Frequent movement of people across tax jurisdictions is a reality today. Globalization has ensured that geography no longer matters and geographical borders are a thing of the past as people move from one country to another undeterred by physical or regulatory boundaries. Companies too find that it is easier to depute personnel from one country to another rather than train people in specific geographical locations. This, of course, means that the tax complexities are also on the rise.
When you deal with two different tax jurisdictions, it may so happen that a taxpayer might turn out to be a tax resident per rules in both jurisdictions. It is also possible that the taxpayer may turn out to be a non-resident in both jurisdictions. How? These quirky situations arise due to the different tax years that various countries may follow. As an example we can take a look at USA and India. For the individual taxpayer, IRS rules specify a calendar year (January to December). India, however, follows a fiscal year starting April and ending March of the following year. Technically between the two tax years, the period covered is 15 months as against the standard 12 months in a year. This is just one of the complexities in such a situation. There are other factors that will also come into play in the final analysis – economic ties, citizenship, treatment of different kinds of income, to name just a few. Double taxation agreements between countries are geared to handle these situations and are based on the logic that a taxpayer must not be taxed twice on the same income.
Given the above facts, governments need ways and means to identify tax issues and check the veracity of returns submitted by its citizens. The IRS depends to a large extent on various information reports and correlation between those reports and the income tax return submitted by a taxpayer. These returns range from FBAR filings to Form 8938 and other forms such as Form 5471, 3520 etc. There are similar requirements in other countries. One common requirement across various jurisdictions is the tax residency certification. The tax residency certificate is a document that certifies the taxpayer is a bona- fide tax resident of a particular jurisdiction and based on this certification another jurisdiction may allow the taxpayer various concessions/reduced rates under the Double Taxation Avoidance Agreements between the two jurisdictions involved.
A US citizen or resident would be able to obtain a TRC by applying to the IRS on Form 8802, application fir United States Residency Certification. Once the IRS receives this application along with the requisite processing fee, it will verify the facts available and issue Form 6166 which is a letter printed on Treasury stationery certifying that the individual listed on the letter is a tax resident of USA. This letter/certificate may then be used to claim treaty benefits in the other jurisdiction where the taxpayer’s income is subject to tax.
It is interesting to note that in case a taxpayer applies for the current year, he must actually attest to his residency. In other words he would be signing the application under“penalty of perjury”. The processing fee has also gone up from the initial fee of $85 to $185 since December 2018. The increase may be attributable to increase in process costs and it may also serve the additional purpose of preventing frivolous applications. A taxpayer may not be eligible to receive a Form 6166 if he meets any of the following conditions:
- He did not file a required US tax return
- He filed Form 1040NR indicating he is a non-resident alien for US tax purposes
- He is a resident of two jurisdictions and using the DTAA tie-breaker has determined that he is not a US resident for tax purposes
The certification can also be requested at entity level. However this article is limited to the rules surrounding a request by an individual.
