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Discussion:Foreign employees in India

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Discussion Forum Index --> Tax Questions --> Foreign employees in India

Tiffaney (talk|edits) said:

9 January 2007
My client is a website developer and data processing company here in the United States. Over the past year he has engaged in developing his business in India. He has transferred money from his American bank accounts to India for purposes of developing his business overseas. He is a corporation, and files form 1120. Overseas, my client has not earned any income, he has only expended funds. He has paid for normal business overhead, and for employees or labor. Are the transfers from the U.S. bank account deductible?

What are the filing requirements that my client has?

Thank you.

Taxref (talk|edits) said:

9 January 2007
Merely transfering funds does not produce deductions. Depending upon whether your client is still in the start-up phase of this business, there may be no current deductions. I would recommend an 1120 be filed in any event. I do no international work, so you should check to see if there are filings needed in India. You should also review the India-US tax treaty to see if anything in it affects your client.

Tiffaney (talk|edits) said:

9 January 2007
Are w-2 necessary for the India employees? If the transfer are not deductions, then what are they? Are they dividend or compensation to the officer?

Lizzit (talk|edits) said:

9 January 2007
1) The transfer was to a bank account, an individual, or an entity.
   a)  If to a bank account, that's an overseas account, presumably owned by your US Corp.  The US Corp must file a Form TD F 90-22.1 (if the value was ever >$10,000) and anyone with signature authority over that account must also file Form TD F 90-22.1.
       i)  if the overseas account is owned by someone other than the US Corp, it's a payment to that person.  Follow (b) below, or if it's a shareholder/officer/director, then it would be up to you to determine whether it is a dividend or compensation.
   b)  If to an individual, and that individual is not a US citizen, US resident, or US greencard holder, you will need to withhold 30% tax and report the payment on Form 1042-S.  You didn't withhold?  Ooops, better rectify that problem soon!  Alternatively, if the recipient has a US ITIN or SSN, you may be exempt from the withholding.
       i)  Again, if the individual is also a shareholder/officer/director, it would be up to you to determine whether it is compensation or dividend.
   c)  If to an entity, then it's an expense of doing business (presumably).  Determine the nature of the service or product paid for (just as you would a payment to Joe Blogs Inc), and categorize it correctly on the 1120.
       i)  Be leery if the India entity is owned by the same people who own the US Corp.  There may be issues of related party transactions (often having different taxation than an arms-length transaction) and/or transfer pricing.
       ii) If the Indian entity is owned by US citizens, residents, &/or greencard holders, there is a host of international corporate tax work required.  Forms 5471 and 926 will be your biggest concerns.  Seek specialist advice to avoid pitfalls that could cost your clients money (and result in a lawsuit to you).

2) If the business is doing well, they may open a sister entity in India. Get international corporate advice to assist in making sure the issues of related party transactions and transfer pricing are fully covered.

Sandysea (talk|edits) said:

9 January 2007
Sounds like a controlled foreign corporation and unless you are seasoned in international taxes, get some advice and assistance with these returns. No matter what you do, transfer pricing has to be addressed if the corporations are owned by the same group of people.

I would suggest that you speak with an international atty or accountant and determine what involvement the Indian and US corporations have.

.Some 2007 & 2008 posts by non-tax-pros have been moved to a consumer forum discussion: Discussion:Client worked from India.

KathyEA (talk|edits) said:

11 August 2009
We have a client with a successful business who is paying for contractors in India. Like the question before mine, there will be no foreign revenue; these expenses help generate US income. Is there any reason these expenses would not be deductible on his 1120S?

One of our staff seemed to think the operations there were disconnected to the US corp, but I can't see why. Any ideas? thanks.

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