US-India Tax Treaty and the Black Money Act of 2015
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US-India Tax Treaty and the Black Money Act of 2015

November 17, 2019


We’ve all had that experience where we are
driving down the road and we see a police officer who has pulled someone over. We assume
they were speeding so we check our speedometer and let up on the gas pedal. That’s exactly
what’s happening to American citizens who are living and working in India. India has
passed a new law called the Black Money Act and all of a sudden Americans living in India
are thinking “Am I in compliance with Indian tax law?” Well this video is for our clients
living in India. We are going to examine what happens when you have two different jurisdictions
who think they both have the right to tax the same amount of earnings – so, in this
case it’s India and the U.S. These same principles apply at the state level when there are two
states who want to or think they both have a right to tax the same amount of income. What happens when you have multiple jurisdictions?
Well, the same amount of earnings may be taxed twice, or not at all. The other thing that
happens is that each country feels that they are a sovereign country and they don’t want
their tax rules determined by a third party, or a third country. So each country is fastidious
about their sovereignty, and they want only their rules to be applied and, of course,
they want the revenue that follows that. In the U.S., we have certain things that are
called tax benefits. Because of this we don’t tax people with low incomes. We give them
a credit for that. If you have a mortgage on your primary residence, that’s excluded
from income. If you have charitable contributions, that is excluded from income. If you have
exemptions or kids, that is excluded from income. If you have a standard deduction,
that is excluded from income. There are two benefits overseas Americans have, one of those
is called the Foreign Earned Income Exclusion and that’s excluded from income. The Foreign
Tax Credit is the other benefit that overseas Americans can have. So, those are some of the unique things our
country has: Tax benefits. Even though you are given these tax benefits you are still
subject to taxes on all that income, even if it doesn’t result in you writing a check
to the federal government. We all know there is a difference between
the posted speed limit, and what’s enforced. That’s a critical difference. In some countries,
that is a very narrow thing, and in others there is a very wide discrepancy. Clients
sometimes think “Oh, I’m cheap, I don’t want to pay for expert advice. I will just go ask
the IRS what the tax treatment for this type of income is. Well, a lot of times the person
that you talk to–either on the phone, or if you walk into their office–is not going
to be knowledgeable about the tax issues you are facing. And if they’re not knowledgeable,
there is only one safe answer for a government employee. Whether it is the IRS, State Department
of Revenue, or Indian Revenue Bureau the safe answer is “of course, it’s taxable!” Government
employees will never get in trouble for saying it is taxable. Government employees will get
into trouble is if they say something is not taxable when it actually is. So, the enforcement
mechanism in India says “We want to see if you pay taxes in the US.” And they might look
at a W-2, or FICA but those aren’t really the rules, and that’s not how the laws were
written. Just so you know, the Black Money Act was
actually geared toward collecting revenue from wealthy Indians. It wasn’t drafted toward
generating revenue from Americans living and working in India although it has had the effect
that American citizens in India all of a sudden are re-evaluating their tax status. Let’s review, and talk about the tax status
of American citizens living and working in India. On the top half of this diagram we
have the US side, on the bottom half we have the Indian side. The question that’s trying
to be answered here is “Where am I a resident?” Because, in the tax treaty, if you’re a resident
of the US you get to be taxed by US rules, if you are a resident in India you get to
be taxed by India’s rules. In the US, just our normal tax laws, American tax law taxes
citizens on their worldwide earnings. This is unusual for most countries. India, like
most other countries, taxes based upon residency. This little road diagram tries to determine
who can tax you, and it does that by asking the question “where are you a resident?” The
first thing you do is come down here. If both countries or neither country, can make a claim
on you then you go on further down the road. So, is an American citizen is working in India
the US is going to make a claim. If you live in India for more than 180 days, India is
going to try to make a claim. So, in this scenario, under article 1 of the tax treaty,
neither one gets to decide what the final outcome is of where you’re a resident because
they both have a claim. So then you go to what’s called a tie-breaker rule of Article
4 of the US tax treaty. In that tax treaty you have a question to ask, “Do you have a
permanent home?” And if so, “Where is that permanent home?” If it’s in India, India will
try to claim you, unless you have a permanent home in the US. The next question is that
of habitual abode. If you have a permanent home in both or neither country you go on
to the next criteria. Do you have a habitual abode in the US or India? If it’s both or
neither you go on to the next criterion which allows citizenship to take you. It will be
the tie breaker of where you are a resident. Where you are a resident determines where
you will be taxed. If you will be taxed primarily by US rules, or Indian rules. So, these are
the tax treaty rules, and we talked about why people are reevaluating their status. Now we’re going to go on to what we need to
do about it. The first one is spend less than 729 days in India in a 5 year period and India
is not going to tax you on income you made in the US or elsewhere. That’s one way to
avoid the rules. Another is to obtain a permanent US home. If you have a permanent US home,
and don’t have a permanent home in India, then you’re going to be a resident of the
US and subject to US tax law. So what is a permanent home? It could be a mailing address,
a place you return to and live, it could be a room at a parent or a sibling’s home, if
you own real estate in America that could be a permanent home that you return to, and
it can be a place you rent out. You probably can’t have a permanent home in India because
you have a visa that limits how long you can remain in India. If you have a permanent home
in neither country, or both countries, you go onto habitual abode. You can have a habitual
abode in both places. A habitual abode is where you routinely or habitually sleep. These
are all ways to minimize India’s claim on your source income. Another way to do that
is to split your wages between a husband and a wife. Lastly, you could file an Indian non-resident
return as a way of putting the Indian government on notice that you are not subject to their
taxation because you have no Indian source income. These are things we have our clients
do to minimize the Indian tax claim. This is a very complicated area of tax law.
It has all been brought up by the Black Money Act. It has caused US citizens living in India
to re-evaluate their tax status. Let us do what we do best: evaluate US Tax Law, so that
you can do what you do best for you. Thank you very much for your time, have a great
day and God bless.

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