International taxation refers to the tax rules that apply to transactions between two or more countries. Individuals or companies performing or impacted by the transactions are taxed accordingly. All taxes are levied under domestic law of each country. Hence, for example, taxes can be levied by both India or United States of America (U.S.), or by both counties in certain cases, by factors that include citizenship, residency (period of stay), and country of source of income, to name a few.
The focus here is individual taxation. 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. However, you may qualify for certain exclusions and /or tax credits. The foreign earned income exclusion allows income up to an amount of your foreign earnings that is 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 on you by a foreign country. There are ways to get relief from taxes paid in India.
A U.S. Citizens or resident aliens living in India will need to file U.S. tax returns showing their worldwide income. The same person will also need to file India tax returns for having stayed in India for a certain period and become an Indian resident, or earned income in India, even if not stayed 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 rules (per India Tax Law).
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 four 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.
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 the countries involved and double taxation avoidance agreements (DTAA) are signed as is the case between India and U.S. The tax filing becomes more complex due to double taxation rules, and needs a understanding of how to claim credit. The worldwide income first gets reported and 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 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, example, salary, rental income, business, royalty, fees, and capital gain have specific handling. They also play 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.
Many foreign citizens settled in India have often thought about their obligation to pay taxes to their home country. Most countries, when it comes to income taxes from their citizens, expect them to pay their fair share of taxes. Perhaps the only way a U.S. citizen living in India can stop filling U.S. taxes is to give up U.S. citizenship, and acquire Indian citizenship. In such a scenario the taxes due for previous years before you acquire Indian citizen are still due even if you did not file returns.
In U.S. the minimum income level for filing tax return if Single or Married Filing Separately is $12,000 and if Married Filing Jointly is $ 24000 per annum. In India, the minimum income level for 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 three years after you file those returns.
While filing taxes some precautions that 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 U.S. such as exchange control laws, such as FEMA in India and tax laws of the two countries. Tax planning, with the help of a tax professional, such as chartered accountants. Finally, compliance with obligations such as TDS, advance tax payments, filing deadlines, reporting rules such as in U.S.. Two requirements below are important.
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 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 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.
The Foreign Account Tax Compliance Act (FATCA) is an important recent development in U.S. efforts to combat tax evasion by U.S. persons holding accounts and other financial assets offshore. There are also efforts by governments to collectively curb tax avoidance and find ways to exchange tax impacting information. This has resulted in the Base Erosion and Profit Shifting (BEPS) rules by many governments, and General Anti Avoidance Rules (GAAR) by India.
In the internet age, exchange of financial information is easy and fast, and it is important to be current and 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 strong 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 proper tax advice.
