Tax Type
Individual Income Tax
Description
Out-of-state tax credit is not applicable for the taxes paid to India.
Topic
Out of State Tax Credits
Date Issued
12-18-2013
December 18, 2013
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2012.
FACTS
The Taxpayers, a husband and wife, filed a joint Virginia resident income tax return for the 2012 taxable year. During that year, the husband realized gain from the sale of real property located in India. Pursuant to Indian law, capital gains taxes were deducted from the proceeds of sale. The Taxpayers claimed a foreign tax credit for these taxes on their federal income tax return. On the Virginia income tax return, they claimed a credit for taxes paid to another state for taxes paid to India. Under review, the Department disallowed the credit and issued an assessment. The Taxpayers paid the assessment and filed an appeal, contending the United States maintains a treaty with India that grants a tax credit for foreign source income and they are entitled to such credit on their Virginia return.
DETERMINATION
Virginia Code § 58.1-332 allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or on any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations in which they are taxed by both Virginia and another state on these types of income during the same taxable year.
Title 23 of the Virginia Administrative Code (VAC) 10-110-220 provides that the credit "is applicable only to income tax paid to another state and does not apply to taxes paid to any foreign country." As such, the out-of-state tax credit is not applicable for the taxes paid to India.
In addition, Article 2 of the Convention Between The Government Of The United States of America And The Government Of The Republic Of India For The Avoidance of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income states in pertinent part, "The existing taxes to which the Convention shall apply are . . . in the United States, the Federal income taxes imposed by the Internal Revenue Code . . . ."
Pursuant to this article, the Convention applies only to certain taxes imposed at the federal level by the United States and Indian national governments. Taxes imposed by state and local governments, including Virginia, are unaffected by the Convention. See also Public Document (P.D.) 96-228 (9/9/1996) and P.D. 07-39 (4/20/2007). As such, the credit for taxes paid to another state claimed by the Taxpayers on their 2012 Virginia income tax return was properly denied, and no refund can be issued.
The Code of Virginia section, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's web site. If you have any questions about this determination, you may contact ***** in the Department's Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Craig M. Burns
Tax Commissioner
AR/1-5455177352.M
Rulings of the Tax Commissioner