Tax Filing in USA: If you are a U.S. citizen or a resident alien (green card holder) living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. The same person will also need to file India tax returns for having stayed in India beyond a certain period and become an Indian Resident, or earned income in India, even if not stayed in India.
However, you may qualify for certain exclusions and /or tax credits. The ‘foreign earned income exclusion’ allows income up to a number of foreign earnings that are adjusted annually for inflation ($103,900 for 2018). For this exclusion, the U.S. citizen should have lived and worked abroad for at least 330 full days during any period of 12 consecutive months. Under ‘foreign income tax credit’, you can claim a credit for foreign taxes that are imposed by a foreign country. There are ways to get relief from taxes paid in India.
In the USA, the minimum income level for filing a tax return is, if Single or Married Filing Separately, $12,000 and if Married Filing Jointly $ 24000 per annum. In India, the minimum income level for a single is 250,000 INR. The amounts get adjusted annually. For U.S. purposes, it is advised to file tax returns even if below the limit. In the U.S. the IRS can review income and add penalties for not paying tax over a longer period than if you filed returns. If you don’t file your U.S. taxes, the statute of limitations on tax collections never runs out. On the other hand, if you file yearly taxes, the statute of limitations in most situations for IRS audits will expire 3 years after you file those returns.
Tax Filing in India: In India, you are considered an Indian resident for a financial year if you are in India for at least 6 months (182 days) during the financial year or, you are in India for 2 months (60 days) for the year in the previous year and have lived for one whole year (365 days) in the last 4 years. The Indian Resident is taxed on worldwide income in India. A person who is Non-Resident in India (also called NRI for Indians living overseas) is not taxed on income whose source is outside of India, i.e. taxed only on Indian income. A company is said to be a resident in India if It is an Indian company; or it has a place of effective management (POEM) in that year, in India. Normally a person has a tax residence and has to show worldwide income only in one country, but U.S. Citizens, who are Residents of India have a dual obligation of showing worldwide income, in one case due to citizenship of U.S.A (per U.S. Tax Law), and also in India due to Residency in India (per India Tax Law).
DTAA (Double Taxation Avoidance Agreement): When the same income gets taxed in multiple countries, this is called double taxation. To mitigate the negative effects of this, there are concessions given by the countries involved and double taxation avoidance agreements (DTAA) are signed as happens between India and the U.S. The tax filing becomes more complex due to double taxation rules and needs an understanding of how to claim the credit. The worldwide income first gets reported and the tax credit is given per the tax laws of each country, considering DTAA. Typically, the tax payer ultimately pays in aggregate the tax that is the maximum of one country.
A lot of complexity in international taxation is the determination of income, where it is received, or deemed to be received, or deemed to be accrued or arise, and how to calculate the amount of income. The classification of the type of income determines the tax rates and concessions that can be claimed per DTAA and tax rules. Each of the types and subtypes of income and expenses, for example, salary, rental income, business, royalty, fees, and capital gain have specific handling. DTAA also plays a role in how tax rules can be interpreted. In India, the tax reliefs for double taxation are handled in section 90 where a DTAA exists and sections 91 where one does not exist between the countries.
While filing tax returns in India or the USA, some precautions can help. Proper documentation that includes accounting, statements and supporting paperwork of worldwide transactions and classified by type of income. This helps in case of audit or review by tax authorities. Next, awareness of laws of both India and the U.S. such as exchange control laws, for example, FEMA in India, and tax laws of the two countries is important, Tax planning, with the help of a tax professional, such as a Chartered Accountant is needed. Finally, compliance with obligations such as TDS, advance tax payments, filing deadlines, reporting rules is needed.
Two reporting requirements of USA tax returns are important to note.
a. Form 8938 to report the ownership of specified foreign financial assets if the total value of those assets exceeds an applicable threshold amount. Specified individuals living outside the U.S.: Unmarried individual (or married filing separately): Total value of assets was more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. Married or individual filing jointly: Total value of assets was more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
b. Reports of Foreign Bank and Financial Accounts (FBARs). If you have a financial interest in or signature or other authority over at least one financial account located outside the United States and if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year then the same need to be reported. Unlike Form 8938, the FBAR (FinCEN Form 114) is not filed with the IRS. It must be filed directly with the office of Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, separate from the IRS.
Recent Tax Developments: Each country wants to protect its tax revenue base and curb tax avoidance and misreporting of income and tax. In the USA, an important recent development is the Foreign Account Tax Compliance Act (FATCA) which is an effort to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. There are initiatives by other governments to curb tax avoidance and ways to exchange tax impacting information. The Base Erosion and Profit Shifting (BEPS) rules have been endorsed by a large group of countries. Specific to India, in addition to the other applicable international initiatives, is the General Anti Avoidance Rules (GAAR).
In the internet age, the exchange of financial information is easy and fast, and it is important to be compliant with changing international tax laws and resulting obligations. The penalties if misreporting is detected is high. Both India and U.S.A are coming strongly against so-called tax evaders. Guidance of a tax professional, who is aware of taxation rules in both India and U.S.A, can help mitigate the annual anxiety in preparing tax return via tax advice.
