The Ventura Pranas Quarterly Newsletter (January – March 2024)
- R & D credit and how it will impact our clients
- Foreign Derived Intangible Income (FDII)
- You Ask, We Answer
- Parallel Universes
- Bringing It All Together - Creating an impactful social and emotional change
- Our Director Prabha’s Talk at SICCI - Singapore
- Prabha’s Office Location
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Here’s wishing a bountiful new year to all our clients across the globe. We want to thank you for the trust and faith you have invested in us, over the years.
One of Ventura Pranas’ desires for 2024, is to engage with clients on a personal level, not only providing results of the tax returns but also providing a few planning ideas based on the results of the returns. We will endeavor to do this on every return we work on.
Further for our clients who are embarking on their own entrepreneurial journeys, if you feel that you would like to provide more information on your product or service to fellow clients (our fraternity of clients) then we can provide you an opportunity to do so on a webinar or through our newsletter. So if this is something you wish to do, please write to us at firstname.lastname@example.org
We also propose to organize more webinars and would like to hear from you on topics that could be of use to you as you take on financial planning for 2024. Please again write to us at email@example.com and Cc me at firstname.lastname@example.org
I will be on the East Coast, Trichy and Bangalore in the next month or so (look out for travel dates in the Appointments section), in case you would like to connect with me.
Wishing you once again a wonderful new year and good luck with the new beginnings that the year promises,
Prabha, and the Ventura Pranas team
R & D credit and how it will impact our clients
The research and development (R&D) tax credit is a federal tax credit (the R&D Credit) designed to encourage investment in the development and/or improvement of products, processes and technologies in the United States. This federal credit allows eligible companies to receive a tax reduction of up to 20% (13% net) of their qualified R&D spending above a base amount calculated from prior years. Originally a temporary credit, the R&D Credit was made permanent in 2015. It was also expanded to offer a reduction in tax liability for many small to medium sized companies who previously may have been unable to utilize the R&D Credit.
As already mentioned, Tax credits help those who are willing to go headlong into experimentation, to create an impact and revolutionize living; in essence, we talk about young Start-Ups, who are willing to bank on their creativity. Hence, we look at a part of the most important areas that they will influence and how it could impact our clients:
A. The benefits of R&D tax credits for startupsR&D tax credits are more than just a financial perk for startups; they’re a catalyst for innovation and market presence. This section discusses how these credits not only bolster a startup’s financial health but also pave the way for experimentation and competitive differentiation.
B. What Are State R&D Tax Credits?In addition to the federal R&D Credit, many states offer R&D tax credits for qualifying research activities performed within their borders. Several states also allow for the R&D tax credits to be sold or paid in excess of tax liability, which can be a significant benefit.
C. Cash flow:Firstly you should know that one has to spend to incur expenses that qualify for the R & D Credit. The R & D credit is a dollar-for-dollar reduction in the federal tax bills. Depending on which state you operate out of, you might even qualify for a state R & D Credit.
D. Experimentation & what type of expensesR & D expenses generally have to be incurred on US soil to be eligible for the credit calculations. Many of our clients have delivery centers in India incurring significant costs in India and assume that these should qualify for R & D expense on a US parent’s returns. This is not the case. Also the type of costs determine how much of the costs can be used to calculate the credit. Eg. Wages vs Consulting fees paid to R & D staff are treated differently from material costs or costs paid to Research Consortiums or Think tanks.
E. Why Evaluate Your Eligibility To Claim R&D Tax Credits Now?On December 18, 2015, the federal Protecting Americans from Tax Hikes (PATH) Act of 2015 was signed into law. This law provided the following immediate benefits to enhance the R&D Credit:
- Made the R&D Credit permanent
- Expanded the applicability of the R&D Credit by allowing “eligible small businesses”(defined as non-publicly traded businesses with less than $50 million in average annual gross receipts for the three preceding taxable years) to offset their Alternative Minimum Tax (AMT) liability; and c) Expanded the applicability of the R&D Credit by allowing “qualified small businesses”(defined as businesses with less than $5 million in gross receipts for a given tax year with no prior gross receipts for more than five preceding tax years) to offset their payroll tax liability up to $250,000 annually.
F. Quantum of Credit:
The tax credits and percentages vary depending on whether you are an early start-up Vs one that has been in existence for a longer duration. Second taxpayers have a choice on whether to avail a reduced credit Vs a full credit but a ratable reduction in the deductions. Usually reduced credit is preferred for companies whose income visibility is quite distant vs a full credit that works well for companies that are profitable. So if you are a startup and believe that you are developing a product or an IP then talk to us. We might be able to assess whether you qualify for the R & D credit and provide you this input ahead of the tax preparation this year. Please write to us at email@example.com or make an appointment at firstname.lastname@example.org.
Foreign Derived Intangible Income (FDII)
(US entity holding IP that is licensed abroad and taxed at a lower rate)
As you are aware, Foreign Derived Intangible Income (FDII) is a special category of earnings that come from the sale of products related to intellectual property (IP).
Some points about FDII that can be helpful to know:
Many a time when we take on structuring projects for our clients, one of the questions we ask them is where would they like to hold the IP which indirectly means where would you like the ultimate parent company.
While we agree that this is driven by a lot of other factors, where you intend to raise money, where your ultimate customer and marketing and distribution base is, another important factor also is the effective rate of tax the group is subject to.
The US corporate rate today is 21% Vs approx 25% in India for Private Limited Companies.
One aspect we ask our clients to think about is that, if revenue is derived across the world from IP that is owned by a US parent, the tax rate in essence gets halved to 10.5%. This undoubtedly reduces the global tax rate for group companies.
The form used to compute this FDII is form 8993 and is a complex one.
The Calculation is also impacted Qualified Business Asset Investment (QBAI) which is a 10 percent tax exemption for U.S. multinationals based on the value of buildings, machinery, or equipment. The QBAI exemption is part of the Global Intangible Low-Tax Income (GILTI) tax base, a measure that discourages companies from shifting profits out of the U.S., and part of the calculation for FDII
The 10 percent QBAI exemption in GILTI attempts to limit U.S. taxation of foreign income to income that is easy to move to low-tax countries, usually intangible property like intellectual property (IP). This includes things like patents for technology, software, or medicines.
Assets like IP may have high up-front costs and require considerable research and development, but IP tends to be relatively cheap to replicate, resulting in low costs to scale and higher profits. IP is also relatively easy to relocate to foreign low-tax jurisdictions.
Policymakers used a 10 percent profit margin on foreign tangible assets as a proxy for mobile profits that can be shifted to low-tax countries to avoid paying taxes. Those mobile profits are the intended target of foreign tax policy like GILTI.
The QBAI exemption partially shields U.S. multinationals with lower profit margins on foreign tangible property from what might otherwise be an overly punitive domestic tax burden. GILTI still ensures U.S. companies are not escaping taxation on profits that are more easily shifted to low-tax jurisdictions. The purpose of QBAI is to ensure that U.S. companies are not punished simply for having operations or machinery abroad.
Therefore if you are a US corporation owning an Indian subsidiary that is generating an income, you will need to factor in what the nature of the income so derived is and whether it is from the deployment of US-Owned IP. the calculations are complex and one where a consultation with an expert is necessary.
You Ask, We Answer
When are taxpayers required to capitalize and reduce the SRE expenditures?
Excellent question! The capitalization and amortization of specified research or experimental (SRE) expenditures under § 174, taxpayers must capitalize SRE expenditures and amortize them ratably over the applicable §174 period (5 years/60 months for domestic research; 15 years/180 months for foreign research) beginning with the midpoint of the taxable year in which such expenditures are paid or incurred; taxpayers must look to where the SRE activities are performed to determine whether they are attributable to foreign research. So section 174 is a section different from Section 41 which is what is covered in the above section on R& D credit. One is a tax credit calculation while the other is a section that determines if the costs can be written off as incurred or capitalized.
What Are Qualified R&D Expenses?
The R&D expenses eligible for the R&D Credit are called Qualified Research Expenses (QREs) and are defined as the sum of in- house research expenses and contract research expenses. These expenses generally include:
Wages – The wages of personnel performing, supervising or supporting qualified R&D activities.One hundred percent of an employee’s wages may be included if that individual spends 80% or more of his or her time on qualified activities for a given period. If the individual spends less than 80% of his or her time on qualified activities, wages that may be included will be prorated.
- Supplies – Most tangible personal property used or consumed during the qualified R&D activities (generally excluding land improvements and other depreciable properties).
- Contract Research – Usually 65% of the amount paid to a third party to conduct or support qualified R&D activities, or 75% of contract research performed by a qualified research group.
In what way will Ventura Pranas help, using the R&D Tax Credits?
The R&D tax credits is a lucrative opportunity to help improve cash flow, but claiming the R&D tax credits and documenting your qualified research expenditures can be confusing. Securing federal and state R&D tax credits requires knowledge of federal and state statutes, IRS guidance, precedential court cases and scientific fields. Additionally, the laws around tax credits and incentives change often. Many businesses lack the experience and time to identify which activities qualify.
What is the modus operandi of Ventura Pranas, when it comes to the applicability of the R&D Tax Credits?
Defining the actual cost of R&D is often made even more problematic because only a small number of companies have project accounting systems that capture the wages paid to the numerous employees who collaborate on R&D activities. Project tracking systems often do not account for contractor fees, direct support costs or the wages of high-level staff who contribute on a given research effort. Many project accounting systems are configured to track expenditures according to company definitions rather than to the specifications of the ever-changing laws mentioned above. Because of these significant challenges, businesses that want to claim the R&D tax credits often work with an R&D credit service provider like Ventura Pranas.
Could you elaborate the manner in which Ventura Pranas actually hand- holds us with respect to the R&D Tax Credit Claim?
VENTURA PRANAS completes an R&D Credit study using the following process:
VP provides a complimentary assessment to preliminarily determine eligibility and potential credit amount
- You engage VP to perform an R&D credits study and document your business’s eligible tax credits
- VP prepares calculations and a preliminary analysis to determine the actual credit amount for which you may be eligible
- We file the tax forms necessary to claim your eligible federal and state credits, as applicable
- Within 4 – 12 weeks, the R&D credit deliverables, including supporting documentation to support the credits claim, will be provided
How Much Does It Cost to Complete the R&D Tax Credit Study?
VP offers competitive and flexible pricing arrangements that will be based on the scope of the project and our client’s needs. The preliminary fee range can typically be provided after an initial, complimentary phone conversation with VP. We also offer fixed-fee pricing options so that you can budget for the cost at the outset of the project
Ideally, when would we receive the benefits?
In terms of when you can expect to receive an R&D Credit benefit, it all depends on the opportunities that apply to your business. We will work with you to understand your business’s particular circumstances and provide an approximation of when you can expect to receive the benefit associated with any R&D Credits claimed
And the most important question- How Are R&D Tax Credits monetized?
R&D Credits can be monetized in a variety of ways. A corporate taxpayer might include two additional forms with their federal income tax return and the R&D Credit will directly reduce the tax liability for that corporate taxpayer on that federal income tax return. For those eligible to offset payroll tax liability, the payroll tax offset would be claimed on quarterly payroll tax filings following a company’s federal income tax filing.
Additionally, state credits may be sellable or refundable. Ventura Pranas will not only work with you to help you better understand the process, we will help you with the completion of any forms necessary to claim the R&D Credits for which you are eligible.
I understand that as a 100% owner of a US parent owning a 100% subsidiary in India, my US entity is already paying tax on GILTI income, do I have to pay a tax on FDII income as well? If not, what income is excluded from FDII?
Yes, this is to be always kept in mind: Certain income, however, is categorically excluded from qualifying as FDII
Amounts included in gross income under §951(a)(1) (subpart F and investments in U.S. property)
- Global intangible low-taxed income (GILTI) included in gross income
- Financial services income
- Any dividend received from a controlled foreign corporation with respect to which the corporation is a U.S. shareholder
- Any domestic oil and gas extraction income
- Any foreign branch income
Stories and scenarios you can relate to, for families in the US and in India, to help you understand the complexity (and humour) involved in financial planning. Please note that the following is simply a case study. Any references to names and situations are entirely coincidental.
Let us take the example of Ravikumar and Satish who went to college together in India. Ravi left for the US and continues to live there while Satish stayed in India. both of them took the entrepreneurial route to making a living. Ravi started a company that would develop an IP that would be used by any company engaged in the travel business while Satish built a semi conductor product company in india from the ground-up.
Now Ravikumar set up a Company in Sunnyvale with a 100% subsidiary in India. he continued to leverage India by engaging engineers in India in the R & D efforts. Ravi’s parent company holds the IP but uses India as a development center in addition to incurring some of the expenses in the USA. The question becomes how are these costs looked at, from the standpoint of the R & D Credit and from a deductibility stand point.
From a deduction standpoint:
Previously R&D expenses could be written off for tax purposes while they are capitalized for book purposes. However TCJA brought about changes wherein now they mandate that R& D costs must be capitalized for tax purposes and written off over a period time. Domestically incurred costs in the US are written off over 5 years whereas those incurred in India from Ravi’s Sub as a development center, can no longer be deducted but have to be capitalized in the books Ravi’s US company and written off over 15 years of 180 months.
In addition to the above treatment for tax purposes, the costs may also be considered to calculate a tax credit which a reduction in what Ravi’s US company will incur in taxes as the credit is a dollar-for-dollar reduction in tax. For this purpose only domestic costs are considered. This is under section 41.
Let us look at the case of Satish: His Indian Semi- conductor product company owns a wholly owned sub in the US. the Indian entity owns the IP and has some contractors and employees engaged by the US entity in the development of the IP.
Given that the employees are on the US company payroll and the costs incurred on US soil these costs will undoubtedly count towards the calculation of the R & D credit even though the Indian entity owns the IP. Section 41 does not limit the availability of the credit based on who owns it.
However, from a cost deductibility standpoint, the costs incurred do not contribute to an asset that would be built and owned by the US entity. The title to the IP lies with the Indian entity and therefore the whole amount of costs incurred in the US can be deducted on the books of the US entity subject to any limitations under sec 41.
The Indian company would then have to follow the Indian tax rules as they apply to R & D costs not only for the costs it incurs on its own account but also for those incurred by its 100% US sub.
As you can see the treatment of the costs, as a credit or a deduction, can vary substantially depending on where the parent is located and whether or not the expenses are incurred in the US or India and on whether the parent or the Sub owns the title to the IP.
Bringing It All Together - Creating an impactful social and emotional change
“ If wishes were horses, then beggars can ride them! ”
So, if we aspire to achieve something, we must keep in mind that a lot of perseverance and consistent effort are the elements to fuel our aspirations.
In this issue of the newsletter, we would like to feature a person who has been the catalyst for rural women’s lives to change.
Prabha met Uthara Narayanan recently, who runs a grassroots NGO that enables rural women empowerment. Buzz Women, enables underserved women by making knowledge, skills and tools available at their doorsteps towards economic, social, personal and ecological empowerment through various training. Her NGO is FCRA approved.
The programs are built on the foundation of the 5 Cs - Cash, Care, Climate, Community, and Confidence. Buzz Women wishes to aid in combating poverty not only through a change management process that deals with the economical aspect of poverty, but also the ecological, psychological, and sociological aspects.
The program is divided into multiple interventions that are contextual and meaningful. Buzz India, through its program aspires to achieve the 1st SDG of ‘No Poverty’ and 5th SDG of ‘Gender Equality’. The women who go through their intervention have inculcated a savings habit (79%), participate in household decision-making (69%), demonstrate confidence (67%), expand their enterprises (69%), and actively participate in community discussion (28%).
From 2012 to date, Buzz Women has reached 500,000 women and has more than 9000 volunteer community anchors in its network across 11 districts of Karnataka. They have also been able to franchise the model to The Gambia, Georgia, Tanzania, and Punjab. They aim to reach 1 crore women by 2030 in all 31 districts of Karnataka and are also looking for funders and partners to catalyze their impact.
Our Director Prabha’s Talk at SICCI, Singapore
Prabha was recently at SICCI at Singapore to deliver a talk on the financial intricacies related to -when a person has bases in three places: India, Singapore and the US. The following is a short report of the talk delivered at the SICCI, as reflected on the Ventura Pranas page, for you all to go through.
Synopsis of the talk
While it is not so simple to summarise what the talk at SICCI was about in a nutshell, the following are the points of focus. However, the central points are mentioned below, and primarily deal with the following:
Managing real estate sales or purchase in India, while living in Singapore or in the US, and the consequences of the financial transactions, if the property were to be purchased, gifted, or inherited
- Indian stock sales, with special attention if one exits out of listed or private equity funds, as of late, everybody seems to be bullish on India and wants to jump onto “the next decade - being India’s bandwagon”
- Holding structures out of Singapore, and the pros and cons of whether people should set up an entity in Singapore or not, depending on whether you are a US person
- About FEMA (Foreign Exchange Management Act) and its impact on any financial decision originating out of IndiaSuccession planning, dealing with all three countries- Singapore, the US, and of course, India. The idea behind this segment was to familiarize people with what tools they have to work with in planning the transfer of assets in each jurisdiction. Among many other tax-related topics, the focus shifted to the IDGTs (Intentionally Defective Grantor Trusts), which is how people maneuver around very sizable estates in the US, and if all else fails, one is going to need liquidity in the estate with the assistance of ILITs (Life insurance Trusts)
- Succession planning, dealing with all three countries- Singapore, the US, and of course, India. The idea behind this segment was to familiarize people with what tools they have to work with in planning the transfer of assets in each jurisdiction. Among many other tax-related topics, the focus shifted to the IDGTs (Intentionally Defective Grantor Trusts), which is how people maneuver around very sizable estates in the US, and if all else fails, one is going to need liquidity in the estate with the assistance of ILITs (Life insurance Trusts).
- Dual Taxation Avoidance Agreements, which allows one to not tax the same income twice as long as there is a reciprocal arrangement between the countries
- State residency in the US, highlighting the dual tax structure in the US. State taxes can be a significant factor if one leaves a state or establishes residency in a state
Do check out the link below to watch the full video recording of the entire Talk.
Prabha’s Office Location + appointments
Our director, Prabha Srinivasan will be in available for appointments in Bangalore, Singapore, Los Angeles and New York over the next quarter. Below is her schedule:
Bangalore : February 21 to 23 - 2024
Singapore: March 1 & 20 - 2024
Los Angeles: March 2 to 9 & March 16 to 18 - 2024
New York: March 10 to 15 - 2024
To book an appointment, send in an email to email@example.com , along with details of what you would like to discuss, as well as your time zone so we can schedule the call or appointment for an appropriate time. Alternatively, email Prabha directly at firstname.lastname@example.org