Business Visitors To Us In For Us Tax Traps
By Sudhir Shah

Published in Economic Times on Sunday 11^th March 2001

Internet explosion coupled with globalization is driving Indians to establish branches of there existing Indian businesses in US and transfer their Managers, Executives or persons with specialized knowledge to the US branches to work there as Intra Company Transferee on L-1 visa. The increase in the of H-1B visas' quota will also lead many more thousand Indians to travel to US and work there. Many travelers to US on B-1 visas officially work there temporarily in connection with their Indian employers' international transactions and are remunerated in India for their services provided in US. Multitudes of those who are not in a position to obtain L-1 or H-1B visas or are unable to wait till their petitions are processed take the risk of traveling to US on Tourist or Business B-2/B-1 visas and work there.

Majority of these Indians are ignorant of the US Tax traps.

Many of these Indians are unwary of the common universal fact that an economic activity is generally taxed where the activity occurs. The majority of B-1 visitors entering the US are generally ignorant of the tax implications on account of there mere physical presence in the US.The United States follows the rules of designating "the source of income for service" to be there, where the services are performed. Even if the payment is made on an Indian payrole, in Indian currency, prorata portion of a business visitor's remuneration for the work days spent in US is there US source income.

The "commercial traveler rule" is the only one exception to the general rule that treats compensation as an Indian source, if:-

(a) the Indian business visitor is temporarily in the US for 90 days or less in a calender year,

(b) the remuneration for the US services does not exceed the amount equivalent to US$3000 in the aggregate and

(c)    the services in US are performed as an employee of an Indian company.

Normally very few Indian business travelers working for their Indian company in US are able to meet these conditions.

If the visitor to US is a tax resident in a country with which the US has a tax treaty, the remuneration earned by him for the work days spent in US may be exempted from tax under the treaty. The US has tax treaties with 61 countries including India. All treaties include provisions exempting employment remuneration from US tax if the individual meets the treaty provisions. The conditions of the treaty vary from country to country. An Indian employee who exceeds the commercial traveler limit, is subject to US Income-Tax on his remuneration, even if received in India, for the services rendered to the Indian employer in US. Thousands of Indian business visitors to US every year exceed this rule and become subject to US income tax without becoming aware of the said liability.

An Indian's presence in US on B-1 visa can have much more dreadful tax consequences. The US tax rules provide that the Indian business visitor who spends 183 days or more in US in a calender year or 183 days based on a "formula", is a resident for the purpose for being liable for paying US tax. The "formula" is that all of the current year's days spent in US are added to the one-third of the prior years days spent in US and one-sixth of the days spent in US in the second preceding year. Days spent as Vacations days are also counted along with the business days. Even the partial days such as the day on which the Indian business traveler arrives in US and the day on which the Indian business traveler departs from US are counted as full days in the formula. If the Indian business visitors' stay in US exceed 30 days in the current year and the result of the formula is 183 days or more, the Indian visitor is considered as resident for the purpose of US tax. Take for example, that Mr. Naidu from Hyderabad working with an Indian IT company visits Boston, New Jersey and Silicon Valley in US regularly on behalf of his Indian company as a business visitor and there gives demonstrations, guidance and practical training to their US customers. This Mr. Naidu normally visits US 3-4 times in a year and spends, on an average in aggregate 5 months in a year in US. Mr. Naidu therefore becomes a US resident under the "formula" in the following manner.

(i) 5 months x 30 days of each month = 150 days of the current year.

(ii) One-third of the prior year's 150 days = 50 days and

(iii) One-sixth of the second preceding year's 150 days = 25 days.

(iv)    Total of 150 + 50 + 25 = 225 days i.e. in excess of 183 days.

 

When an Indian is considered as a resident of US under the formula he is subject to US income tax on his US income, Indian income and worldwide income. In order to avoid this result a Business visitor must average less then 122 US days per Calender Year.

There is an exception in the US tax laws. It allows an Indian visitor who is present in US less than 183 days in the Calender year but whose presence over the current year and two prior years equals or exceeds 183 days to avoid US tax resident status if that Indian visitor has a tax home in India for the full Calender year, and he can prove a closer connection to India for the Calender year. An Indian who is in US for a period expected to last more than a year cannot meet this exception because that Indian's tax home has shifted to US. An Indian who is a tax resident in India may be able to claim non-resident status under a residency tie-breaker rule of the treaty even if his US presence exceeds the 183 day residency test. Such an Indian has to substantially maintain all economic and social contacts with India and should not be accompanied by his spouse or children to US.

Many of the Indian Business visitors to US change their status whilst in US from a Business visitor (B-1) to H-1B or L-1. If that Indian is in the US for more than 183 days in the Calender year he no longer qualifies for the treaty exemption for his remuneration received in India. In addition that Indian becomes a resident of US from his first day of entering US in the Calender year. If that Indian has investments in US, the permissible exclusion of gain of sales of US securities is lost to him for all gains during the Calender year because his presence in US exceeds the 183 days US presence limitations of the gain exclusion rule. Even if the Indian visitor remains as non-resident under the 183 days residency rule in the initial year, a change of tax home to the US will cause the loss of the gain exclusion. In the typical transfer situation the Indian employee considers that income tax obligations for the visitor period is satisfied by payments of tax to the Indian Government. But actually because of the IRS, that Indian has paid the pre-transfer period tax to the wrong tax authority.

The Indian business visitors to US who desire to avoid exposure to US income tax should plan his US business carefully to maintain non-resident status. The Indian visitors to US on B-1 visas intending to eventually transfer themselves to US on H-1B or L-1 or any other category of visas are required to carefully study the complex tax laws of US before they and their employers plan their transfer to US.

 Mr. Sudhir Shah of Sudhir Shah & Associates, Advocates & Notary, Mumbai, India is the Indian Member of Global Chain of Immigration Attorneys.