The issue of global taxation of Indians residing in USA, or residing in India but being a US reportable person, requires comprehensive understanding of the following:
1. US tax laws which are governed by IRS;
2. Specific regulations under FATCA which covers foreign assets;
3. Provisions of FEMA in India;
4. Guidelines by the Reserve Bank of India from time to time in relation to remitting or receiving dollars; and
5. Income Tax Act, in specific, Indo-US DTAA.
Each of the above is a specialised area in itself; however, the only way to address the issues of global taxation for Indians residing or anticipating residing in America is to understand them thoroughly with a unified approach. This article aims to give a 360operspective apropos the tax intricacies for Indians who have now become US Citizens, NRIs, Green card holders & for aspiring immigrants under the EB-5 route.
The first & most imperative point to understand is that the moment you become a green card holder, global income must be reported to IRS irrespective of whether the green card holder stays in USA or abroad. Thus, a US green card holder who spent entire 365 days in India, would still need to reflect his Indian & other global income to US authorities nevertheless he being considered resident in India as well. It does not matter whether you are a provisional or permanent green card holder; and it also does not matter whether you obtained your green card organically or through the EB-5 route. It would be preposterous to keep arguing on different permutations-combinations, and trying to find a way of avoidance, because the law is very clear that all US green card holders must surrender their global income to IRS for taxation in US. It is a harsh fact that many Indians, especially provisional green card holders who are residing in India, have not been adhering to the system because a significant number of them have no clue whatsoever on the reporting requirements. In the past, this wouldn’t be a problem; but with cross-country reporting and increasing regulations for mandatory exchange of information, there has been a terrific rise in levels of transparency between the two nations. US government has already started taking actions, and a plethora of people have been officially reported to have received notices for compliance failures.
It is not possible to write down the intricacies and various different stands which an individual may take for his or her personal case, however, important provisions have been outlined below:
1. All types of foreign income, whether taxable in the foreign country or not, must be reported to IRS. There are a bunch of questions asked by clients to me, the most popular one being “Whether rental income earned in India should be reported to IRS or not”. When someone comes to me with a question like this, it only means people have misled themselves all this while. The law is very clear “Any foreign income”, and thus there is nothing further to interpret. It certainly doesn’t matter whether your source of income is rental, capital gains, or bank interest.
2. FBAR has to be filed if you have financial interest in a foreign account, and the aggregate value of all such foreign financial accounts exceeds $10,000 at any time during the calendar year. Again, do note here that reporting has to be of all the financial accounts once you touch the limit. For e.g., Mr. India, a business owner residing in California, has 4 bank accounts in India, and one bank account in Kenya. The bank account in Kenya had a balance of dollar equivalent $ 10,300 at one point during the entire financial year, whereas the bank accounts in India have a closing balance of US$ 100 each. In that case, all the foreign bank accounts would get reportable, mandatorily, under the current provisions of the Bank Secrecy Act. The reason I am quoting this example is because some people are under a misconception that only those bank accounts are reportable which have crossed the non-reportable limit.
3. Compliance under FATCA is in addition to point 2 above. Again, most NRIs are not aware that these are two completely separate reporting requirements. FBAR has been in practise for quite some time now whereas FATCA is relatively new; and importantly, it has been introduced in addition to the Report of Foreign Bank & Financial Accounts. The provisions of FATCA are applicable to US citizens, Green card holders, H1 visa holders and those persons who have resided in USA for 183 days or more in the current year OR 31 days in the current year coupled with 183 days in immediately previous 3 years. Further, to satisfy the test of 183 days, count all of the days you were present in the current year, and one-third of the days you were present in the first year before the current year, and one-sixth of the days you were present in the second year before the current year. Complex as it sounds, but not!
4. Under the provisions of FATCA, all financial interests overseas, including balance lying in bank savings account, mutual fund investments, fixed deposits, would have to reported under Form 8938 at the time of filing of your annual tax return with IRS if the value of such assets exceeds:
For taxpayers living abroad (abroad here refers to US reportable persons who are residing anywhere other than USA)
• You are not a married person and the total value of your foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year. Do note that “year” refers to calendar year, and not financial year as followed in India. I come across situations quite often where people are checking their closing balances as on 31st March, which is out rightly absurd. The closing date has to that of the relevant calendar year, being 31st
• You are married & thus filing a joint income tax return. The combined value of the couple’s foreign financial assets is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.
For taxpayers residing in USA
• You are unmarried and the total value of your foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
• You are married & have chosen to file a joint income tax return, and the total value of your foreign financial assets is more than $100,000 on the last day of the tax year or more than $150,000 at any time during the year.
• You are married but have chosen to file a separate tax return, and the total value of your foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the year.
Do note that FATCA is not merely about reporting on Indian bank accounts & their balances; as it also covers other financial assets like the underlying interest in a private limited company by NRI, insurances, mutual fund investments, etc.
Failure to file Form 8938 by the due date or filing an incomplete form attracts penalty of US$ 10,000. Additional penalty of US$ 10,000 per month up to a maximum penalty of US $50,000 is payable on continuing failure to file in-spite of a notice issued by IRS.
5. One of the most frequently asked doubts is on the mechanism for obtaining credit on tax paid in India, especially for those people who have literally zero income in USA, and would still need to file a US tax return. Generally, most Indians in USA would not have an active source of income in India, other than bank interest, and few investments here and there. Unless a property is being sold which has resulted into some capital gain, I have lately seen that NRIs in general have stayed away from owning active / official partnership or stake in Indian businesses. They would not normally have the issue of obtaining tax credits every tax year. However, those Indians who are still very much residing in India, and are in the process of obtaining green card, they would need a heck of proper tax planning. For instance, Mr. Shah & his family have filed i-526 petition under the EB-5 immigration route. A few months later he received his provisional green card. The question that first comes to mind is whether he needs to start filing US tax returns from the next tax year onwards? The answer to this question is 100% yes. Nevertheless his continuing to be resident in India, and notwithstanding any other fact, he must start reporting his income in India to IRS. He can however file Form 1116 with IRS to claim credit of taxes paid to Indian government.
I am not touching the Double Taxation Avoidance Agreement between India & USA as that would require a separate article by itself. Terrific amount of relief is given to taxpayers by virtue of this treaty; a bit of planning will go a long way in saving your money legitimately.