r2i forum

Hello All,

I have r2i'ed and am a NRA for US Tax purposes. I am trying to fillup the W8-BEN form to submit to the MF cos to declare the NRA status and have the following questions:

1. Do I need to submit a statement that identifies that CG is not taxable to NRAs. DO I also have to state the preferential treatement to Interest Income/Dividents.
2. In Part 2, I have checked only 9 a and b. Is that sufficient ?
3. Can you please guide me what should I be filling for line 10 for the IRA and non-IRA accounts ?

THanks,

I found the following sample from one of the threads fom the old forum for line 10:

Article 20 of the
treaty identified on line 9a above to claim a 0 % rate of withholding on (specify type of income): . Periodic IRA distributn.
Explain the reasons the beneficial owner meets the terms of the treaty article: IRA funded by rollover of private 401k. At age>55,distributions qualify as Pension. Refs- (1) Cross Border Employee Transfer, footnote 37, (2) U.S. Model Income Tax Convention September 20,1996, p-53, Article18, (3) IRS Publication 901,Table 1,code=14 for India

This seems to applicalble for the IRA accounts to someone over 55 withdrawing systematically over a period of time. I will be following the general consensus of this forum to withdraw the entire amount during the 2 year RNOR period. What should I be filling in ?

And should we fill in something while filing with MF that has Non-IRA money ?
I need this information urgently as I am sending the W8BENs thru someone to the US. I would appreciate greatly it if RRK/Bobus/Desi could share their views on this matter.

Line 10 should be left blank and for Non IRA MF, if with the same institution, same W8 will suffice. If with other institution, a W8 needs to be submitted to that institution.

The cap gains on MFs for NRA are exempt from taxes and the MF company will not withold once W8 is filled.

Do I need to submit a statement that identifies that CG is not taxable to NRAs.

See Desi's response below that says the FI will take care of it i.e. apply relevant US domestic tax law when it comes to withholding, given declaration of NRA status.

DO I also have to state the preferential treatement to Interest Income/Dividents.

The interest income from banks is tax exempt for NRAs. Dividend distributions received by NRA are subject to flat 30% tax under US domestic tax law - so what preferential treatment are you refering to for distributions received from mutual fund, other than cap gains? In any event, the FI shd take care of application of relevant US domestic tax law as it applies to NRA.

2. In Part 2, I have checked only 9 a and b. Is that sufficient ?

Yes.

3. Can you please guide me what should I be filling for line 10 for the IRA and non-IRA accounts ?

Cite Article 10(2)(b) of India-US tax treaty that says that tax rate on dividends received by India resident will be 25%. If in doubt, look up the treaty in the Internet and go thru it.

In addition, perhaps you can try your luck, and cite Article 20 of India-US tax treaty and Article 17 and 18 (check) of the Nov 15, 2006 US Model Tax Treaty that says private pension distributions received by India resident are exempt from US taxes. See discussion in the following thread about a conjecture, yet to be verified:

Taxes on US tax Deffered assets like 401K

#1 doesntMatter

In view of what Bobus referred to #4, I suggest that you may consider using the following language for item 10 in your W-8BEN

Article 20 of the treaty identified on line 9a above to claim a 0 % rate of withholding on (specify type of income): Periodic IRA distributn
Explain the reasons the beneficial owner meets the terms of the treaty article: IRA funded by rollover of private 401k. Distributions qualify as Pension. Refs- 1) IRC Secs. 3405(e)(2), 3405(e)(1)(A), 7701(a) (37); 2) U.S. Model I.Tax Convention Nov15, 2006, Articles 17&18, www.treas.gov/press/releases/reports/hp16802.pdf, 3) IRS Pub 901,Table 1,code=14.

Please note that a W-8BEN has value only with respect to withholding by a financial institution. Subsequently, a 1040NR has to be filed with IRS. They may choose to interpret things differently.

Firstly, pls accept my apologies for the delayed response. I would also like to thank Desi, Bobus, and BmMukerji for your response and your persistent investigations and help in this forum.

I know that atleast Bobus helps members who put some effort and does not like spoon-feeding and I agree with that and respect that. I would also expect the the other seniors to have similar expectations.
I did spend some time reading "Taxes on US tax Deffered assets like 401k" and tried reading some of the technical explanation to the treaties and have had limited success. It is a huge challenge for me to understand legal jargon and could have misunderstood something. Hence pls bear with me and point out my errors. Nonetheless I will present my understanding to this board for further scrutiny and comments:

Based on my understanding so far: US has a treating with India that was signed in 1991. The Nov-06 US model tax treaty and tech explanation is a generic version of the tax treaty. Now, it is my assumption that the Nov-06 version will apply when US does not have a treaty with a county and will be over-ridden by the treaty US has with India.

The above assumption is supported by the following that I see in the tech explanation.
On page 54/55 under articl 17,"However, the State of residence, under subparagraph (b), must exempt from tax any amount of such pensions or other similar remuneration that would be exempt from tax in the Contracting State in which the pension fund is established if the recipient were a resident of that State."
Another example is the following from Article 18 from Page 56:
"Paragraph 1 provides that, if a resident of a Contracting State participates in a pension
fund established in the other Contracting State, the State of residence will not tax the income of the pension fund with respect to that resident until a distribution is made from the pension fund. " We know that this is not true in India and GOI taxes during ROR period accruals thru dividends and sale within IRA even if distribuition is not mode.

The above seems to impose something or expect something from India and I suppose such a thing has to be accepted by India as well. As the US-India treaty has not been updated, I suppose that will hold in such a situations.

Hence I question if it is safe to go with the Nov-06 treaty explanation in an NRA's (of Indian citizenship) case.


Why do we need to look at Non-06 US model treaty when Article 20 of the US-India treaty explicitly states that "Paragraph 1 provides that private pensions and any annuities derived by a resident of a Contracting State from sources within the other Contracting State are taxable only in the State of residence of the recipient. "


Is a withdrawl over 12-16 months considered periodic payment or does it have to span multiple years ? My situation is that I might have 50-70k income in 2007. Based on the previous understanding that IRA withdrwal is considered income, I thought I could not withdraw without tax implications. I now have until Dec'0 to withdraw my IRA completely. A brief background is provided below.

Age: 31
R2I date: Oct 6th 2006.
RNOR period until 31st march 2009
IRA amount: ~75k
Expected income in 2007 from ESOP sale: anywhere from 20-80k based on the stock price on the date of the sale.
Citizenship: Republic of India
GC: None

Would greatly appreciate a response from this board.

#6:

To the extent the Nov 06 US model treaty unilaterally curtails a right to tax that the US-India tax treaty has given to India, such unilateral curtailment by US will not be binding on India - so your understanding about the non-binding nature of such unilteral US curtailments on India's right to tax is correct.

However, to the extent the Nov 06 model treaty unilaterally curtails a right to tax that the US-India tax treaty has given to US, no consent from India is required.

Article 20 of India-US tax treaty gives India the right to tax US source private pensions paid to a resident of India and takes away such right from US. What is private pension (for purposes of exemption from US tax) is not clearly defined by the treaty. Prior IRS private letter rulings have come up with certain conditions which were found in the old US model treaty. These conditions are absent from the Nov 06 US model treaty. So there is hope that the IRS may not insist now on the conditions that it had earlier imposed in prior private letter rulings. To know if the hope is reasonable, steps have been outlined in the thread refered to earlier in this thread. If the hope does not materialize, then the default situation is being subject to US taxes on IRA withdrawals made by a resident of India.

#6
First, I wish to commend you for your effort in self-help. Some comments:-

I. ?Now, it is my assumption that the Nov-06 version will apply when US does not have a treaty with a county and will be over-ridden by the treaty US has with India?.
This assumption is incorrect. Treaty agreements provide for updating views between governments.

II. ?Why do we need to look at Nov-06 US model treaty when Article 20 of the US-India treaty explicitly state "Paragraph 1 provides that private pensions and any annuities derived by a resident of a Contracting State from sources within the other Contracting State are taxable only in the State of residence of the recipient."
?Hence I question if it is safe to go with the Nov-06 treaty explanation in an NRA's (of Indian citizenship) case?.
To base a claim, one certainly can rely solely on Article 20 of the DTAA. In the present context, reference to Nov-06 model treaty was to highlight a contrast with the 1996 version. An advance PLR would have been nice. Since you are not a US tax-resident, it may be difficult to obtain a ruling.

III. ?Is a withdrawal over 12-16 months considered periodic payment or does it have to span multiple years? ?.
Tax filing is a yearly event. I think a minimum of two years is necessary to qualify for periodic. Periodic payment could be unequal amounts over unequal time intervals.

Thank you for your response Bobus and bmMukherji,[Edited Later] thank you for your kind words of encouragement but my effort pales in comparision to the tremendous efforts that you all put. I had to spend atleast a couple of hours in trying to reread the legal jargon and make some sense of it and that too left me with a good stuffed head. I guess not for a faint heart techy guy;-).

Now to some business:
Somehow my technical brain does not seem to accept that we can selectively choose which code (DTAA or '91 treaty) we want but I will go by your more educated opinion.

Bobus, I guess you ment the Nov-06 model's Article 17&18, which now takes away the right and not the Article 20 of India-US treaty. My understanding was before the new code, US had a right to tax pvt pension withdrawls and requirements for tax-free/penalty free dist was stringent. Now the new code makes it clear that that US does not have a right to tax pvt pension withdrawl.

I suppose the only unknowns are:
* does 401k rolled over into IRA qualify for pvt pension (in your words: for purposes of exemption from US tax)
* does withdrawing with 2-3 years qualify as periodic dist.

The only reasonable step for me from the ones outlined in "Taxes on US tax Deffered assets like 401K" is to call Mr Watson and I will do that.

However, before I call, it might be useful if there is an agreement on this board, what are the clarifications we need (both confirmations and the unknowns) so that I can atleast sound a bit confident/tax literate and have a chance of getting useful information. I fear that if I call based on what I know now, I might blabber some in-compreheisible mumbo-jumbo and confuse Mr Watson aslo. Hence this precaution.If someone else wants to take the initiative, I am willing to wait.

Thanks once again to the experts for their patience and persistence

My understanding was before the new code, US had a right to tax pvt pension withdrawls and requirements for tax-free/penalty free dist was stringent. Now the new code makes it clear that that US does not have a right to tax pvt pension withdrawl

No, per Article 20 of the India US treaty (even before the Nov 06 US model treaty), US does not have the right to tax US source pvt pension distributions made to a resident of India.

It is on the issue of what constitutes a pension distribution (for qualifying under Article 20 of the India-US tax treaty and thus) that the Nov 06 US model treaty may be of some relevance.

I will try to call Watson within 1 week from today and post about the conversation.