US PFIC Taxation Summary by Bobus

[shonnavalli]

Hi Bobus- You mentioned a USC can avoid PFIC hassles by buying individual stocks. Can you please elaborate on this topic. So if PFIC does not apply how does a USC report gain/loss in 1040 when the position is liquidated. Also - I believe, a USC cannot open a DMAT a/c in India to buy stocks or mutual finds - is that true?

Thanks,
SH

[rajeev83]

I have gone through several threads on this forum on the issue of PFIC with Indian Mutual Funds; and thanks to the great post - I have gathered good understanding on the PFIC topic - but have 1 outstanding quesiton which I am hoping you can answer. I have a US citizenship; and am currently in India. For Debt Mutual Funds offered in India - they have 2 schemes --- Dividend Scheme and Growth Scheme. For the Dividend Scheme the dividend gets paid at a regular frequency (say monthly). The mutual fund company already pays a 15% "dividend distribution tax"; and what we get in hand is the dividend after that tax is paid (hence we don't pay any taxes on the final dividend received in India). I don't think we get any TDS certificate or anything --- we just see the final dividend (less the Dividend Distribution tax). Now I understand that as a USC when I report my global income - I have to report the dividend that I receive on my US tax return and that dividend will be taxed as ordinary income (which in my case will be approx 28%). So the question is do I then effectively have to pay this 28% on top of the 15%? OR is there any way to tell the US IRS that the mutual fund company has already deducted 15% DDT so I should pay only another 13%?

You can tell IRS that 15% tax was paid on your dividends to Indian income tax department using form 1116 www.irs.gov/pub/irs-pdf/f1116.pdf. I think the form 1116 is the correct one, but your US CPA or the more experienced members in this forum can guide you correctly. However, you need to get a statement from your mutual fund scheme that 15% tax was paid to Indian income tax department on the dividend distributed to you. A letter from the mutual fund scheme on their letterhead which states something like
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"nehad" holds N number of units in our scheme A which is managed by Asset management company DEF. 15% tax was paid to Indian income tax department as per section 115H or section 115R of Indian tax law on dividends issued to nehad.
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The letter needs to be signed, have proper contact information. Getting the letter might be difficult since the first level of support for most mutual funds will not know how to tackle this so you need to approach folks in upper echelon of the mutual fund scheme for it. Additional evidence, could be using section 115H or section 115R of Indian tax law(Double check whether it is section 115R or 115H from a Indian CA) where a debt mutual fund is required to pay taxes to income tax department in India. Attach a print out of the relevant text of the law, link to it when claiming this. But, ensure that you get the letter from the mutual fund scheme. Send the letter from the mutual fund scheme and print out of the relevant text of the section 115R or 115H law and explain your exemption. Review this http://www.irs.gov/businesses/article/0,,id=183263,00.html

I was informed this should work by a US CPA(who had used this approach successfully for some of his clients from other countries) and a tax attorney in US, but I could not use this approach since my mutual funds were equity mutual funds so they are exempt from the dividend distribution tax(which I think is 12.5% not 15%, but your Indian CPA can guide you here too).

Hope this helps and post back how it worked out so that we all can benefit from your experience.

[rajeev83]

Correction: The above approach I mentioned "may" not work because of the Double Taxation Avoidance Agreement India and US have. It "may" work if you can prove that funds invested in the debt funds are from income earned in India.

[gurusw]

For investment in India debt mutual funds, I feel that the M2M method is not bad.

Say I apply M2M for debt funds, and pay PFIC taxes to IRS. When I sell these debt funds (say after 3 years), can I avail tax relief from GOI corresponding to the PFIC taxes paid to IRS for these 3 years?