Foreign Taxes Paid credit for corporations?

Our small company had 1 customer in India in 2009 that witheld taxes of around 10% of a large payment to us for support services which they pass to their goverment, they call it TDS. Do corporations get a 1:1 credit for foreign tax paid that offsets US taxes due, or is this just a deduction or a reduction in top-line revenue? If it is a "credit" and you have a loss (no US tax liability) can you carry it forward?

Reply to
Thunderbird
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Are you saying that you billed them like $10,000, and they paid you $9,000 and submitted $1,000 to the Indian government?

It looks like TDS stands for tax deducted at source. It's kind of like the US requiring withholding on a 1099-MISC -- thus, when you when you pay a contractor, you would be required to withhold tax, and the 1099-MISC would reflect this.

This page describes the TDS

Tax deduction at source means the tax required to be paid by the assesses, is deducted by the person paying the income to him. Thus, the tax is deducted at the source of income itself. The income tax act enjoins on the payer of such income to deduct the given percentage of income as income tax and pay the balance amount to the recipient of such income. The tax so deducted at source by the payer is to be deposited in the income tax department account. The tax so deducted from the income of the recipient is deemed to be payment of income tax by the recipient at the time of his assessment.

...

The income from the following sources is subjected to tax deduction at source

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  • Payments to contractors and sub-contractors( Section 194C )

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It sounds like section 194C might apply to you as you are a contractor of the Indian company. The code is here:

194C. Payments to contractors and sub-contractors.

(1) Any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and-

So it looks like the tax should only be paid to individuals and corporations who are residents of India. However, the code goes on to say that the withholding is 1% or 2%, not 10%. So maybe another section, such as 194J, covers the tax.

Ask the Indian company under which section of the Indian code they withheld the tax? Ask them if withholding is required if company the contracted from is in the US.

What I'm thinking is that you should have been paid in full, and you can file an Indian tax return to get back that 10%. On your last year US tax return you would report 10k as business income, and when you recover the 1k you don't report anything. If there is no way to recover the money, then you report the 10k as income, and take a 1k foreign tax credit.

But my first disclaimer: I've no idea about Indian taxes. Just researched it just now through the web.

It's a 1:1 credit, up to the US income on that amount. If the US income on that $10,000 is $1,500 then the full credit is allowed and you pay $500 to the US. If the US income on that $10,000 is $500, then only $500 of the credit is allowed, and your US tax is zero, and $500 of the credit is carried forward for 10 years. It can only be used against future income from India.

In general, the rules are different for every country. If the country is on the blacklist (like North Korea), then the $1000 is only allowed as a deduction, and your US tax liability would be 15% of $9000 or $1,350. India is not on the blacklist.

But a second disclaimer: The above rules are for individuals. I'm guessing that the rules are the same for companies. The instructions for form 1116 at

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that the form is only for individuals, trusts, estates. Theremust be another form for corporations, but I don't know about it.

Yes, for 10 years for individuals.

Reply to
removeps-groups

Disclaimer: I am neither a lawyer nor a tax professional.

The applicable section is Section 195:

195. Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head Salaries) shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.

Now, the question is whether the income the OP's company received was "any other sum chargeable under the provisions of this Act". For that, one needs to know about what kind of support services were provided and where they were provided.

The applicable section is Section 9 which is quite lengthy and can be found here:

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The US-India Tax Treaty may also have some say in whether the income is chargeable to tax in India or not.

If the income is not chargeable to tax under Section 9 or under the treaty, then the OP needs to file a return and claim a refund of the amount. The tax year in India is from the 1st of April to the 31st of March. To claim a refund, the return has to be filed within 1 year from the end of the assessment year.

Reply to
Manoj

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