In general, it is difficult for the tax authority of a country to enforce its internal tax laws on foreign residents. That is why, most countries withhold taxes from such payments sourced from their country right at the time of payment. The tax rate for such withheld funds is generally high, usually as high as 30-35%. This strategy puts the burden on the non-resident to file taxes with such countries in order to receive excessive taxes as refunds.
In this blog post, I am going to use the example of a US resident having a bank account with ICICI bank in India. Let us assume that the US resident has multiple Fixed Deposit accounts totaling INR 10,00,000 (10 lakhs) with ICICI bank, and that ICICI bank pays a significant percentage, say 8%, as Interest. Annually, the US resident receives INR 80,000 of Interest income. If this entire INR 80,000 is remitted to the US resident, there is no guarantee that the Indian Income Tax Authority is going to receive taxes on the interest income. As such, ICICI generally withholds 30% (INR 24,000 in this example) and pays the US resident the remaining (INR 56,000).
However, the US and India have signed tax treaties in order to obtain preferential tax rates for their residents. This is called Double Tax Avoidance Agreement (DTAA). For US residents, the maximum withholding tax rate is 10% for Interest payments. But, how do you tell ICICI that you are a US resident?
The procedure laid out by ICICI is as follows: (See their website for up to date information):
1. Obtain a tax residency certificate from the United States. In the US, the Internal Revenue Service (IRS) issues the tax residency certificate on Form 6166, which is a computer generated form on US stationery. In order to request the tax residency certificate, you use IRS Form 8802. There is a fee to obtain this. At the time of writing this blog, the rate was $85 USD payable to United States Treasury. Please see their instructions if any questions are not clear. The instructions also tell you where to mail the form (to their Philadelphia address). The one thing I recommend is to get a few extra copies for future use. The fee is for IRS to process your form, not for the number of forms requested.
This process takes a while, so request this first, and wait for IRS to respond.
Once you get this certificate via USPS regular mail, send one original copy to ICICI along with the other documents mentioned below:
2. ICICI also requests you to send a self-attested copy of your PAN Card. Self-attested essentially means you write the words "Self-Attested", sign and date on the photo copy of your PAN form. I generally use blue ink for such signatures.
3. Print this "Request for Double Tax Avoidance Agreement" form from their website:
4. Print the 10-F form also.
5. Mail the above forms to their Mumbai address:
ICICI Bank Limited,
NRI Hub, RPC Mumbai,
Autumn Estate, 5th Floor, A wing,
Near Mhada, Chandivali, Andheri (E),
Mumbai - 400 072.
India.
ICICI is generally good with communicating with you when they receive the documents. Watch for your next statement to ensure that they are deducting 10% Interest instead of 30%.
Please feel free to email me at PhoenixITIN@gmail.com or call me at +1-480-442-7063 if you need to engage me for preparation of your cross border taxes.
Disclaimer: This post is specific to Indian ICICI bank accounts, and the corresponding Interest payments from your Indian bank accounts. The post is specific to US residents holding bank accounts in India. This is not to be considered as tax advice - please contact your tax professional for tax questions.