International Taxation: An Overview
International taxation refers to the tax rules that apply to transactions between two or more countries. Individuals or companies involved in these transactions are taxed according to the domestic laws of each country. Taxes can be levied by multiple countries based on factors such as citizenship, residency, and the source of income.
For U.S. citizens or resident aliens living outside the United States, worldwide income is subject to U.S. income tax, regardless of residence. However, certain exclusions and tax credits may apply:
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Foreign Earned Income Exclusion: Allows the exclusion of up to a certain amount of foreign earnings, adjusted annually for inflation.
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Foreign Income Tax Credit: Provides credit for foreign taxes paid, reducing the overall tax burden.
Dual Tax Filing Obligations
U.S. citizens or resident aliens living in India must file U.S. tax returns for worldwide income and Indian tax returns if they meet residency requirements or earn income in India. This dual obligation arises from U.S. citizenship (under U.S. tax law) and Indian residency rules.
Residency Rules in India
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Indian Resident: In India for at least 182 days during the financial year, or 60 days in the financial year and 365 days in the previous four years.
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Non-Resident: Not taxed on income sourced outside India, only on Indian income.
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Company Residency: Based on incorporation in India or place of effective management (POEM).
Double Taxation and Relief
When the same income is taxed in multiple countries, it leads to double taxation. To mitigate this, countries enter into Double Taxation Avoidance Agreements (DTAA). The tax filing process becomes complex due to these rules, requiring proper credit claims per each country’s laws and DTAA provisions.
Income Classification and Tax Rates
Income classification (salary, rental income, business, royalties, fees, capital gains) affects tax rates and available concessions. Proper classification ensures accurate tax calculation and relief claims under DTAA and local tax laws.
Tax Obligations for Foreign Citizens in India
Foreign citizens in India must understand their tax obligations in both their home country and India. U.S. citizens may need to give up U.S. citizenship to avoid dual filing, but previous obligations remain due.
Filing Requirements and Precautions
These thresolds change every year, so need to review for that specific year.
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U.S. Filing Thresholds: $12,000 (Single/Married Filing Separately), $24,000 (Married Filing Jointly).
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India Filing Threshold: INR 250,000.
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Statute of Limitations: U.S. has a longer review period without filing, shorter with annual filing.
Documentation and Compliance
Proper documentation, awareness of tax laws, and professional tax planning are crucial. Compliance includes obligations like TDS, advance tax payments, and filing deadlines.
Key U.S. Filing Requirements
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Form 8938: Report specified foreign financial assets exceeding certain thresholds.
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FBAR (FinCEN Form 114): Report foreign financial accounts exceeding $10,000 in aggregate value.
FATCA and Global Information Exchange Efforts
The Foreign Account Tax Compliance Act (FATCA) combats tax evasion by U.S. persons holding offshore financial assets. Global efforts like BEPS rules and GAAR aim to curb tax avoidance and promote information exchange.
Staying Compliant
In the internet age, financial information exchange is swift. Compliance with international tax laws is crucial to avoid penalties. Seeking guidance from tax professionals aware of both U.S. and Indian taxation can alleviate the complexities of international tax compliance.
