With effect from financial year 2012-13, India made it mandatory for all foreigners, including non-residents to obtain a Tax Residency Certificate with certain prescribed details from their country of residence in order to claim benefits of the Double Taxation Avoidance Agreement (DTAA).
The complete notification for this was released in September 2012, and hence financial year 2013-14 is the first full year when this will become applicable.
Let us quickly look at what the treaty benefits are and then go on to understand how Indian Americans can get the TRC from the US Internal Revenue Service (IRS).
To put it in a nutshell, the India-US DTAA allows residents of the US who have income from India to pay a lower amount of tax in India provided tax on the same is paid in the US.
The table below will give you a snapshot of common incomes that have treaty benefits:
“Sections 90(4) and 90A(4) in this regard say that foreign vendors must ‘obtain’ a Tax Residency Certificate. What this means is that the NRI must obtain this certificate and keep it with him. If he claims the treaty benefits at the time of filing his tax returns, then he must be ready to present the TRC at the time of assessment. However, if he is claiming the treaty benefits at the time of Tax Deduction at Source (TDS), then the payer may ask him to furnish the TRC in order to deduct tax at the lower rate,” explains Vineet Agarwal, Director – Tax, KPMG India.
Tax Residency Certificate
The IRS issues this on Form 6166. Form 6166 is a letter printed on US Department of Treasury stationery certifying that the individuals or entities listed are residents of the United States for purposes of the income tax laws of the United States.
In order to obtain this certificate, you must fill up Form 8802, Application for United States Residency Certificate.
When to apply: If you need the Tax Residency Certificate for 2013, you can apply now. “The TRC will be available only for one calendar year at a time. So if you need one for financial year 2013-2014, you will need to get two certificates, one for 2013 and one for 2014,” explains Roy Vargis, CPA and promoter of IndiaCPA.com.
There are a few challenges here. First is that the IRS will issue the TRC for a future year only after Dec 1 of the earlier year. That means, if you need a TRC for 2014, you can apply only after 1st December 2013. So this is something NRIs must remember and act on later on to get their 2014 TRC.
Secondly, “If someone was deputed to US recently or is a recent migrant, he will not be eligible to file Form 6166 for TRC. The certificate will be issued only if a US tax return was filed. If for the current year you filed a 1040NR (a non resident return), then too you will not be eligible for the TRC,” Vargis explains. In such case, you would need to pay tax in India and then claim credit in your US tax returns.
“To take this a step further, if you were a dual resident, a resident of US and India, your application for TRC may be denied. This is possible in a situation where you were either a Green Card holder or a Citizen of US living in India. In this situation, the application should be submitted with evidence to establish that you are a resident of the US under the tie breaker provision of the US India DTAA Article 4(2). Do note that US Citizens or Green Card holders who do not have a substantial presence or permanent home in the US during the tax year are not entitled to treaty benefits,” Vargis adds.
Documents: The IRS needs to know that you are indeed a US tax payer. So if you are applying for the TRC for 2013, then you should have filed your 2012 returns. Since the due date for tax returns for 2012 just passed, it is possible that the IRS may not have your tax return in their system. In such cases, it will be useful if you included a copy of the income tax return with your Form 8802. Write “COPY – do not process” on the tax return.
In addition, you must also sign a ‘Penalties of Perjury Statements and Attachments’ declaring that you would continue to be a US taxpayer in the year for which you are requesting the TRC, that is, for 2013.
Fee: You must pay a user fee of $85 for each Form 8802. The IRS advices applicants to request all forms 6166 on a single form 8802 to avoid paying $85 for processing a second form 8802.
This is the first year that India is mandatorily seeking TRCs and there are likely to be teething troubles.