"I know I have to pay taxes in India because I am a resident of India. But I also need to know if I should file my taxes in the US, since I am working for a clinic based in the US," that's Nandini's dilemma.In this age of global technological convergence, cases like Nandini's are not few. There are instances of the reverse scenario too. Like Shreya Das, a freelancer for a publication in India. She lives in San Francisco, California, and writes on technological developments for a digital magazine in India. Her pay too gets wired to the US from India. Her question: Do I need to file taxes in India? In order to find the answer to both their queries, we need to look at the law in both these countries.
Who should pay tax in India
Every person who is a resident of India must pay taxes in India on his or her global income. A resident of India is defined as a person who has been in India for a period of 182 days or more in the financial year or who has been in India for 60 days or more in a financial year and 365 days or more in the 4 years before that financial year (section 6).
Since Nandini has been in India for the entire time during since 2009, by this definition, it is clear that she is a resident of India and must file her tax returns in India for the year 2011-2012.
A non-resident, that is, a person who is not a resident by the above criteria, must pay taxes in India on any income that is earned from a source in India (section 9). By that definition, since Shreya earns income from a source in India, she must pay tax on that income in India.
Who should pay tax in the US
According to the US tax code, any person who is a resident of US must pay taxes in the US. The IRS defines resident as one who meets either of the following two tests:
1. Green card test: If at any time during the calendar year you were a lawful permanent resident of the United States according to the immigration laws, you are considered to have met the Green Card test.
2. The substantial presence test: To meet the substantial presence test, you must have been physically present in the United States on at least 31 days during the current year, and 183 days during the 3 year period that includes the current year and the 2 years immediately before. To satisfy the 183 days requirement, count all of the days you were present in the current year, and one-third of the days you were present in the first year before the current year, and one-sixth of the days you were present in the second year before the current year. Since Shreya has lived in the US for the whole of 2011, she must file her taxes in the US.
A non-resident alien, that is, a person who is not a citizen or resident of the US but has a US source income on which tax has not been fully withheld at source, must file taxes in the US. By that definition, Nandini must file her taxes in the US since her source of income is in the US.
Double Tax
One look at these provisions will tell you that Nandini and Shreya are now liable to pay taxes in both countries - India and the US. Enter - DTAA! The provisions of the Double Taxation Avoidance Agreement (DTAA) will over ride the provisions of the income tax rules of both countries. The DTAA is a treaty that India has signed with the US and several other countries to ensure that its residents and citizens do not end up paying tax in two countries on the same income.
Roy Vargis, an Illinois based CPA and promoter of the Nexus Management Group explains, "For the purpose of the two cases above, since they are on contract basis and not on employment, we need to refer to Article 15 of the India US DTAA."
Article 15 deals with Independent Personal Service that include independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
"In such cases, if a person is resident of one country and earning income from a source in another country, then that income would be taxed only in the country of his or her residence," says Vargis.
What this means is that in the case of Nandini, she owes taxes only in India and she can tell her US payer not to withhold taxes in the US. In order to do that, she must submit Form W8BEN to her US payer. Form W8BEN is a declaration that she is a tax paying resident of India.
In the case of Shreya, she would owe her taxes in the US and she would thus have to inform her Indian payer not to deduct taxes at source from her income. In her case, she would have to submit a Tax Residency Certificate, issued by the US IRS to her payer in India.
Vargis also highlights another point, "It is important to remember that if the person has a fixed base in the other country (country of source of income) or has lived in that country for more than 90 days during the taxable year, then such income would be taxed in that country. So in case of Nandini, if she had an office in the US or lived in the US for more than 90 days during 2011, her tax would be withheld in the US." Roy explains.
What this also means is that she would not have to pay taxes on that income in India. But, since as a resident, she must file her returns in India, she would be able to claim a credit on the taxes paid in the US.
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