17/07/17

Two States: compliance can be a taxing problem

FATCA has limited investment options for Indian Americans, reports The Hindi Times.

The onus on Indians, who are U.S. citizens or green card holders, being subject to foreign income and asset reporting in the U.S. and India has been in the news lately. The Foreign Account Tax Compliance Act (FATCA) endeavours to pre-empt inadvertent non-reporting of investment and income earned outside the U.S. It imposes reporting obligations both on financial institutions and the individual investor. This, coupled with the Indian government introducing newer reporting standards, has turned the simple, annual task of filing returns into quite an ordeal for the average dual taxpayer. FATCA reporting and associated tax treatment of foreign sources has severely limited investment options for Indian Americans.

Managing worldwide income and estate taxes has become a common and at times a complex affair to deal with. One common misconception is that creating trusts in India and moving assets to those trusts, albeit for U.S. beneficiaries, will exonerate U.S. persons from FATCA formalities.

A foreign trust which has U.S. beneficiaries or a grantor, should be FATCA compliant with respect to its assets. The consequences of not being so can result in 97% of the trust corpus being depleted by taxes when it eventually converts to an irrevocable trust.

With more nationalistic views in the U.S. fuelled by the results of the last November’s elections, many Indian Americans are keeping their options open of returning to India, to either run family legacy businesses or to simply safeguard the now very valuable assets in India. Here are some tips: If you have a green card, you may be able to make elections in the year of move to relieve you from worldwide income taxation in the U.S. You may not be off the hook insofar as FATCA informational forms are concerned but the taxation could be less complicated and more optimal. You may also be able to exempt or postpone U.S. estate or exit taxes.

An Opportune time

The first two years of moving to India are opportune to consider converting retirement savings plans in the U.S. such as 401Ks to ROTH Individual Retirement Accounts (IRA), when the foreign income sources do not attract tax in India, during the Resident and Not Ordinarily Resident (RNOR) years. The result of converting during RNOR years is far more palatable than when a person is on a Resident and Ordinarily Resident (ROR) status. Sale of a principal residence in the U.S. is best timed in this period.

If you are moving back to the U.S. and you intend liquidating real estate in India, consider selling before the move to minimise exposure to withholding taxes. Sale of assets in India from inheritance may not be a costly affair in the U.S. due to special basis calculation rules and the relative decline in the value of the rupee against the dollar. While real estate transactions in India provide for options to defer or exempt the gains from tax, dual filers may face taxation in the U.S. if not planned properly. There are IRS provisions that can yield similar benefits simply by meeting tighter rules.

For those who were unaware of their global reporting obligation, there is respite under the Streamlined Domestic & Offshore Disclosure Procedures the IRS introduced in July 2014. The procedures promote and accommodate voluntary disclosure and provide taxpayers relief from criminal and civil liabilities. There are eligibility conditions to satisfy but the procedures are a welcome relief against the only option of the offshore voluntary disclosure program (OVDP). With Indian Americans moving back and forth like never before with their money, staying compliant to the laws of both countries is the key to ensuring an optimal tax structure while maintaining one’s peace of mind.