The response offered to Mr.Jack is that, he is entitled to Apply the Tie Breaker test under Article 4 of the US India DTAA.
The first issue to be considered in this regard is what are all the situations in which, an assessee will end up in a situation of being a resident of both the countries. The second issue is whether such an assessee can avail the double tax relief provided in the DTAA between the two countries of which he is a resident and if so, what should be done to claim such a relief. The third issue is how the double tax relief should be actually claimed in the context of the Indian tax filing.
1. A country’s domestic law provides specific rules for individuals that are Residents or Non-Residents of that country as defined under its domestic laws. The Indian domestic law is embodied by the Indian Income Tax Act 1961 and the USA domestic law is embodied by Internal Revenue Code (IRC), Treasury Regulations and case law.
2. For an individual, the concept of ‘Resident of a Contracting State’ is necessary: --
(a) in solving cases where double taxation arises in consequence of dual residence and
(b) in solving cases where Double Taxation arises as a consequence of taxation laws in the State of Residence and in the State of Source or situs.
3.(a) Both US and India have entered into Bilateral Income Tax Treaty (DTAA) to modify the results that otherwise occur under each country’s domestic laws. Each Contracting State may claim tax treaty benefits afforded by the DTAA. For India, provisions of Section 90 and other relevant provisions of the IT Act come into play and whichever is more beneficial for the Assessee, shall be available to him as DTAA applies to him. This is as per the Indian Tax Act. It is relevant to note that the Residency provision as per DTAA is more beneficial to Mr.X, being a Citizen of USA. It is also presumed that he also holds OCI Certificate issued by Govt. of India.
(b) Mr.Jack was born in India but his engagement in very senior positions with multinational companies resulted in him moving to the United States where he continued to occupy key roles. He has been continuously living and working in USA which is his permanent home. His desire is that it should continue to be his permanent home in the future too. Mr.Jack wife in India and who managed their assets in India and whom he visits periodically and be of help in every possible way
(c) Mr.Jack has his permanent home in, and Citizenship of USA, is liable for payment of taxes on his worldwide income as per IRC of USA. During forthcoming financial year/s he may have to stay in India for more than 182 days. In that case, according to the provisions of Indian Income Tax Act, and in consequence of his duration of stay in India, he will be liable to be taxed on his worldwide income as a “Resident” in India. This is some kind of deemed Residency fiction. It is apparent that both countries claim that he is a Tax Resident of their respective country resulting in Double Taxation of the same income (here in this case, it refers to his USA income). This conflict is resolved by proper application of DTAA Tie-breaker rules which do find place in the Indian Income Tax Act as well as in US-India Double Tax Avoidance Agreement
4. Let us take each one by one. The DTAA Tie-breaker rules are used to determine a single Country of Residence in a case of dual Residency. The Tie-breaker rules carry out a test which is conducted sequentially for each of the 4 Criteria specified. In the case of Mr.Jack, his Country of Residency test results in his favor, thereby confirming that USA is his Country of Residence. The specified Criteria broadly are: -
a) Permanent Home of the Individual
b) His Centre of Vital Interests
c) His Habitual Abode
d) His Nationality (DTAA means it as Citizenship)
{i} Permanent Home
In the case of Mr.Jack, he has a permanent home in USA which is rented and retained exclusively for his use while he lives in the US. He currently visits India and stays in his wife’s home which is available for his use as a home whenever he visits India. Thus as far as facts currently stand his permanent home is only present in the US and not in India thus obviating the need to apply test #2 under the DTAA.
In the event a case is made that his home in India, albeit in his wife’s name is his home as well and with it the existence of permanent home in both countries, the application of Tie-breaker test does not end there but continues to the next Criteria.
{ii} Center of Vital Interests
Detailed below are the specific facts pertaining to the Tie-breaking test for ‘Center of Vital Interests’ which substantiate the fact that Mr.Jack, tie-breaks his Residency test in favor of USA for him.
Briefly the facts are: -
a) He has a house property and car and other assets in USA
b) As a Citizen he exercises his voting rights in all USA elections
c) He contributes to his Social Security account in USA
d) His car driving license issued by the State has his home address Inscribed in it
e) His designated Country of Residence (TRC) has always been USA
f) He has been living continuously in USA
g) He has all his savings and wealth assets invested in securities and other market instruments of USA
h) He has all his insurance policies and bank accounts in USA
i) His employment is in USA through contract positions with companies
j) He also old directorial positions with companies in the US
k) All his Retirement and Pension plans are based in USA
l) His economic and personal interests and financial assets are in USA as his Centre of Vital Permanent Interests are in USA
m) Mr.Jack has very limits income in India as compared to his US sources
{iii} Habitual Abode
This tests comes into play if the previous test still renders his residency indeterminate. There is no need to apply this test as there are very strong factors in his favor under the Test of Center of vital interest.
Habitual abode is the home to which the taxpayer returns to when he is not travelling. It would therefore be best that Mr.Jack arrests the testing to Test 2 above, as his returning to his home where his wife lives can be construed as his habitual abode.
(iv) Nationality
Again this test need only be applied if for some reason test 3 renders his residency indeterminate.
As Mr.Jack is a Citizen of USA, his Nationality test should favor USA for him.
So, per DTAA, Mr.Jack s a Resident of USA and Non-resident of India. Under the Indian Income Tax, an assessee has a right to choose between Income tax act and DTAA which is beneficial to him.
What are all the situations in which, an assessee will end up in a situation of being a resident of both the countries?
Some such situations are listed below even though it is not exhaustive.
i. An US national and who is a PIO being sent to India by his employer on deputation for a long period and consequently, in the later years of his employment, he becomes resident of India by virtue of his stay in India exceeding 182 days. At the same time, because he is an US national, he will be deemed as resident for US tax purposes and thus, arises the situation of dual residency.
ii. An assessee who is an US national and being an independent professional happens to visit India frequently in connection with his professional work and period of his stay in India during financial year exceeds 182 days. (this is the scenario that applies to Mr.Jack)
iii. An assessee who is an US national has come back to India for permanent stay here but still retaining substantial assets as well as close family members in US and consequently being treated resident of India as well as US. (as would apply to Mr.Jack)
iv. An assessee being an Indian national being employed in US but sent back to India due to his deputation coming to an end and he comes back to India after first July of the relevant financial year. Since his stay in US for the calendar year will be 182 days and also his stay in India for the relevant financial year will be more than 183 days, he will become resident of both the countries for the same year
Whether such an assessee can avail the double tax relief provided in the DTAA between the two countries of which he is a resident and if so, what should be done to claim such a relief?
If a person is an US national and he becomes resident of both US and India and wants to claim the benefit of DTAA between India and US and thereby invoking the tie breaker Rule, then, the first step is that he has to obtain TRC (Tax Residency Certificate) from the US government. In addition to that, he can submit the declaration in IT Form 10-F.
Even though there is no facility provided for uploading either the TRC or Form-10F along with the uploading of the Indian tax return, while making disclosures to that effect in Schedule-EI of the Indian IT return, a reference to TRC Number in that Schedule will be quite helpful. In addition to that, if, by invoking the tie breaker Rules, that assessee claims his status as resident of US and non-resident of India and accordingly fills his residential status in the Indian tax return as “non-resident”, then, he will have to furnish tax payer identification number in the country of which he claims to be tax resident. In this case, since he is a tax resident of US, he will have to furnish his SSN which is the tax payer identification number in US. Furnishing all those information, namely, SSN in US and TRC reference number in Schedule-EI will entitle the assessee to claim the benefit of the relief under DTAA and thereby invoke the tie breaker Rules.
How the double tax relief should be actually claimed in the context of the Indian tax filing?
The next issue is how actually claiming of double tax relief should be reflected in the Indian tax return. It is to be noted that this discussion is relevant only for those assesses who have paid taxes in US on the incomes sourced from US and who want to claim tax relief/exemption from the Indian taxes for the same items of incomes by claiming non-resident status through tie breaker Rules.
In this regard only, we have discussed two options below:
a. File as Non-resident and report zero foreign income on ITR and no FA schedule. This cannot be construed as misrepresentation as all the facts and circumstances will point to him being a Resident of USA under the DTAA.
b. File as Resident and report foreign income under exempted income on ITR and FA Schedule
a. File a Non-resident return and report actual number of days in India
When an assessee file as Non-resident, he is expected to report the number of days stay in India, the jurisdiction of residency and tax identification number.
| (e) |
| Residential Status |
| A. Resident |
You were in India for 182 days or more during the previous year [section 6(1)(a)] |
| You were inh India for 60 days or more during the previous year, and have been in India for 365 days or more within the 4 preceding years [section (6)(1)(c)][Where Explanation 1 is not applicable] |
| B. Resident but not Ordinarliy resident |
You have been in India for 729 days or less during the 7 preceding years [section 6(6)(a)] |
|
You where a non-resident during the previous year.
(i)Please specify the jurisdiction(s) of residence during the previous year-
|
| c. Non Resident |
S.No Jurisdiction(s) of residence |
Taxpayer Identification Number(s) |
| 1 |
2 |
| (ii) In case you are a citizen of India or Person of Indian Origin(POI).Please specify |
| Total period of stay in India during the previous year (in days) |
Total period of stay in India during the 4 preceding year (in days) |
| 250 |
750 |
| Residential Status in India(for HUF)(Tickapplicable option) |
□ Resident |
□ Resident but not Ordinary Resident |
□ Non-resident |
An assessee could file as non-resident with number of days. The department does allow you to E-file with this mismatch of filing status vis-à-vis the # of days. However, the Income tax department might question the residential status based on the number of days and Mr.Jack would be required to explain his position under the DTAA. We have filed returns for our clients in this fashion whose background facts match that of Mr.Jack.
Our suggestion is that to counter further inquiries by the department that Mr.Jack should secure a Tax Residency Certificate (TRC) from the US IRS for the years in question.
This option should certainly be considered by all assesses who are US nationals and as a result of which, they have to pay taxes in US on their global income including the income earned from India.
b. File as Resident and report foreign income as exempt income on Schedule EI invoking the Article 4 of the DTAA
Mr.Jack could file as resident and report the foreign income as Exempted Income on ITR and but might have to report FA Schedule. So, he would in essence, be filing as Resident under India Income tax and exempt his foreign income by invoking the DTAA provisions.
We have seen this position taken largely by some Big 4 firms. Their argument is that filing status is driven by the local law which in this case is the Income Tax provisions.
This method of filing does not in any way reduce Mr.Jack risk of being subject to a scrutiny by the Income tax dept. for failure to report global income and for his claim of relief under the DTAA.
We feel the option suggested by US under “a” above is the path of least resistance since there is little reason for the department to focus on revenue lost as opposed to option “b” where the disclosures of the large quantum of foreign assets may lead the department to pursue a utopian hope of extracting more taxes from the assessee.
Recommendation:
File as Non-resident with actual number of days reported. Although there is a possibility of scrutiny in both instances (a) and (b) the department’s visibility into the assessee’s worldwide assets is far less with (a) than in (b).
In connection with the above analysis, we invite your attention to ITA No.1655/Bang/2017 (Assessment year: 2013-14) The Deputy Commissioner of Vs. Shri Kumar Sanjeev Ranjan (the full case is included in the Appendix). The summary of this case is that the original position of the assessing officer attempting to tax US income deeming the Assessee as a resident of India was reversed by the Tribunal in an appeal. The facts and circumstances of the case including the position under the DTAA are very similar to what would be grounds of our defense for Mr.Jack.
We also invite you to the CBDT Circular No.2/2021 in which the Income tax department clearly acknowledges that that taxpayers can in fact file as a Nonresident in India if they are able to establish under the DTAA that they are residents of another country. (this is also included in the Appendix)
Summary:
1. All such assesses that fulfil the conditions of analysis explained above, can invoke the tie breaker Rules in the DTAA subject to their fulfilling the criteria specified to that effect in Article-4 of the DTAA.
2. For claiming such relief, those assessees have to arm themselves with TRC obtained from US government and quote reference number of the same in Schedule-EI of the Indian tax return.
3. If such assessees want to avoid tax liability in India and also the disclosure obligations in the tax return in respect of their foreign assets, they should declare their status in the Indian tax return as non-resident even though they may state their actual period of stay in India during the year as more than 182 days.
4. Along with that, they should fill in Schedule-EI of the Indian tax return the entire amount of overseas income earned abroad for which tax exemption is claimed in India along with a statement that it is claimed exempt by applying the tie breaker Rules. Such a disclosure would absolve the assesses of any penal proceedings which may be initiated by the tax authorities for concealment, mis-reporting and under-reporting of the income.
5. When the residential status is claimed as “non-resident”, then, there is no need to disclose details of foreign assets in Schedule-FA of the Indian income tax return.
To conclude:
It is an irony that even though the Indian government is fully aware of the situation of dual tax residency as evident from CBDT Circular No.2/2021, they have not considered it necessary to incorporate suitable provision in the Indian tax return Form for the assesses to claim the DTAA benefit by invoking the tie breaker Rules tests.
We offered to review the returns as prepared by Mr.Jack Indian auditor before submissions
