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Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 3737
Experience:  3+ decades of varied tax industry exp. Tax Biz owner
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I have an indian company who does web design, based in

Customer Question

Hello, I have an indian company who does web design , based in india, paying me, A U.S. Citizen , residing in USA for helping with web services (marketing, design, etc).
I work soley in the U.S.A. and have never been to india, nor have any assets, offices or connection to India.
They are saying they need to withhold 20% of my payments income for their tax purposes. However in doing research and looking at the USA tax treaty with india, it seems they dont need to because i am a u.s. citizen who never hs been to india nor has any office in india or relations with india.
Article 15 of the USA-India treaty backs up my thinking -
I know if I was paying somebody in India, I would not withhold 30% because they would fill out form W8-Ben showing they had no connections to the USA (no Social Security Number, address, visits, etc). So is the same true for India, they do not need to withhold taxes to a U.S. Citizen doing independent persona
Submitted: 2 years ago.
Category: Tax
Expert:  Tax.appeal.168 replied 2 years ago.

Thank you for requesting my assistance. You wrote that your company is based in India. As the company is based is India, this is considered a Permanent Establishment (PE). Most countries do place tax on PEs. SEE BELOW:

Internationally, two basic principles of taxation are followed- the residence based taxation and the source based taxation. Most of the countries, including India, tax their residents on their global income under residence based taxation. They tax non-residents on their income sourced in that country under source based taxation.

When a resident of one country earns income from a source in another country, the possibility of double taxation arises because one country may tax that income on the source principle whereas the other country may tax it on the residence principle. Generally, following the source based taxation, the Source Country is allocated the right to tax the income arising therein. While the Residence Country also taxes the income following the residence based taxation. The Residence Country mitigates the effect of double taxation either by way of tax exemption or by way of tax credit.



Part of Article 15 of the treaty reads as follows:

1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from, the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State: (a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State;


As you can see is Paragraph (a), it states that you can be taxed in the other country.

However, Article 25 of the treaty does address the elimination of double taxation. SEE BELOW:

1. In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or citizen of the United States as a credit against the United States tax on income: (a) the income tax paid to India by or on behalf of such citizen or resident; and (b) in the case of a United States company owning at least 10 percent of the voting stock of a company which is a resident of India and from which the United States company receives dividends, the income tax paid to India by or on behalf of the distributing company with respect to the profits out of which the dividends are paid.

Let me know if I can be of further assistance to you regarding this matter.

Customer: replied 2 years ago.
Customer: replied 2 years ago.
Let me reclarify, THERE IS AN INDIAN WEB DESIGN COMPANY PAYING ME, A USA CITIZEN, to help them with web design. I do not own an indian company, nor have any connection to an indian company beyond being a freelance contractor assisting in web design services from the USA , which is my citizenship and only place of doing business and where i pay my taxes.
Expert:  Tax.appeal.168 replied 2 years ago.
Hello again,
I apologize for misunderstanding the following statement that you initially wrote;
Hello, I have an indian company who does web design , based in india, paying me, A U.S. Citizen , residing in USA for helping with web services (marketing, design, etc).
India has a mandatory withholding tax on foreign remittance. SEE BELOW:
14. Sec 195A – Grossing up of taxes Grossing up required in case of net of tax payments Tax payable by non resident to be added to income remitted Tax payable by non resident determined on gross figure Particulars Amount payable to non-resident (net of tax) Tax rate applicable Amount INR100 20% Gross-up income: 100 * 100 . (100-20) INR 125 Tax payable (INR 125 * 20%) INR 25 Net amount paid to non-resident (INR 125 – INR 25) INR 100.
Again, because of the tax treaty, you can claim a credit on the U.S. tax return.
Customer: replied 2 years ago.
when you say claim a credit on u.s. tax return, what does that mean exactly? For example, I report $1000 income but state that India has held 20% ($200) so that when I pay my taxes here If I owe 25% for example, that $200 is a credit and therefore I only pay $50 on the $1000 earned?What form / line item is that, this claim a credit on u.s. tax return ?
Expert:  Tax.appeal.168 replied 2 years ago.
You can claim the Foreign Tax Credit on Form 1116.
Link to Form 1116/instructions:
Expert:  Tax.appeal.168 replied 2 years ago.
Additional Info:
The bot***** *****ne information from the Form 1116 transfers over to Line 48 of the Form 1040.