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Foreign Tax Credit for double taxation

Asked Feb 23, 2008, 11:51 AM — 2 Answers
Hello,

I work for an Indian IT consultancy in California. The consultancy has offices in both India and the US. Having an office in India requires them to pay Provident Fund (and therefore India salary) to all of their employees. Therefore, for their US-based employees, they are required to pay salaries both in India and the US.

The way they have implemented the salary policie in order to comply with both India and US laws is by depositing a part of the US salary as India salary. Therefore, that part appears in both the India and US salary slips, and is taxable in both countries.

In other words...

If a US-based employee's salary = X
And their India salary = dX
The amount they are actually paid in the US = X - dX
The amount for which they pay US taxes = X
The amount they are paid in India = dX
The amount for which they pay India taxes = dX

Therefore the US-based employee is paying taxes for dX both in India and the US.

My first question is--is this setup legal?

And the second question is--Can I use Form 1116 to recover US taxes for the amount of dX?

Any help will be much appreciated.

Thanks,
Tirtha Sarkar

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IntlTax's Avatar
IntlTax Posts: 812, Reputation: 118
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#2

Feb 26, 2008, 07:41 PM


If you performed all of your services in the U.S. Then all of your income is U.S. Source income. This means that you would not be able to claim any foreign tax credits, even if you paid foreign taxes. It is quite odd that Indian taxes have to be paid on employees not located in India. You might want to have them double check that this is necessary under Indian tax law.
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tms_taxQ's Avatar
tms_taxQ Posts: 2, Reputation: 1
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#3

Mar 3, 2008, 05:49 PM
Hi IntlTax,

Thanks for your response.

My company says that I can. Can you point me to any legal documentation that says that I can not?

Thanks again.
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