r2i forum

This is a Master Thread (MT) for questions on what PFIC is and for questions / answers related to PFIC.

Some threads from MSN Board:

[URL="http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=45972"]US Taxes PFIC rules for investment in india mutual funds..
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US Exercise Tax on foriegn insurance policies..

[URL="http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=53131"]PFIC and Indian liquid funds
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[URL="http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=54568"]PFIC and Post office investment
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[URL="http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=52815"]PFIC not an issue below $80000 earned ?
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[URL="http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=51048"]PFIC Question
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[URL="http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=48150"]
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[URL="http://groups.msn.com/R2INRIFinanceAndInvestments/general.msnw?action=get_message&ID_Message=48150"]PFIC rules and ULIP
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Another related thread from this forum:
Exploring Investme in Indian Debt Mutual Funds without Inviting High PFIC Taxes

Admin
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The following post is by Member laks0:

http://www.personalfn.com/detail.asp?date=2/2/2007&story=2

FPs in India have no idea about US tax and US FPs have no idea about indian Tax, more reason to appreciate this forum.

Even in US many financial planners, dont bother about taxation. It is not a subject they want to advise on. They will ask you to check with your tax advisor. Ofcourse there are some exceptions and some take care of taxes while doing fin plans.

For USC R2I'ers. Investing in Indian MF's is not worthwhile due to PFIC. Refer Bobus and others extensive posts on this matter. Some gurus like desibabu recommend mirroring the Nifty 50. I beleive there are ETF's in India as well, though not sure how many. Do Indian ETF's come under the purview of US PFIC? Because ETF's are like stocks really in the way they are traded?

How will us ETF's be treated in Indian taxation point of view?

Just trying to find a way out of the tax nightmare and avoid dividend distributions that are taxable among other things...

Any opinions?

Can you list any ETF that tracks the Sensex or Nifty?

The general consensus on the forum is that USC investing in Indian MF get slapped with PFIC. Better option is to invest in a fund like MINDX from US. When I bring this up with the India based mutual fund advisors/agents, they wonder how the many lacs of US based NRI's have been directly investing in India based MF all these years? There is also the additional tradeoff like no long term capital gains tax (equity based funds) and more variety of funds to choose from if invested directly from India instead of MINDX.

Could the PFIC be a case of something that *might* be technically correct but something that is difficult to enforce due to IRS/Indian IT co-operation (or lack of it)? Meaning, can a r2ied usc who is a little more *adventurous* (wink wink) and not too worried about repatriation can get away with this
fairly easily? Most r2ied USC have the option of either investing as NRI or ROR (if they having been staying in India for a while) practically speaking.

I am also attaching a doc that I received regarding the PFIC rules. It seems that it is meant to catch the VC's of startups and other such big fish rather then the small time salaried engineer.

I realize that this is a "gray area" question that might not be taken well by some. I am sure I am asking this on behalf of scores of r2ied folks here.

-restlessdesi

restlessdesi,

As many other issues I dont think there is a clear cut answer to this. I think what really matters is if YOU, as an individual, are comfortable with such an investment?

If you are of the type that do not hesitate to go for small adventures and don't loose sleep over the consequences and think you can deal with them when they hit you, then go for it.

Sometimes "Ignorance is Bliss" where more knowledge doesn't necessarily result in happiness.

I know a lot of my colleagues who treat ESPP shares as regular Stock Trades. Now, thier ignorance doesn't make it right, but, they are happy not to include Part of the trade as income and pay more taxes.

So, in case of PFIC given the complexity of the Rules involved, Lack of complete understanding and how remote the chances are that the US may come to know of your investments in INDIA, My guess is people would fall into one of the 4 camps.

1. Dont know that there are such rules exist, dont want to research before investing but just want to invest.

2. Did my research, know the issue, dont want to deal with the complexity. so dont invest.

3. Know the rules/issues. want to take the pain of dealing with the rules for potential higher gains.

4. Know the rules, but ignore the rules, still invest, deal with it when the time comes.

You just need to figure out which camp you fall into and what you are comfortable with it.

You have raised a very interesting topic. The fact is strictly speaking, indian mutual funds are PFIC. It is your choice whether you choose to report to IRS or not. There is a good chance IRS will never find out, you know best whether to take the chance. Lakhs of NRI's include those who are not US based and those who are but investing unknowing of these rules.

It is your choice. To me, the only legal way is to legally gift the money to someone you trust who is not a USC and let them invest with all the risks associated with it. Even here if your intention is to benami invest, strictly speaking then it is not a gift.

If my net worth were 2-3 million or more, I would not consider USC at all. It is not worth it, without going into patriotic, emotional, ethical, moral or other considerations.

If one spouse is USC + other spouse is Indian citizen and then if you were to R2I and become Indian residents, you could probably do all the Indian mutual fund investment in Indian citizen's name. Not sure how you would then file MFJ in US. Can someone throw some light on whether this is feasible or not?