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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India budget proposals and foreign investors

Indian Finance Minister presented the annual budget yesterday that contains host of income tax provisions that need attention for an efficient tax planning by a foreign investor. Some of the key provisions are:

  • Royalty and technical fee paid to a foreign person is now subject to 25% withholding tax rate instead of 10%. Lower rate maybe available for the investors from treaty countries.
  • Introduction of FIRPTA kind of withholding tax – all buyers (including NRIs) of real property in India would be subject to 1% withholding tax (TDS) on the sale price of the real property. If the seeler does not have a Permanent Account Number for tax purposes, the withholding tax would be assessed at 20%
  • There was a confusion if tax residency certificate is conclusive evidence to establish residency of foreign country in order to claim treaty benefits; it has been clarified that it may not be sufficient evidence although it will be necessary
  • Mortgage interest is now allowed to be dedducted in a limited amount provided certain conditions are met
  • Direct Tax Code will be introduced prior to the end of current budget session according to the Finance Minister
  • Surcharge on foreign company’s taxable income to increase from 2% to 5% if the taxable income exceeds Rs. 100 million ($2 million)
  • Dividend distribution tax surcharge to increase from 5% to 10%; however, 15% rate on dividend received by the Indian company from its foreign subsidiary will continue for one more year

Additional information is available from CPA Global Tax professionals.