Tag: India

#IndiaU.S.TaxTreaty Ep. 2: Article 4 – Residence

Posted on by Peter Harper


We have heard “a dollar saved is a dollar earned,” and given the current economic environment, my readers have a few common questions like “what is the cost to save that dollar?” or “what is the tax impact if I move to the U.S. or out of the U.S.?” 

In the language of tax, the answer is your tax cost depends on the country of your “residence.” The determination is primarily in how the domestic tax legislation defines “residence.” Still, where you are a resident of two or more countries, tie-breaker rules under the tax treaty apply to determine your country of residence. The relevance is that the country of your residence generally has the right to tax you on your worldwide income; therefore, you should consult an advisor.  

If domestic tax legislation defines “residence,” what is the relevance of tax treaties?

Before dwelling directly on the India-U.S. DTA, let’s read the definition of “residence” under the Indian and U.S. federal tax legislation.

Definition: Indian Tax Legislation

Section 6 of the Income Tax Act, 1961, states about residence in India. An individual is an Indian resident if the below conditions are satisfied during the financial year (i.e., from 1st April to 31st March of the following year):

  1. stays for 182 days or more in India; or
  2. stays for 365 days or more in four years preceding the financial year.

The above clause (b) substitutes “365 days or more” to “60 days or more” where:

  • an Indian citizen leaves India for employment purposes outside India or as a member of the crew of an Indian ship (as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958). 
  • an Indian citizen or someone of Indian origin (POI) visits India.

Please note that beginning 1st April 2021, an Indian citizen (who is not liable to tax in any other country because of their domicile or residence or other criteria of a similar nature) and earns Indian sourced income exceeding INR 1.5 million (~USD 18,000) is considered to be an Indian resident. 

An individual is ‘not ordinarily resident’ of India in a financial year where they have been:

  • a non-resident in India for either 9 out of 10 previous financial years preceding the financial year under consideration.
  • stayed for 729 days or less during the 7 financial years preceding the financial year under consideration.
  • an Indian citizen or POI who stays in India for 120 days or more but less than 182 days and earns an Indian-sourced income exceeding INR 1.5 million (~USD 18,000).

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Definition: U.S. Federal Tax Legislation

Section 7701(a)(30) of the Internal Revenue Code considers an individual to be a ‘U.S. Person’ where such an individual is either a U.S. citizen or a U.S. resident. An individual born or naturalized in the U.S. and subject to its jurisdiction is a U.S. citizen. Any individual who isn’t a U.S. citizen is a resident if they:

  • passes the substantial presence test; or
  • holds a U.S. green card; 
  • elects to be taxed as a resident 

An individual automatically becomes a U.S. resident upon becoming a U.S. green card holder. There are peculiarities concerning the ‘start date’ of individuals moving to the U.S. to become green card holders; discussing this with your advisor is essential.

An individual will be regarded as a resident alien in terms of the substantial presence test (SPT) if they meet the following requirements:

  • such an individual was present in the U.S. on at least 31 days during the calendar year; and
  • the sum of the number of days on which such an individual was present in the U.S. during the present year and the 2 preceding calendar years (the year before the current year x 1/3 + 2 years before the current year x 1/6) equals or exceeds 183 days.

The regulations further clarify certain peculiar aspects to determine an individual’s residency. Further, where an individual resides in the U.S., residency should also be determined under the applicable State tax legislation.  

Definition: India-U.S. DTA

A tax treaty, in general, intends to benefit the taxpayers of the countries entering into such a convention or agreement. The manner to avail of the benefit is often stated under the domestic tax legislation of a country and might be self-executive or need additional action for its application. The objective of the tax treaties is the elimination of double taxation. Article 1 of the India-U.S. DTA identifies citizens or permanent residents of India or the U.S. whose obligations are affected by the tax treaty application.

Article 4 of the India-U.S. DTA defines an individual as a ‘resident’ of a country under domicile, citizenship, residence, place of management, place of incorporation, or any other criterion of a similar nature and limits its application concerning income sourcing rules in a country. It further contains tie-breaker regulations to be applied where an individual is a resident of both the U.S. and India. The tie-breaker test is used as under:

  • an individual who is deemed as a resident of the country in which they have a permanent home available to them; 
  • if there is a permanent home is available in both States, then they shall be deemed as a resident of the country with which their personal and economic relations are closer (center of vital interests);
  • if the country in which they have a center of vital interests cannot be determined, or if they do not have a permanent home available in either country, then they shall be recognized as a resident of the country in which they have a habitual abode;
  • if they have a habitual abode in both countries or neither of them, they shall be recoginzed as a resident of the country of which they are a national;
  • if they are a national of both countries or neither, the Contracting States’ competent authorities will settle the question by mutual agreement.

It further limits or restricts the source country to tax certain income and requires an individual’s country of residence to provide tax relief either by way of a foreign tax credit or an exemption for the foreign-source income.

In understanding the terms “permanent home,” “habitual abode,” and “personal or economic relations” to establish a closer connection, reference is drawn from the OECD Model Tax Convention and UN Double Tax Model Convention.  

Albeit the above residency rules under the India-U.S. DTA, the ‘saving clause’ under Paragraph 3 of Article 1 of the India-U.S. DTA preserves India and the U.S. with a right to tax its citizens and permanent residents as if there is no tax treaty benefit. Therefore, once an individual becomes a U.S. citizen or permanent resident, the tax treaty benefit is unavailable.  

The interpretation of the “residency” rules under the India-U.S. DTA requires deep analysis, and a cross-border tax advisor should be consulted with applying the tax treaty to the facts and circumstances of your situation.

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What to ask and provide your advisor in determining your residence?

#

Questions

Basic information to be shared with your advisor
1. Whether domestic tax legislation determines residency based on a number of days, citizenship, holding a green card, domicile, or any other manner?  Provide your advisor with the following:

  • country(ies) of your citizenship;
  • countries where you have traveled or stayed during a tax year;
  • your visa status, if not a citizen of a country where you are employed or doing business;
  • your latest I-94 arrival/departure record (if in the U.S.); 
  • your passport with immigration stamps to support the entry and exit. 
2. What is the residency’ start date’ if I obtained U.S. green card during the year?  Provide your advisor with the following:

  • the issue date of your green card;
  • the date you first entered the U.S. to become a green card holder;
  • the number of days in which you were present in current and prior tax years before the issue of your green card.
3. Does the “saving clause” under the DTA cover me? Inform your advisor if you are a citizen or a U.S. green card holder.
4. What is the manner of determining residency if you are a resident of more than one country? Provide your advisor with the below details to apply tie-breaker rules under the tax treaty:

  • the details of where you own a permanent home or leased premises;
  • the country where your family stays;
  • the country where you earn your income.
5. What compliance do you need to do if you are a resident of more than one country? Provide your advisor with the following:

  • details of the income earned;
  • details of any taxes paid or withheld in earning the income;
  • details concerning your business interest.
  • requirement to report any additional information like international bank accounts.
6. Whether you can file a treaty-based return? Provide your advisor with the details mentioned in (3) above and ask how it impacts your residency.

Note: See our blog on U.S. Expatriation Tax for more details.
7. What is my residence status if I travel on a student, trainee, teacher, or similar visa status to the U.S.?  Inform your advisor about your visa status because there are preferential rules to determine your residence in the U.S. for specific visa categories.

 

Our team of international tax specialists at Asena Advisor has in-depth knowledge of interpreting international tax treaties and ascertaining their applicability to your specific circumstances. Please contact Janpriya Rooprai, Head of the US-India Tax Desk, for more information.

Janpriya Roopari

Peter Harper

#IndiaU.S.TaxSeries Ep. 1: What are Tax Treaties?

Posted on by Peter Harper

This refreshing entry of the #AsenaTaxBlog series on tax treaties focuses on the US and India tax treaty framework. The first blog presents a brief history that might interest my readers, who are curious to learn about the application of tax treaties and their interplay with domestic legislation to determine how beneficial provisions impact their cross-border tax planning needs. In doing so, there is a list of questions that you should discuss with your advisor to ensure your tax compliance is in order. 

Background

A tax treaty is an agreement or a convention between two countries. For instance, an income tax treaty is an agreement primarily concerning the taxation of income, prevention of double tax, and evasion. There can be various reasons for a country to negotiate and enter a tax treaty with another country.  

Post the First World War, the League of Nations began developing model tax conventions, which were taken over by the Organization for Economic Co-operation and Development (OECD) and later the United Nations. The United Nations was essential in establishing the United Nations Economic and Social Council (ECOSOC) to address the needs of the developing countries to formulate a model tax convention promulgating the manner to negotiate a tax treaty that is focused on addressing the sourcing country’s taxing. In 2003, the United Nations’ Department of Economic and Social Affairs published a revised edition of the Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries. It noted that “the twin goals of a tax treaty are, firstly, to encourage economic growth by mitigating international double taxation and other barriers to cross-border trade and investment, and secondly, to improve tax administration in the two Contracting States by reducing opportunities for international tax evasion.”  

US Tax Treaty Framework

In the US Constitution’s Article II, Section 2, Clause 2 confers the President to make treaties and lays out how to enforce a treaty. The US has signed the Vienna Convention on the Law of Treaties (Vienna Convention) but considers many of its provisions concerning the application of international law to the law of treaties. 

The US has entered into income tax treaties with several foreign countries. The US concluded the first income tax treaty with China in 1932 to foster trade relations between the US and France. As more developing countries seek to achieve foreign investments, the bilateral income tax treaties could be a guidance tool for taxation of income, avoidance of double taxation, and evasion of taxes.  

The US has below types of treaties dealing with tax matters:

  1. Double tax avoidance income tax treaties;
  2. Estate and gift tax treaties; 
  3. Tax information exchange agreements (TEIAs); 
  4. Social security agreements or Totalization agreements; and 
  5. Multilateral Convention on Mutual Assistance in Tax Matters.

The list of countries with which the US has an income tax treaty is provided on the IRS’s official website. Countries included are Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belarus, Belgium, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Georgia, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tajikistan, Thailand, Trinidad, Tunisia, Turkey, Turkmenistan, Ukraine, Union of Soviet Socialist Republics (USSR), United Kingdom, United States Model, Uzbekistan, Venezuela, and Vietnam.

India Tax Treaty Framework

Article 253 of the Indian Constitution confers the Parliament of India to make treaties and lays out how to enforce a treaty. However, India is not an official signatory to the Vienna Convention. Still, how the courts (Ram Jethmalani v. Union of India (2011) 8 SCC 1 and various high courts in India) have acknowledged and embraced the customary international law provisions is a small step towards encouraging an integrated framework. 

India has below types of treaties dealing with tax matters:

  1. Double tax avoidance income tax treaties including comprehensive, limited bilateral, limited multilateral, and other agreements (DTAs);
  2. Tax information exchange agreements (TEIAs); 
  3. Social security agreements (SSAs); and 
  4. Multilateral Convention on Mutual Assistance in Tax Matters.

India has entered into 96 comprehensive and eight limited bilateral income tax treaties. These include Armenia, Australia, Austria, Bangladesh, Belarus, Belgium, Botswana, Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Ethiopia, Finland, France, Georgia, Germany, Greece, Hashemite Kingdom of Jordan, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kenya, Korea, Kuwait, Kyrgyz Republic, Libya, Lithuania, Luxembourg, Malaysia, Malta, Mauritius, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portuguese Republic, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Swiss Confederation, Syrian Arab Republic, Tajikistan, Tanzania, Thailand, Trinidad and Tobago, Turkey, Turkmenistan, United Arab Emirates, UAR (Egypt), Uganda, United Kingdom, Ukraine, United Mexican States, United States of America, Uzbekistan, Vietnam, and Zambia. 

The Indian tax legislation prescribes the availability of tax treaty benefits subject to certain procedural compliance and poses a challenge for taxpayers. For example, a non-resident Indian (NRI) is required to obtain a Tax Residency Certificate (TRC) from the tax authorities of a country of which he/she/they are a resident, in addition to filling out a self-declaration form. 

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India-US Income Tax Treaty Framework

Forms of tax treaty agreements between India and the US: India and the US have only two bilateral tax agreements, namely:

  1. The Convention Between the Government of the United States of America and the Government of the Republic of India was made for the avoidance of double taxation and the prevention of fiscal evasion concerning taxes on income 1989, which came into effect on 1 January 1989 (India-US DTA), and the protocol and technical explanation to guide for that.  
  2. The Agreement between the Government of the Republic of India and the Government of the United States of America for improving the international tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA). This agreement was entered on 9 July 2015 in terms of Article 28 relating to the exchange of information for tax purposes on an automatic basis and put into effect from the period beginning 1 January 2017.

There is no gift, inheritance, nor estate tax treaty between India and the US. Therefore, a taxpayer is required to be governed and comply with the domestic tax legislation of the country where the citizenship/residence/domicile is established at the time of the taxing event.

Snapshot of the Articles covered under the India-US DTA

Broadly, the articles under the India-US DTA can be categorized as under:

Category

Article
Scope and Taxes Covered Article 1: General scope;

Article 2: Taxes covered;

Article 30: Entry into force;

Article 31: Termination
Definition Article 3: General definition;

Article 4: Residence;

Article 9: Associated enterprises
Individual Income  Article 6: Income from immovable property;

Article 10: Dividends;

Article 11: Interest;

Article 12: Royalties and fees for technical services;

Article 13: Gains; Article 15: Business personnel services;

Article 16: Dependent personnel services

Article 17: Director’s fees;

Article 18: Income earned by entertainers, and athletes;

Article 21: Payments received by students. and apprentices;

Article 22: Payments received by professors, teachers, and research scholars;

Article 23: Other income;

Article 29: Diplomatic agents, and consular officers
Business Income Article 5: Permanent establishment;

Article 7: Business profits;

Article 8:  Shipping and air transport;

Article 14: Permanent establishment tax
Pension Income Article 19: Remuneration and pensions in respect of government services;

Article 20: Private pensions, annuities, alimony, and child support
Other Provisions Article 24: Limitation on benefits;

Article 25: Relief from double taxation;

Article 26: Non-discrimination;

Article 27: Mutual agreement procedure;

Article 28: Exchange of information and administrative assistance

The interpretation of the articles covered under the India-US DTA needs deep analysis, and a cross-border tax advisor should be consulted to apply the tax treaty to the facts and circumstances of your situation.

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Key Questions to Discuss with Your Advisor Concerning the DTA While Tax Planning or Compliance: 

  1. Whether the DTA is effective or in force?
  2. What is the nature of the DTA in force – comprehensive or limited?
  3. Does the scope of the DTA cover me?
  4. What is the basis for determining my residential status under the DTA?  
  5. Does the “saving clause” under the DTA apply to me?
  6. What types of income are covered under the DTA?
  7. Does my business activity in a country establish a “permanent establishment” status?
  8. Do I have an option between applying the DTA and domestic tax legislation? 
  9. Is the application of the DTA more beneficial than domestic tax legislation? How do they interact? 
  10. What are the relevant provisions for the elimination of double taxation?
Our team of international tax specialists at Asena Advisor has in-depth knowledge of interpreting international tax treaties and ascertaining their applicability to your specific circumstances. Please contact Janpriya Rooprai, Head of the US-India Tax Desk, for more information.

Janpriya Rooprai

Peter Harper