Foreign Tax Credit Timing Mismatch When the Foreign Country Follows a January to December Tax Year

 

 

Many Indian companies operate in jurisdictions that follow a January to December tax calendar. This creates a real challenge when claiming Foreign Tax Credit under Rule 128 in India.

Income earned from January to March relates to the Indian financial year ending in March. However the foreign tax on that income becomes payable only when the foreign return for the full calendar year is filed in the next year. By that time the Indian return and even the revised return deadline are already over.

Since Rule 128 requires proof of payment and Form 67 to be filed before the Indian return due date, taxpayers are unable to claim the credit in the correct year. This leads to timing based double taxation even though all compliance requirements are met in both jurisdictions.

Until a policy solution is introduced taxpayers often end up claiming the foreign tax credit in the next Indian year when evidence of payment finally becomes available.

Cross border taxation continues to evolve and these timing issues highlight the need for constant review of administrative rules so that they reflect the realities of global business.