foreign students that receive financial aid or other forms of assistance, and the primary countries that are represented in the foreign student body. The second part of the paper looks at tax treaties between the USA and selected foreign countries that are represented in the foreign student body. The third and final part of the paper looks at examples of students from four countries that send the most students to Texas colleges and universities and the taxation of their income. Survey of Texas Colleges and Universities Colleges and universities in the state of Texas are a favorite destination for foreign students. The following table provides useful information on foreign students in Texas colleges and universities. On an average foreign students account for about 2-3% of the student body and a majority of the institutions offer financial aid to students. The countries that send the most number of foreign students are China, India, Mexico, and Japan (U.S. News and World Report).

2 Table A: Foreign Student in Texas Colleges and Universities Name of School Tuition and Fees Financial Aid to Intl Students % of Intl Students Countries Most Represented Baylor University $12,804 No 2.0% Taiwan, Korea, Japan, India, Canada, People's Republic of China University of Texas-Austin $10,096 Yes 3.0% China, India, Korea, Taiwan, Mexico, Indonesia University of Texas-SA $9,833 No 2.0% China, India, Japan, Mexico, Taiwan, Thailand Guatemala, Panama, Mexico, Trinity University $16,554 Yes 2.0% Germany, Switzerland, Romania China, India, Japan, Turkey, Sam Houston State Univ. $7,508 No < 1.0% Canada, the Czech Republic Texas A&M - Coll. Station $10,052 Yes 2.0% China, India, Korea, Mexico, Taiwan, Indonesia Southern Methodist Univ. $20,796 Yes 3.0% China, India, Canada, Mexico, Japan, South Korea Texas Lutheran Univ. $13,540 Yes 3.0% Japan, Ecuador, France, Germany, Norway, Taiwan Texas Christian Univ. $15,040 Yes 4.0% Japan, China, India, Mexico, Panama, Germany India, China, Mexico, Taiwan, Texas Tech Univ. $9,694 Yes 1.0% Canada, Russia China, Japan, India, Russia, Southwest Texas State $9,910 Yes 1.0% Korea, Taiwan University of Texas El Paso $7,917 Yes 11.0% Mexico, India, China, Germany, South Korea, Japan China, Cyprus, Mexico, Rice University $16,835 No 2.0% Singapore, Sweden, Canada Japan, Nigeria, Burunidi, Mexico, Abilene Christian College $11,650 Yes 4.0% Zimbabwe, Kenya Angelo State University $9,052 Yes 1.0% Germany, India, China, Mexico, Trinidad and Tobago, Bulgaria Austin College $15,963 Yes 2.0% Belgium, Japan, Mexico, Taiwan Concordia Univ. -- Austin $13,230 No 3.0% Japan, Slovakia, Brazil, China China, Japan, Mexico, Taiwan, East Texas Baptist $9,050 Yes 3.0% Kenya, Korea Hardin Simmons Univ. $10,645 Yes 0.0% United Kingdom, Zaire, Mexico, Kenya, Brazil Howard Payne Univ. $10,000 No 0.0% Taiwan, China, Japan, Mexico, the Ukraine, Armenia LeTourneau Univ. $12,840 Yes 1.0% Philippines, Canada, Kenya, Nigeria, Japan, Honduras Kenya, Russia, Japan, Korea, Lubbock Christian College $10,326 No 2.0% Canada, Albania Bosnia, China, Ghana, Kenya, Mc Murry University $10,775 Yes 0.0% Mexico, Kosovo China, India, Georgia, Japan, Midwestern State Univ. $8,936 No 3.0% Mexico, the West Indies

3 Table A (continued): Foreign Student in Texas Colleges and Universities Name of School Tuition and Fees Financial Aid to Intl Students % of Intl Students Countries Most Represented Our Lady of the Lake Univ. $11,966 Yes 3.0% Japan, Mexico, Taiwan Prarie View A&M Univ. $9,116 No 0.0% Bahamas, Ghana, Iran, Jamaica, Pakistan, Nigeria Mexico, Ireland, Taiwan, Canada, Schreiner Univ. $12,318 Yes 1.0% Japan, South Africa Southwest Adventist Univ. $10,020 n/a 3.0% Canada, Honduras, Malaysia, the Philippines, Puerto Rico, Brazil St. Edward's Univ. $12,728 No 2.0% Bahrain, Germany, India, Mexico, Qatar, Brazil China, Taiwan, Japan, India, Stephan F. Austin State U. $8,609 No 0.0% Korea, Canada Japan, Mexico, Peru, Romania, St. Mary's Univ. SA $13,480 Yes 3.0% Canada, Nicaragua Sul Ross State Univ. $8,930 Yes n/a Mexico, Belize, Haiti TAMU- International $8,883 No 3.0% China, Mexico, Morocco, India, Korea, France TAMU- Commerce $9,166 No 1.0% China, India, Indonesia, Canada, Thailand, Taiwan TAMU- Corpus Christie $7,466 No 0.0% India, China, Mexico, Canada, Malaysia, Russia TAMU- Galveston $10,160 No 0.0% Canada, Malaysia, Mexico, Panama, Saudi Arabia, Venezuela TAMU- Kingsville $9,057 No 2.0% Bangladesh, China, India, Mexico, Qatar, Japan Texas Southern Univ. $7,142 n/a 0.0% Bangladesh, Hong Kong, Iraq, Nigeria, Saudi Arabia, Thailand Texas Wesleyan Univ. $10,690 Yes 3.0% Mexico, Russia, Saudi Arabia, Thailand, Taiwan, Korea Texas Woman's University $9,150 Yes 1.0% India, Vietnam, Mexico, Nigeria, China, Korea China, Turkey, Japan, Mexico, Univ. of the Incarnate Word $13,498 No 17.0% Taiwan, Korea India, Japan, China, Thailand, UT- Arlington $8,024 Yes 3.0% South Korea, Bangladesh UT- Brownsville $7,258 Yes 0.0% Mexico, the Philippines, Germany, Canada, Japan UT- Dallas $8,471 No 3.0% India, China, Vietnam, Taiwan, Mexico, Canada UT- Tyler $9,242 No n/a China, India, Nigeria, Sweden, Taiwan, the United Kingdom Wayland Baptist Univ. $8,150 Yes 1.0% Barbados, Lithuania, Nigeria West Texas A&M Univ. $7,235 Yes 1.0% Taiwan, China, Korea, Thailand, Indonesia, India 3

4 Foreign Student Income Taxation The factors that affect the taxation of income of foreign students include the following: a. Tax treaty provisions b. If no tax treaty exists, the Internal Revenue Code (the Code ) and the Regulations thereunder dealing with non-residents. The typical foreign student in Texas is a resident of China, India, Japan or Mexico and is present in the United States under an F-1 visa. The student does not possess a green card and is not a lawful permanent resident of the United States. Additionally, it is unlikely the student will meet the Substantial Presence Test because his status under the F-1 visa renders him as exempt individual for the purpose of counting days toward meeting this test. Because days in the United States as an exempt individual are not counted, the student will fail to meet the test and, therefore, will not be a resident. As a non-resident alien, the foreign student must report income and pay tax according to a bifurcated system which distinguishes (1) income effectively connected with a trade or business within the United States and (2) income that is not effectively connected with a trade or business in the United States (the 30% tax ). Students in the United States under an F-1 visa are, by law, automatically considered to be engaged in a trade or business and must pay tax, after allowable deductions, at the usual, progressive tax rates that apply to United States residents and citizens on U.S. source income. Without an applicable tax treaty, the foreign student receives no preferential U.S. income tax treatment and must conform with the reporting and payment requirements of other 1040 NR (and 1040NR EZ) filers. Foreign students who are residents of China, India, Japan and Mexico each have specific and different treaty provisions which will control how much or how little benefit they receive. The chart below summaries the basic provisions of those four tax treaties: Table B: Maintenance Payments (Gifts) Received from Abroad China India Japan Mexico Exempt Exempt Exempt Exempt U.S. Personal Service Income Exempt up to $5,000/year None 1 Exempt up to $2,000/year 2 None Foreign Government Grants Exempt Exempt Exempt Exempt 3 Time Exemptions Permitted Reasonably Reasonably Reasonable Reasonably 1 Although not exempt, such income, when reported on Form 1040-NR (EZ) may be offset by the personal and dependent exemptions and the standard deduction. 2 If a resident of Japan is in the U.S. as an employee of or under contract with a resident of Japan is exempt for up to 12 months and a maximum of $5,000 if here to acquire technical, business a professional experience or to study at an educational institution. If here for a U.S. sponsored activity, the maximum U.S. personal service income is $10, The U.S. Mexico tax treaty provisions for students are brief and somewhat non-specific. Students from Mexico in the U.S. for education and training may exempt amounts received from sources outside the U.S. for maintenance, education and training.

5 Sample Illustrations of Taxation of Foreign Students from Selected Countries Because tax treaty provisions are negotiated separately with each foreign country, and vary, sometimes widely, among the various nations, non-resident students may receive disparate tax treatment. For example, Li, a resident of China studying in the United States under an F visa would be subject to the tax treaty provisions between China and the U.S. As Table B indicates, she would not be subject to taxation on amounts sent to her from her family in China for her maintenance. Payments such as these are essentially support payments or gifts and would not be included in gross income under the income tax laws for residents or citizens. Accordingly, such payments generally are exempt from taxation under all tax treaties. Grants and scholarships received from government and educational agencies in China similarly would be exempt from taxation, although some treaty provisions are more specific than others relating to this source of income. Should Li obtain a part-time job in the U.S. to supplement her income, she will find she has entered into a separate provision of the China U.S. tax treaty dealing with U. S. source personal service income. Such earnings are exempt only up to a maximum of $5,000 per year. Yet this allowance turns out to be relatively generous, since her colleagues from India, Japan, and Mexico may be allowed little or no exempt personal service income. Further, the China U.S. tax treaty allows Li to remain in the U.S. enjoying the student non-resident tax benefits for as long as it is reasonably necessary to complete her education. Indian students at the Diwali Festival of Lights Trinity University, 2002 Patel comes from India to study in the U.S. under similar factual circumstances as Li. As with his Chinese counterpart, Patel will exclude maintenance payments and Indian government grants and scholarships from his income. Unlike Li, Patel is allowed to treat none of his U.S. personal service income as exempt. He will, however, be able to offset this income with personal and dependent exemptions and the standard deduction allowed on his 1040NR or 1040NR-EZ. As with Li, he may linger as a student in the U.S. for as long as reasonably necessary to complete his education. Yiri has enrolled in a U.S. university to study physics and has arrived in this country from Japan. As with Chinese and Indian nonresident students, Yiri will not need to report support payments or Japanese government grants as income for the U.S. individual income tax. His situation regarding U.S. personal service income is different and somewhat more complicated. The Japan U.S. tax treaty allows an exemption from income for personal services of up to $2,000 per year; however, if the provisions are met, Yiri may enjoy a substantial increase in the exempt amount. Specifically, should he be in the U.S. as an employee of or under contract with a resident of Japan primarily to acquire technical, professional or business experience here in the U.S. from someone other than the Japanese employer, he may exempt up to $5,000 for a period of twelve consecutive months. This amount also applies to a person who is studying at an educational institution. Should a Japanese student be in the U.S. to train, research or study under a program sponsored by the U.S. 5

6 government, then personal service income received incident to such training, research or study is exempt up to $10,000. One restriction exists: the individual may not remain in the U.S. for more than one year under the program. Monica is from Mexico City and has been accepted at a private university in Texas as an undergraduate student. She will be required to abide by the Mexico U.S. tax treaty to report her income and, more than the other foreign students, she will need to take care that her interpretation of that tax treaty is correct. The Mexico -- U.S. tax treaty as it relates to nonresident students and business apprentices is at once restrictive and liberal. Like her counterparts, Monica will not report income in the form of payments for maintenance, education or training. In fact, it appears not to matter from where the payment originates, as long as it is from a source outside the U.S. In the same vein, there is no time limit stated relating to these exemptions and seemingly Monica can take as long as she likes to complete her education in the U.S. However, assume Monica takes an evening job translating Spanish-language documents into English. U.S. source personal service income is not mentioned in the tax treaty and, presumably, no exemption is available for this type of income. Monica will need to include this income on her 1040NR. Each of these hypothetical students would have different income tax rules to apply, this in addition to adjusting to life, language and study in a foreign land. It is not unreasonable to suspect some students do not know of the tax treaty laws or, if known, are uncertain as to their application. Individuals who rely on beneficial treaty provisions without being certain those rules apply may face a $1,000 penalty, unless their treaty-based position is disclosed on Form References D.L. Marcus, and R. Hartigan, They are coming to American Schools, U.S. News and World Report, vol. 129, p. 68. D. Golden, Foreign Students now get a break at some Colleges, The Wall Street Journal, February 1, America s Best Colleges, U.S. News and World Report,