India USA corridor (Main tax issues)

INDIA USA TAX ISSUES

1.??Place of effective management:

Under US domestic law, all companies incorporated in the US are treated as US tax resident. Therefore, if a US company has its POEM in India, its worldwide income could be taxable in both in India and in the US without any credit being available in either country for taxes paid in the other country.

2.??Treaty benefits not available to US trusts:

The India-US DTAA is an example of how a special provision is provided for in a DTAA to deal with availability of treaty benefits to partnerships and trusts. Under Article 3(e) of the India-US DTAA, partnerships, trusts and estates are specifically included in the definition of the term ‘person’. Further, under Article 4 of that India-US DTAA, it is provided that for such entities, the term ‘resident of a contracting State’ applies only to the extent that the income derived by such entity is subject to tax in that State as the income of a resident, either in its own hands or in the hands of its partners or beneficiaries. In this regard, the technical explanation of the India-US DTAA on Article 4 provides that under US law, a partnership is never taxed and a trust and estate are often not taxed. Under the provision, income received by such an entity will be treated only to the extent such income is subject to tax in the US as income of a US resident. Thus, treaty benefits would only be given to such US entities only as far as income received by them is taxable either at the entity or the partner/beneficiary level in the US.

3.??Capital gains:

Article 13 of the India-US DTAA provides that each country may tax capital gains in accordance with the provisions of its own domestic law. The capital gains tax regime in India works in such a way that all Indian tax residents are taxable on their worldwide income, including income in the nature of capital gains arising from disposal of a foreign asset. However, all non-residents are taxed in India only on Indiasourced income i.e. capital gains arising from the disposal of an Indian asset. Similarly, in the US, all US citizens and resident aliens for tax purposes are taxed on their worldwide income in form of capital gains (irrespective of situs of disposed asset). However, non-residents are not taxed in the US for disposal of all US-sourced assets. There is no US capital gains tax on a non-resident selling US securities Thus, in a case where a US citizen disposes of his/ her Indian assets, he/she is liable to be taxed both in India (as the asset is India sourced) and in the US as well (since he/she is a US citizen). Also, no credit is available against the capital gains from the sale of shares in an Indian company which are taxable in India (by a US resident shareholder to a US resident company).

4.??PE Issues (Force of Attraction clause):

The OECD approach suggests that the source state must have the right to tax only those profits as are directly attributable to a PE in India, the India-US DTAA borrows the limited force of attraction rule as contained in the UN Model Convention. Thus, apart from profits directly attributable to the Indian PE, the US entity would also be taxed for profits from sales in India of similar goods as sold through the PE or profits from business activities in India similar to those undertaken through the PE.

5.??FATCA:

India and the US entered into an agreement in July 2015 for implementation of the US the FATCA. FATCA is a broad set of rules to increase tax compliance by ‘US persons’ (essentially US citizens, US green card holders and US residents) with financial assets held outside the US.

If a financial institution outside the US does not comply with due diligence and reporting obligations prescribed, investment income/ sale consideration receivable in relation to sale of US investments would be liable to withholding tax at 30% in the hands of the payee. The financial institution would have to claim refund to avail benefits of the India-US tax treaty, if applicable.

Under the India-US agreement for implementation of FATCA, both governments have agreed to exchange information annually on an automatic basis with respect to reportable accounts held by financial institutions in their respective jurisdictions. Consequently, the Indian government has introduced rules regarding reporting obligations of Indian financial institutions.