U.S. Law firms consulting in India – trap for the unwary

International legal and independent professionals consulting in India often have issues receiving funds from their clients in India. India has stringent exchange control regulations contained in the Act called Foreign Exchange Management Act – FEMA. Accordingly all foreign remittances must go through certain procedures. Additionally, Income Tax Department asks for “Tax Residency Certificate” (TRC) from the US service provider so that the treaty benefits can be allowed. If TRC is not produced, the payer must withhold tax from the income remitted to US service provider. This is true regardless of where the services were provided.

Until recently, it was mandatory that TRC issued by foreign tax authority must contain all items required by the government of India in order to exempt any tax withholding requirements. As many of us are aware, Internal Revenue Service issues the US tax residency certificate in Form 6166 which cannot contain additional information as required by government of India. Due to this, in many cases, the Indian income tax department rejected the TRC issued by IRS and that resulted in withholding tax in India.

However, after a few representations, the government of India and the tax department agreed to accept the US residency certificate in its present Form 6166.

Accordingly the following documents are required to successfully receive payments form Indian companies without any withholding:

  1. Form 10F
  2. Permanent Account Number  (PAN or tax ID number)for India
  3. US Form 6166 for the relevant tax year
  4. Signed letter on US law firm’s letterhead stating that the law firm does not have a permanent establishment (PE) in India under the US – India tax treaty article.

Since the tax year in India runs from April 1 to March 31st, it is possible that some clients in India may request that the firm provide TRC issued by IRS in 2015 for payments processed in January through March 2015. Therefore US law firms may want to begin the process of collecting relevant data and partner signatures in advance, so as to file Form 8802 in a timely manner. This will expedite the process to receive TRC from IRS soon. Note that currently IRS charges a $85 user fee and processes the TRC within 45 days.

Please contact us to receive our assistance on both sides of the border.

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Foreign television broadcast in US – is royalty paid to foreign corporation taxable?

French open is around the corner! Some French tennis broadcasting channels will broadcast the matches live via satellites in US. Ever imagined how the tax law would apply to the royalty income paid by US companies to foreign channels?

Interesting issue recently arose when a US subsidiary sought a Private Letter Ruling from IRS to clarify whether the royalty paid by US subsidiary to its foreign parent was subject to any tax withholding.

Facts of the case were, foreign broadcasting company created a subsidiary in US to distribute to US distributors that showed foreign television channels. US subsidiary would collect fee from US distributors and pay royalties to its foreign parent. Income tax treaty between US and the country where the foreign parent was resident of had a tax treaty and a provision for taxing royalty income. However, the royalty article in the US- and foreign country income tax treaty exempts all royalties from US income tax, except royalties or rentals from motion picture films.

IRS ruling favored the Taxpayer.  IRS treated the royalties paid by US subsidiary to Taxpayer (foreign parent) as royalties that are exempt from U.S. income under the royalties article of the income tax treaty between both countries.

It would be interesting to see if the royalties article will include royalties from television broadcasting when the treaty is up for negotiation again!

Important News from IRS

American Opportunity Tax Credit not available to students on F1 visas

The American Opportunity Tax Credit is available to help eligible students and their parents offset the cost of higher education by reducing the amount of the federal income tax they owe. If they don’t owe tax, the AOTC could result in a refund.

If a student is in the United States on an F1 Student Visa, the student would generally be considered a nonresident alien for federal tax purposes. A student who is a nonresident alien for any part of the tax year is not eligible and cannot claim the AOTC unless the student elects to be treated as a resident alien for federal tax purposes.

To learn more about resident and nonresident alien status and restrictions on claiming the education credits, read American Opportunity Tax Credit – Information for Foreign Students.

Now you can find your Social Security 1099 or 1042S online

If you receive Social Security benefits but did not receive or misplaced either form SSA-1099 or SSA-1042S, you may now view, print or replace the form online by creating a Social Security account.

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Form 3115 not mandatory for small taxpayers IRS says in IR-2015-29

The Internal Revenue Service today made it easier for small business owners to comply with the final tangible property regulations.

Requested by many small businesses and tax professionals, the simplified procedure is available beginning with the 2014 return taxpayers are filling out this tax season. The new procedure allows small businesses to change a method of accounting under the final tangible property regulations on a prospective basis for the first taxable year beginning on or after Jan. 1, 2014.

Also, the IRS is waiving the requirement to complete and file a Form 3115 for small business taxpayers that choose to use this simplified procedure for 2014.

“We are pleased to be able to offer this relief to small business owners and their tax preparers in time for them to take advantage of it on their 2014 return,” said IRS Commissioner John Koskinen. “We carefully reviewed the comments we received and especially appreciate the valuable feedback provided by the professional tax community on this issue.”

IRS posts revised FATCA regulations and finalizes new FATCA forms

IRS today announced that it posted the revised FATCA regulations in the Federal register for publication.

This contains the regulations coordinating chapters 3, 4, 61, and Section 3406 of the Internal Revenue Code as well as the revised final FATCA regulations.

Revised Forms:

IRS also posted on its website the revised certain FATCA Forms. These Forms were in draft form until now:

  • Form 1042
  • Form 8966
  • Form W-8BEN
  • Instructions to Form W-8BEN
  • Form W-8ECI
  • Instructions to Form W-8ECI

It  is important to note that the foreign entity receiving the US source FDAP income should file Form W-8BEN-E and is not eligible to file W-8BEN. 

 

IRS releases transfer pricing audit roadmap

Transfer pricing audit is getting a momentum and is being perceived as a big weapon in the hands of IRS for the adjustments. IRC 482 gives immense powers to IRS for adjusting income, credits and deductions of a taxpayer where it finds that a revenue is lost due to the related party transactions that were not conducted on arm’s length standard.

The IRS’s Large Business and International division has released a roadmap providing detailed guidance on transfer audits, including audit techniques and tools to assist with transfer pricing exams, as well as an estimated timeline for the exam, insights as to how the exams will be conducted, and tips for upfront planning.

The roadmap provides the key themes and acknowledges that cases are won and lost on the facts and that enforcement of the arm’s length standard requires the exercise of judgment. As a result, the roadmap encourages IRS examiners to keep an open mind during the examination and avoid “fishing expeditions” (theories in search of facts). Ultimately, the roadmap encourages IRS auditors to determine a reasonable result under the facts and to consider that the taxpayer may have the more compelling theory regarding its situation.

It must be remembered that the roadmap is not an official guidance but a working document for the auditors in planning their audits without having to consult with the Internal Revenue Manual at all times. The roadmap would be equally helpful to the taxpayers and the IRS auditors to understand the objectives and plan for the equitable outcome.

The document can be found at http://www.irs.gov/pub/irs-utl/FinalTrfPrcRoadMap.pdf.

UK announces new tax on equity compensation to global employees

UK recently published a draft legislation that the tax treatment of all employment related securities be the same for all globally mobile employees. Accordingly a portion of any equity award paid to such employees should be apportioned to UK income based on the number of UK days in such financial year.

This legislation can create additional costs to the internationally mobile employee and should be reviewed carefully.