I posted this in another thread bu tthat thread has been inactive for quite long, so am posting it separately hoping to get a response.
How did you arrive at this conclusion about where to claim deduction for double tax?
[INDENT] The thread mentions multiple times, that for income sourced from India which is taxed by both US and India (USC, RNOR), the tax should be paid in India and relief be claimed from US.
Where, in the Indian tax code or in the tax treaty does it say that that the relief can be claimed only from the US?
Reading the Article 25 of DTAA, it sounds like you can get deduction from either country. Though it discusses about 'source of income' in general, it does not seem to explicitly say that you can claim only from US for the Income arising from India.
Could you highlight specific wordings which might imply that?
http://www.irs.gov/pub/irs-trty/india.pdf [/INDENT]
Treaty question
Treaty question
#1 r2maa
It is the " Tax" that has to be paid to the source country that is expressly addressed.
1. Article 2.1(b)(i) of DTAA
2. Income-Tax Act, 1961 as amended by Finance Act , Section 5, Scope of Total Income. Note “ all income from whatever source ” http://law.incometaxindia.gov.in/DIT/Income-tax-acts.aspx
It is the " Tax" that has to be paid to the source country that is expressly addressed.
1. Article 2.1(b)(i) of DTAA
2. Income-Tax Act, 1961 as amended by Finance Act , Section 5, Scope of Total Income. Note “ all income from whatever source ” http://law.incometaxindia.gov.in/DIT/Income-tax-acts.aspx
Treaty question
#2 bmukherji Thanks so much for replying.
Which wording would allow one to conclude that you cannot claim deduction from Indian tax, for the tax paid in the US when the source of income is India?
US requires a USC to pay tax on global Income. India requires a resident to pay tax on global Income (except during RNOR when it is just on the Indian income).
2.1(b)(i) of DTAA seems to say that the convention shall apply to 'Income tax' of India.
And, 25.2(a) of DTAA seems to say that India would allow deduction on tax paid to the US - mainly, it does not seem to qualify this that such tax paid to US should have arisen outSide of India source only.
Here which wording should I consider that says that this is about the tax paid to US 'out of income sourced from US only' and not 'global income'.?
Since USC needs to pay tax to US on all income, it would seem to cover income arising out of India as well.
So it is not clear why the deduction for India source income should be claimed only from the US and not from India.
==> Also could you explain in english 4(a) (Residence) - of DTAA that states "this term does not include any person who is liable to tax in that State in respect only
of income from sources in that State" ==> Is this application to RNOR? If RNOR is not a 'resident' for this convention (dtaa), then how does DTAA help an RNOR with respect to Double Tax avoidance? Where can an RNOR take deduction out of for the salary earned while residing and working from India for more than 180 days.
==> Also could you explain in english 25.3(a) and 25.3(b) as to how the 'source' here has an effect on where the deduction can be claimed from?
Thanks so much!
Which wording would allow one to conclude that you cannot claim deduction from Indian tax, for the tax paid in the US when the source of income is India?
US requires a USC to pay tax on global Income. India requires a resident to pay tax on global Income (except during RNOR when it is just on the Indian income).
2.1(b)(i) of DTAA seems to say that the convention shall apply to 'Income tax' of India.
And, 25.2(a) of DTAA seems to say that India would allow deduction on tax paid to the US - mainly, it does not seem to qualify this that such tax paid to US should have arisen outSide of India source only.
Here which wording should I consider that says that this is about the tax paid to US 'out of income sourced from US only' and not 'global income'.?
Since USC needs to pay tax to US on all income, it would seem to cover income arising out of India as well.
So it is not clear why the deduction for India source income should be claimed only from the US and not from India.
==> Also could you explain in english 4(a) (Residence) - of DTAA that states "this term does not include any person who is liable to tax in that State in respect only
of income from sources in that State" ==> Is this application to RNOR? If RNOR is not a 'resident' for this convention (dtaa), then how does DTAA help an RNOR with respect to Double Tax avoidance? Where can an RNOR take deduction out of for the salary earned while residing and working from India for more than 180 days.
==> Also could you explain in english 25.3(a) and 25.3(b) as to how the 'source' here has an effect on where the deduction can be claimed from?
Thanks so much!
Treaty question
#3 r2maa
01. Quote – “Which wording would allow one to conclude that you cannot claim deduction from Indian tax, for the tax paid in the US when the source of income is India?”
– You would not be able to find an explicit statement for this in either the Tax codes or the Treaty.
02. Quote – “US requires a USC to pay tax on global Income. India requires a resident to pay tax on global Income (except during RNOR when it is just on the Indian income).”
- This reflects a correct understanding of the present income tax laws of each country.
03. It is an accepted principle of taxation that the source country where income originates has the sovereign right to tax that income. Conditional provisions (e.g. IRC §871 (h) or Article 20 of US-India DTAA) may change that for a category of income and/or Taxpayer.
04. Quote – “2.1(b) (i) of DTAA seems to say that the convention shall apply to 'Income tax' of India. Here which wording should I consider that says that this is about the tax paid to US 'out of income sourced from US only' and not 'global income'.? Since USC needs to pay tax to US on all income, it would seem to cover income arising out of India as well. So it is not clear why the deduction for India source income should be claimed only from the US and not from India”.
– The fundamental issue here is the residency of the taxpayer. Two questions ~ where is the income originating and what is the beneficial owner’s residency? In context of the current topic, the answer to both questions is India and therefore Treaty Article 2 will prevail.
05. Quote – “Also could you explain in english 4(a) (Residence) - of DTAA that states "this term does not include any person who is liable to tax in that State in respect only of income from sources in that State."
- In English this is stating that in order to make use of Article 4 of DTAA, a person need to show taxable income in both states.
06. Quote – “Is this application to RNOR? If RNOR is not a 'resident' for this convention (dtaa), then how does DTAA help an RNOR with respect to Double Tax avoidance? Where can an RNOR take deduction out of for the salary earned while residing and working from India for more than 180 days.”
- I believe there is a need to clarify the acronym RNOR. RNOR, by itself, is not a defined term in the Indian code ~ it is widely used as a short hand by combining “resident” and “not ordinarily resident” both of which are defined in the 1961 Income Tax Act. A resident of India, getting active income from working in India and/or passive income from investments anywhere, is liable to tax in India under the residency clause.
Also, if that person happens to be an USC, then he or she needs to comply with another but a completely separate requirement ~ filing a tax return (not necessarily paying any tax) to US. It is independent of the compliance required by India. Fortunately, US tax laws provide for taking a tax relief on the 1040 Form via credit (Form 1116) or exclusion (Form 2555).
I hope the above is English enough for your purpose.
01. Quote – “Which wording would allow one to conclude that you cannot claim deduction from Indian tax, for the tax paid in the US when the source of income is India?”
– You would not be able to find an explicit statement for this in either the Tax codes or the Treaty.
02. Quote – “US requires a USC to pay tax on global Income. India requires a resident to pay tax on global Income (except during RNOR when it is just on the Indian income).”
- This reflects a correct understanding of the present income tax laws of each country.
03. It is an accepted principle of taxation that the source country where income originates has the sovereign right to tax that income. Conditional provisions (e.g. IRC §871 (h) or Article 20 of US-India DTAA) may change that for a category of income and/or Taxpayer.
04. Quote – “2.1(b) (i) of DTAA seems to say that the convention shall apply to 'Income tax' of India. Here which wording should I consider that says that this is about the tax paid to US 'out of income sourced from US only' and not 'global income'.? Since USC needs to pay tax to US on all income, it would seem to cover income arising out of India as well. So it is not clear why the deduction for India source income should be claimed only from the US and not from India”.
– The fundamental issue here is the residency of the taxpayer. Two questions ~ where is the income originating and what is the beneficial owner’s residency? In context of the current topic, the answer to both questions is India and therefore Treaty Article 2 will prevail.
05. Quote – “Also could you explain in english 4(a) (Residence) - of DTAA that states "this term does not include any person who is liable to tax in that State in respect only of income from sources in that State."
- In English this is stating that in order to make use of Article 4 of DTAA, a person need to show taxable income in both states.
06. Quote – “Is this application to RNOR? If RNOR is not a 'resident' for this convention (dtaa), then how does DTAA help an RNOR with respect to Double Tax avoidance? Where can an RNOR take deduction out of for the salary earned while residing and working from India for more than 180 days.”
- I believe there is a need to clarify the acronym RNOR. RNOR, by itself, is not a defined term in the Indian code ~ it is widely used as a short hand by combining “resident” and “not ordinarily resident” both of which are defined in the 1961 Income Tax Act. A resident of India, getting active income from working in India and/or passive income from investments anywhere, is liable to tax in India under the residency clause.
Also, if that person happens to be an USC, then he or she needs to comply with another but a completely separate requirement ~ filing a tax return (not necessarily paying any tax) to US. It is independent of the compliance required by India. Fortunately, US tax laws provide for taking a tax relief on the 1040 Form via credit (Form 1116) or exclusion (Form 2555).
I hope the above is English enough for your purpose.
Treaty question
Dear BMukherji, Thanks so much for your patient and clear reply. It is good to get the interpretation/generally accepted practice from people who are familiar with it. Yes, your English language was much better to understand .. sometimes I feel wordings in law are more like Aamir Khan's definition of book (3 idiots). Can't blame though. There would be thousand people interpreting the law in thousand ways if not defined fully, so the legislators are having to go to lengths. Thanks again!