Tax Deduction Myths!

The tax laws listed out in full glory on the taxpedias might at most times seem too overwhelming for us to understand and interpret. So, there is bound to be a lot of confusion on what deductions to claim on your income tax return. A few commonly misinterpreted / misrepresented deductions are listed below for your clarity:

1. You cannot claim interest deduction on your personal credit card


Whenever you make personal charges to your credit card such as personal recreation, eating out etc, in general, any expense related to running your day-to-day life, the interest is not deductible.

A number of years ago, consumer-interest deductions were allowed, with the belief that it would enhance consumer spending and hence improve economy. However, it was changed on the basis of fear that people may begin to over spend and over borrow.

Hence, if you are self-employed, the best bet to eliminate credit card related confusion is to have separate cards earmarked for your business and personal life.


2. You cannot claim deductions on expenses towards your work clothes / interview suit


You cannot claim deductions on getting smartened up for an interview / work environment demands, but expenses towards smartening up your resume and looking out for jobs with the help of an employment service agency can be deducted.

3. You cannot deduct commuting costs when moving from your place to the office


This cannot be done, as the time you spend commuting to work is considered personal and on the presumption that you have chosen your place of living in relation to your workplace.

However, if you are self-employed / work from home, your cost of commuting from your residence to any place on work-related business (meetings et al).


If you are planning to claim any of the above, sit down with your accountant / tax professional and ensure you have everything noted down properly and in compliance with the IRS regulations.

Crucial Tax Rules!

Crucial Tax Rules:

1. Demarcate personal & business life clearly for tax purposes. Clarity always helps!

2. Maintain sufficient back records - most of the IRS audits are correspondence audits looking for substantiating tax documents!

3. Take good care of your information records such as Form 1099s - regardless of whether you are a payee or payor!

How would you qualify for home office deduction?

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The IRS has the following six requirements to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a business deduction for your home, you must use part of your home exclusively and regularly:

• as your principal place of business, or

• as a place to meet or deal with patients, clients or customers in the normal course of your business, or

• in any connection with your trade or business where the business portion of your home is a separate structure not attached to your home.

2. For certain storage use, rental use or daycare-facility use, you are required to use the property regularly but not exclusively.

3.   Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses.

4.   There are special rules for qualified daycare providers and for persons storing business inventory or product samples.

5.   If you are self-employed, use Form 8829, Expenses for Business Use of Your Home to figure your home office deduction and report those deductions on Form 1040 Schedule C, Profit or Loss From Business.

6.   If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be for the convenience of your employer.

Source: www.irs.gov 

FATCA partners

In a major development, U.S. declares “FATCA partners” with five countries whereby each pledge more tax information sharing between the Governments. The five countries are France, Germany, Italy, Spain and the United Kingdom.




Extracts of the report:




Under Treasury’s proposed “new government-to-government framework for implementing FATCA,” the governments of France, Germany, Italy, Spain and the United Kingdom will work together to create a means to collect the information from their banks and send it to the United 

States.




Treasury said that once these five “FATCA partner” countries finalized the framework, banks in those countries would not have to enter into separate data disclosure agreements with the IRS.

In addition, in a reciprocating agreement, Treasury said the United States would collect and share information with the five participating EU countries about accounts held by their citizens in U.S. financial institutions.

For nations not invited to become “FATCA partners” with the United States, banks and financial institutions in those countries must still cooperate on their own with the IRS.

Noticeably absent from the new framework were major international banking nations such as Canada, Switzerland and the Netherlands, not to mention tax haven jurisdictions such as Ireland, the Cayman Islands and Bermuda.

Entire Reuters article can be read here

http://www.reuters.com/article/2012/02/08/usa-tax-treasury-fatca-idUSL2E8D82J120120208

Who must file new Form 8938?

For tax years beginning after March 18, 2010, certain individuals must file new Form 8938 to report the ownership of specified foreign financial assets if the total value of those assets exceeds the reporting threshold amount.

Who Must File?

Unless an exception applies, you must file Form 8938 if you are a specified person that has an interest in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold.

Exception

If you do not have to file an income tax return for the tax year, you do not have to file Form 8938, even if the value of your specified foreign financial assets is more than the appropriate reporting threshold.

Specified individual: 

You are a specified individual if you are one of the following:

1. A U.S. citizen

2. A resident alien of the United States for any part of the tax year

3. A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return

Specified foreign financial assets: 

Generally include the following assets:

1. Any financial account maintained by a foreign financial institution.

2. To the extent held for investment and not held in a financial account, any stock or securities issued by someone that is not a U.S. person, any interest in a foreign entity, and any financial instrument or contract with an issuer or counterparty that is not a U.S. person.

Reporting threshold: 

If the total value of your specified financial assets is more than the following:

	Taxpayer living in United States		Taxpayer living abroad
	On the last day of the tax year	Anytime during the tax year	On the last day of the tax year	Anytime during the tax year
Unmarried	$50,000	$75,000	$200,000	$300,000
Married filing jointly	$100,000	$150,000	$400,000	$600,000
Married filing separately	$50,000	$75,000	$200,000	$300,000

Form 8938 does not relieve you of the requirement to file FBAR form TD F 90-22.1

CBDT chief - meet targets & get ahead!

MUMBAI: The chairman of the Central Board of Direct Taxes (CBDT) has told senior officials that their career prospects would depend on their success in meeting targets for tax collection, emphasising the government's desperation to raise revenues to plug the rising fiscal deficit, but raising fears among the wealthy of harassment. Laxman Dass, the chairman of CBDT, has told 100 top officials that tax revenue targets are 'nonnegotiable'. 


The letter, dated February 7, admonishes his colleagues, officials of the rank of chief commissioners and director general, for their lack of success in bringing in money. "I have taken over as chairman at a time when revenue collections seem to be far away from the Budget target, with less then two months at hand." 


Dass outlines a carrot and stick policy to get the situation back on track. "Among the parameters of performance in your area, achievement of revenue collection target will obviously be given the highest weightage while writing your APAR and (it) will also be a major factor while considering placements during AGT 2012." APAR is the annual performance appraisal report and AGT is annual general transfer. 


The aggressive stance of the tax authorities has caused dismay among some experts. "India is the highest tax jurisprudence producing country in the world. Every day at least two or three international tax decisions are being taken by either the courts or the tribunals," said Daksha Baxi, executive director at Khaitan & Co, a law firm that provides legal counselling to corporates. 


A chief commissioner who does not want to be identified said: "Though it is a fact that one's performance is taken into account for promotions and transfers, a letter from the chairman is unprecedented." Dass declined to comment on the letter. 


Tax head of Deloitte India, Lakshmi Narayanan told ET that assigning collection targets to officers is not a practice in developed countries. He said the CBDT chairman's letter could result in "high-pitched" demands. 


"Officers are now compelled to make high-pitched demand on large corporates, which cannot be sustained at the appellate level. The excess demand get refunded next fiscal. What are they trying to do? Just deferring the problem, as it gets into litigation for five to six years." Under pressure from the top, tax officials often force assesses to pay tax - even if there is a dispute over it - threatening them with the prospect of a raid or its softer version, the so-called survey, many taxpayers complain. 

The tax department, going by the feedback from the ground and collections by way of tax deducted at source ( TDS), securities transactions tax (STT) and so on, is facing a likely shortfall of Rs 50,000 crore in tax collection. The government has raised its target to Rs 5.80 lakh crore, but in all likelihood the collection will border the original target of Rs 5.35 lakh crore, sources said. 


The letter from the chairman of the board is seen as a desperate step to meet the higher target, a senior tax official said. Another senior income-tax official said: "Authorities should know that tax collection is closely linked to the performance of the economy. If some sectors do badly, tax collection from the sector too will be affected." 


INCREASING UNCERTAINTY 


Baxi said the letter would only add to the air of uncertainty prevailing in companies. 


"Corporates are not sure about certain transactions because of the unpredictability of the tax department," says Baxi. "This is creating a lot of uncertainty. They are not comfortable in ploughing back profits while the GDP growth has slowed down. This is a major factor for the slowdown," she said. 


Baxi laments that tax officers refuse to acknowledge court orders. "What is increasingly been seen is the tax officer refusing to acknowledge the decisions or precedence of a higher body. They simply disregard the tribunal decisions or another jurisdiction which supports the views of the taxpayer," she said. 


There is also a drive to raise revenue from demands disputed at the appellate levels such as Commissioner, Income Tax, Appeals (CIT-A) and Income-tax Appellate Tribunal (ITAT). 


The CIT-A has the power to direct the taxpayer not to pay the tax until it decides on the correctness of the demand, or to direct him to pay 50-100% of the disputed amount, depending on the merit of the case. 


Though it is a quasi judicial body, the CIT-A is headed by an official of the Income-tax department, who will be promoted or transferred after his tenure ends. Taxpayers are complaining that the appellate commissioners too appear to be part of the drive to enhance tax collection. 


Senior chartered accountant TP Ostwal said, "Appellate commissioners are deliberately asking taxpayers to pay up at least 50% of the disputed tax. In several other cases they are asking taxpayers to pay the full amount. On the other hand, the assessing officers tend to make wrong assessments in order to meet the targets assigned to them. My clients have been affected by this unusual drive to meet the target."

Source: http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/finance/meet-targets-or-face-music-cbdt-chief-tells-officials/articleshow/12191585.cms?curpg=2

Compliance aspects of inward remittance

Any company setting out to receive foreign share capital has to know what percentage of investment is allowed in that industry by the Government.

An auto component manufacturing company from Korea was on the lookout for a suitable joint venture partner to set up a facility in India that would logistically support supply to the car manufacturer in Chennai. After conducting due diligence, the Korean company identified Anish Southern Group companies as an ideal venture partner, with whom the procedures for incorporation were set in motion. The new joint venture company, comprising both Korean investors and Indian investors, was incorporated with the Registrar of Companies with 49 per cent of equity investment by the Indian investor, and 51 per cent investment from the Korean investor.

The company opened the bank account with a private sector new generation bank, through which the funds were routed from Korea to India, and the branch of the bank is an Authorised Dealer (AD) of RBI. The AD secured KYC documents on receipt of the inward remittance, but didn't follow up on some other FEMA-related requirements for foreign inward remittance. The company allotted shares to all investors, and complied with ROC formalities by filing Form 2. The initial focus was on operations, and meeting its orders and augmenting supply chains and logistics to further strengthen its hold on the market. During the first audit of the books of the company, the auditors sought FEMA compliance papers for verification of the foreign share holding. At this point, the JV Company realised that they had unintentionally missed out on this aspect of the deal.

SECTORAL CAPS

Whenever any company sets out to receive foreign share capital, certain essentials need to be verified. It needs to know what percentage of investment is allowed in that specific industry under the Government of India's FDI schemes, and one needs to verify that the industry doesn't fall into the list where the Government has set sectoral caps or limits on foreign investment. There are three such categories — where 100 per cent FDI is allowed, where sectoral caps exist, and last but not the least, where FDI is absolutely not allowed. Further, there are industries where investment is allowed via the automatic route — in other words, only information reports need to be filed with the Reserve Bank of India. In certain other cases, prior approval of the government is required, and must be secured from the Foreign Investment Promotion Board (FIPB), Government of India.

The JV Company, having received FDI under the automatic route, should have reported certain details on the Advance Reporting Form to the Regional Office of the Reserve Bank of India, within 30 days from the date of receipt of inward remittances. The report would include details of the receipt of remittance towards issue of equity instrument (viz. shares / fully convertible debentures / fully convertible preference shares), copies of the Foreign Inward Remittance Certificate (FIRC) evidencing the receipt of inward remittances, and Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount.

ADVANCE REPORTING

The procedure may be classified into two stages. Stage 1 happens on the receipt of share application money, and should be completed within 30 days of receipt of remittance. Stage 2 is due when shares are allotted. At that time, the JV Company needs to file a report on form FC-GPR with the respective regional office of the Reserve Bank of India.

This report must be accompanied by certain certifications from the Company Secretary and Statutory Auditors of the JV Company. Another point to be noted is that all the reporting happens through the AD category 1 branch of the bank where the company has an account, and which receives the remittance of share capital. It is, therefore, imperative that the AD keeps its customers informed of FEMA requirements in such cases.

In this case, failure to report the transaction will invite penal provisions under FEMA. The JV Company would need to apply to RBI for compounding of contravention under FEMA. One can also make an application for compounding, suo moto, on becoming aware of the contravention. It would, of course, be better to follow reporting requirements, rather than invite penal provisions, as these types of irregularities will dominate the horizon when the foreign investor wants to repatriate dividends or capital on a later date.