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 Rev. Rul. 76-19

1976-1 C.B. 441

Section 871

IRS Headnote

Canadian corporation's employees' salary while assigned in U.S. Salary received from a Canadian oil corporation by employees experienced in oil well drilling who are assigned to the U.S. for one year of training in off-shore drilling is not exempt from Federal income tax under Article IX of the U.S.-Canada Income Tax Convention and is subject to the FICA and income tax withholding.

Full Text

Rev. Rul. 76-19

Advice has been requested whether Article IX of the Income Tax Convention between the United States and Canada, T.D. 5206, 1943 C.B. 526, (the Convention) will exempt two employees of a Canadian corporation from United States Federal income tax filing requirements with respect to the remittances they receive from such corporation while temporarily assigned in the United States for training.

The two employees in question, citizens and residents of Canada, are employed by S, a Canadian oil company. Both employees are engaged in oil process recovery, one having 9 years experience in the drilling department and the other, 4 years experience in the engineering department. During the taxable year, S assigned the employees to the Louisiana office of its United States parent corporation, P, for purposes of training in off-shore drilling operations for a period of 12 months. At all times their training will be conducted in the United States. After this training the employees return to Canada and resume their duties there. During the period of their training the employees receive their usual salary remittances and benefits subject to the normal Canadian deductions from the home office of S. This training program has been undertaken by S because its recent involvement in foreign exploration has necessitated the development of an off-shore drilling program. Since S does not have the facilities for such training, it has taken advantage of the extensive off-shore drilling activities of P for the training of its personnel.

Article VII of the Convention, exempting certain compensation received by nonresidents temporarily present in the United States for not more than 183 days, is not applicable since, as stated above, the two employees of S will be temporarily in the United States for a period of 12 months.

Article IX of the Convention provides, in part, that business apprentices who are residents of Canada temporarily residing in the United States for purposes of acquiring business experience are exempt from Federal income tax upon remittances received by them from Canada for purposes of their maintenance if and to the extent such amounts constitute gross income.

As the term "business apprentice" is not specifically defined in the Convention, it must be given its common and ordinary meaning. In the ordinary sense, an apprentice is defined as a person who serves another for a specific time in order to learn some art, trade, profession, or business. He must be considered a beginner or inexperienced person who is gaining basic experience by practicing under skilled workers. See Rev. Rul. 66-384, 1966-2 C.B. 566, in which this rationale was set forth to support the holding that amounts representing remittances for living expenses received by a chief engineer of a South African corporation, (a citizen and resident of South Africa) temporarily assigned by his employer in the United States for a period of training on machine designing with the object of improving the overall efficiency of his employer, are not exempt from United States tax under the United States-South Africa Convention.

In the instant case, the two employees of S cannot be considered apprentices for Federal income tax purposes as they already possess some experience in drilling techniques (process recovery). They are not beginners or inexperienced persons who are gaining basic experience. The training they receive in off-shore drilling techniques in Louisiana is a refinement of the basic experience that they already have in oil drilling techniques.

Accordingly, the two employees of S will not be exempt under Article IX of the Convention from United States income taxation with respect to the remittances they receive for their maintenance from S while assigned in the United States for training.

Since the remittances are not exempt under the Convention, section 871 of the Code relating to tax on nonresident aliens is applicable. Under section 864(b)(1) employees rendering personal services for a foreign employer for over 90 days in the United States (or whose compensation is over $3,000) will be considered to be engaged in a trade or business within the United States. Section 871(b)(1) provides, in part, that a nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable on income effectively connected with that trade or business as provided in section 1 (graduated tax rates applicable to citizens and residents of the United States). Under section 1.864(c)(6)(ii) of the Income Tax Regulations the payments received by the two employees are considered effectively connected income in that the activities of their trade or business (rendering personal services) are a material factor in the realization of their income.

Accordingly, in accordance with the provisions of section 871(b)(1) of the Code, remittance received by the two employees from S while in the United States are taxable under section 1.

Under section 31.3401(a)(6)-1(a) of the Employment Tax Regulations, all such remuneration paid after December 31, 1966, in years during which services are rendered in the United States by nonresident aliens is subject to withholding under section 3402 of the Code with certain exceptions not pertinent here. Therefore, S, as employer, shall deduct and withhold a tax determined in accordance with the tables set forth in section 3402(a) from the wages it pays to its two employees while they are present in the United States.

The two employees are also subject to the tax imposed by section 3101 of the Code, relating to the Federal Insurance Contributions Act (Social Security), on wages for services performed in the United States and received by them with respect to such employment, provided they were not admitted into the United States under subparagraph (F) or (J) of the Immigration and Nationality Act (8 U.S.C.A. section 1011) pertaining to students and exchange visitors.

Section 3121(b) and section 31.3121(b)-3 of the regulations provide, in part, that the term "employment" means any service performed by an employee for the person employing such employee, irrespective of the citizenship or residence of either within the United States. See Rev. Rul. 71-125, 1971-1 C.B. 358. Section 3121(b)(19) of the Code and section 31.3121(b)(19)-1(a) of the regulations provide, however, that employment shall not include services by a nonresident alien temporarily present as a nonimmigrant under subparagraph (F) or (J) of section 101(a)(15) of the Immigration and Nationality Act if the services are performed to carry out the purpose specified in subparagraph (F) or (J).

Accordingly, since the two employees of S did not enter the United States pursuant to these provisions of the Immigration and Nationality Act, they are subject to the withholding provisions of section 3101.