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Simple Tax Guide for Americans in Nepal

Simple Tax Guide for Americans in Nepal

US Expat Taxes - Nepal

At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Nepal for over 8 years. Our clients live in - Kathmandu and are mainly working for US government agencies.

As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.

We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS

The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.

As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Nepal for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.

There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.

We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.

Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
 

Nepal Individual Income Tax Rates

Below we include information on the Nepalese Tax System for the American Expatriates.

Nepal individual income tax rates are progressive to 25%. Tax exemption limit is Rs.160,000 for individuals and Rs.200,000 for couples:

Tax rates for resident individuals

Income (Rs.) Tax Rate
First 350,000 1%
Next 100,000 10%
Next 200,000 20%
Next 13,50,000 30%


Tax rates for Married (including widow & widower)

Income (Rs.) Tax Rate
First 400,000 1%
Next 100,000 10%
Next 200,000 20%
Next 13,00,000 30%

The 1% tax on employment should be deposited in separate revenue account in IRD as Social Security Tax. The 1% tax is not levied if the employment income is pension income. 1% social security based income tax is also not levied for such individuals who make contribution to contribution based Social Security Fund.


Tax rates for Proprietorship Firm - single

Income (Rs.) Tax Rate
First 350,000 -
Next 100,000 10%
Next 200,000 20%
Next 13,50,000 30%


Tax rates for Proprietorship Firm - married

Income (Rs.) Tax Rate
First 400,000 -
Next 100,000 10%
Next 200,000 20%
Next 13,00,000 30%

 

Special Tax Rates for Natural Persons

Particulars Applicable Tax Rates
For incomes earned from operating special industries 20% where 30% tax rate applies
For incomes earned from export business

15% where 20% or 30% tax rate applies


If the natural person has taxable income of Rs. 2.0 million & above, additional tax need to be paid, calculated as 20% of tax liability for income above Rs. 2,000,000.

A female resident natural person deriving income only from employment in Nepal shall be provided with a rebate of 10% on the tax liability. Income Tax Manual, 2073 does not require the female to opt for individual assessment of tax to avail the Rebate facility

Gain from disposal of Non Business Chargeable Assets of a resident natural person is taxed at 10% after taking into consideration exemption limit (i.e. Rs. 350,000 for individual and Rs. 400,000 for couples), subject to following:

  • In case of land and buildings, where the disposed land & buildings has been owned for more than 5 years, tax rate of 2.5% shall apply.
  • In case the disposed land & buildings has been owned for less than 5 years, tax rate of 5% shall apply.
  • In case of gain from disposal of shares of listed entities, 7.5% tax rate shall apply for resident natural person.

Gain from Non Business Chargeable Assets includes:

  • Gain from sale of shares of companies,
  • Gain from sale of building owned and resided for less than 10 years and disposed for more than Rs. 10 lakhs and gain from sale of land disposed for more than Rs. 10 Lakhs

The tax is collected on source, by collection through an agent. The tax payer should submit tax returns to avail exemption benefit.


Tax Deductions and Facilities for Resident Persons

Life Insurance Premium - While calculating taxable income, life Insurance premium paid by a resident natural person is deductible up to the limit of Rs 25,000. Where both husband and wife have opted as couple, the insurance paid can be clubbed to claim for deduction, subject to maximum of Rs. 25,000.

Employees working in Diplomatic Agencies - 75% of foreign allowance is deducted from taxable income in case of an employee employed at diplomatic agencies of Nepal situated at foreign countries.

Incapacitated natural persons - In case of incapacitated natural persons, the minimum exemption limit (Rs. 350,000 for individual and Rs. 400,000 for couples) is increased by additional 50%.

Remote Area Benefit - In case of resident natural persons working in remote areas, minimum exemption limit shall be increased by Rs 50,000 depending on remote area category, as follows:

Category A Rs. 50,000
Category B Rs. 40,000
Category C Rs. 30,000
Category D Rs. 20,000
Category E Rs. 10,000

The facility is proportionately calculated for period of stay.

Additional limit for pension income - If income of a resident natural person includes pension income, the taxable income is first reduced by additional 25% or pension amount included in income whichever is lower and then tax liability is calculated on balance income.

Health Insurance Premium If a resident natural person pays health insurance premium to a resident insurance company, lower of the following amount is deductible for tax purpose:

  • a. Rs. 20,000; or
  • b. Annual Health insurance premium paid to resident insurance company


Tax Credits for Resident Persons

Medical Tax Credit - In case of approved medical expenses, medical tax credit is available to resident natural persons as deduction from tax liabilities. The limit prescribed is Rs.750 or 15% of Approved medical expense or actual approved medical expense incurred whichever is lower. Any unutilized expenses can be carried forward to next year. Approved medical expense does not include cost incurred for cosmetic surgery.

Foreign Tax Credit - If foreign income is included in taxable income of a resident person, foreign tax credit for tax paid in foreign country in respect of that income. The foreign tax paid can either be deducted as expense or tax liability in Nepal can be reduced by such tax paid up to average rate of tax applicable in Nepal, depending on the option of tax payer. The calculation should be done for each sourced income separately and tax not eligible as credit in a year can be carried forward to claim as foreign tax credit in future year from the same source country.

Tax Rate for Non Resident Natural Person

Taxable income of a non resident natural person shall be taxed at 25%. Nonresident natural persons are allowed to claim “Remote Area Benefit”.

Nepal Corporate Tax Rates

The standard rate of corporate tax in Nepal is 25%. However, different entities are taxed at different rates:

Particulars Tax Rate
Special Industries   20%
Banks and Financial Institutions 30%
General Insurance Companies 30%
Entities engaged in the business of petroleum products 30%
Industries producing products with tobacco as basic raw material and Industries producing liquors, beers and similar other products 30%
Telecommunication or Internet Service Provider Companies 30%
Entities involved in Money Transfer Business 30%
Entities involved in Security Market Business 30%
Entities Involved in Merchant Banking Business 30%
Entities operating Commodity Future Market 30%
Entities involved in Commodity and Security Broker Business 30%
Entities involved in operation of roads, bridges, tunnels (including cable-car), rope-way, sky bridge, after construction 20%
Entities involved in operation of trolley bus & tram 20%
Cooperative Societies registered as per Cooperative Act 2048 and Engaged in business other than tax exempt 20%
Export Income of an entity with source in Nepal 20%
Trust of deceased or incapacitated person Rates as natural person

Reduced Tax Rates - Concessions for F.Y. 2018/19

 

Industries Rates as Percentage of Applicable rate
Special Industries and Information Technology Industries providing direct employment to 100 or more Nepalese citizens throughout the year 90%
Special Industries and Information Technology Industries providing direct employment to 300 or more Nepalese citizens throughout the year 80%
Special Industries and Information Technology Industries providing direct employment to 500 or more Nepalese citizens throughout the year 75%
Special Industries and Information Technology Industries providing direct employment to 1,000 or more Nepalese citizens throughout the year 70%
Special Industries and Information Technology Industries providing direct employment to 100 or more Nepalese citizens throughout the year, of which at least one-third are women, dalits (oppressed) or incapacitated 80%
Special Industries and Information Technology Industries providing direct employment to 300 or more Nepalese citizens throughout the year, of which at least one-third are women, dalits (oppressed) or incapacitated 70%
Special Industries and Information Technology Industries providing direct employment to 500 or more Nepalese citizens throughout the year, of which at least one-third are women, dalits (oppressed) or incapacitated 65%
Special Industries and Information Technology Industries providing direct employment to 1000 or more Nepalese citizens throughout the year, of which at least one-third are women, dalits (oppressed) or incapacitated 60%
Special Industries operating in remote area for first ten Income years 10%
Special Industries operating in undeveloped area for first ten Income years 20%
Special Industries operating in underdeveloped area for first ten Income years 30%
Special Industry with capital investment of more than Rs. 1 Billion and employing 500 individuals during the whole year 0% (for first five years of operation) & 50% (for next three years)
Existing Special Industries increasing installed capacity by 25% and increasing the capital to Rs. 1 Billion, with direct employment to at least 500 people 0% on incremental profit (for first five years of operation) & 50% on incremental profit (for next three years thereafter)
Industries established in Special Economic Zone of hilly district as specified by the government and mountain district 0% (for 10 years), 50% (thereafter)
Industries established in Special Economic Zone of other areas 0% for 5 years & 50% thereafter
Income from foreign technology, management fee and royalty earned by foreign investor from industries established in special economic zone 50%
Capitalization of profit by Special Industry, Agro-based industry and tourism industry for Capacity Expansion Dividend Tax- Nil
Person transacting on exploration of petroleum and natural gases, if business operation starts within 2080 Chaitra end 0% for first 7 yrs & 50% for next 3 yrs
Industry operating in Technology Park, Biotech Park, and IT park and involved in software development, statistical processing, cyber café, digital Mapping 50%
Entity involved in generation, transmission or distribution of hydroelectricity, if commences commercial activities related to generation, transmission or distribution within Chaitra end of 2080 0% for first 10 yrs and 50% for next 5 yrs of applicable Rate
Entity involved in generation, transmission or distribution of electricity, if commences commercial activities related to generation, transmission or distribution within Chaitra end of 2080 when the electricity are generated from solar, wind or bio energy 0% for first 10 yrs and 50% for next 5 yrs of applicable Rate
Profit on export income of an industry 75%
In case of dividend of industries in Special Economic Zones Dividend tax exempt for first five years of operation and 50% concession is provided for dividend tax in next three years
Income from construction and operation of roads, bridges, tunnels (including cable-car), rope-way, sky bridge or investment and operation of tram, trolley bus 60%
Manufacturing, tourism, hydroelectric generation, distribution and transmission entities and Industry operating in Technology Park, Biotech Park, and IT park and involved in software development, statistical processing, cyber café, digital Mapping; if listed in Stock Exchange 85%
Industry producing brandy, cider and wine based on fruits and established in remote area (for first ten years of operation) 60%
Royalty income from export of intellectual property 75%
Income from sale of intellectual property 50%

Industry related to Tourism Sector or aviation company for international flights with capital investment of more than Rs. 2 Billion

 

Such facility is provided to existing industry that increases its capital investment to Rs. 2 Billion after increasing its capacity by at least 25% and on income generated through utilization of increased capacity

No tax for first five years and 50% of applicable rate for next three years
Private company (other than that required to be converted into Public as per Sec. 12 of Companies Act), if coverts into public company 90% (for three years from the date of conversion)
Domestic tea production and processing industry, dairy industry and garment industry 50%
Community Hospitals 80%
Micro enterprises owned by female 0% for first seven years
Micro enterprises owned by other than female 0% for first five years

Tax Rates for Special business of Non Residents

Particulars Tax rates
For incomes earned from operation of water transport, charter service or air transport where the departure is from Nepal or by operating a cable, radio, optical fiber or earth-satellite communication business from the transmission of news or information through the equipments installed in Nepal. 5%
For incomes earned from providing air transport, water transport or telecommunication services outside the territory of Nepal, the first point of departure being outside Nepal 2%
On repatriation of income by Foreign Permanent Establishment 5%

Presumptive Taxation- Income Tax on Owners of public vehicles

Type of Vehicle Tax (per vehicle per annum)

Car, Jeep, Van, Microbus

- Up to 1300 CC

- 1301 CC- 2000 CC

- 2001 CC- 2900 CC

- 2901 CC- 4,000 CC

- >4,000 CC

 

- 4,000

- 4,500

- 5,000

- 6,000

- 7,000

Minibus, Mini-truck, Water tanker 6,000
Mini Tripper 7,000
Bus, Truck 8,000
Machinery equipment including dozer, loader, roller, excavator, crane 12,000
Oil Tanker, Gas Bullet, Tripper 12,000
Tractor 2,000
Power Tiller 1,500
Three wheeler, auto rickshaw, tempo 2,000

Income Tax for Small Tax Payers

Resident Natural Persons who derives income only from business having source in Nepal with annual business turnover up to Rs. 20,00,000 and net income below Rs. 2,00,000 and not registered for VAT purpose may chose to pay tax as below. In such case, the person cannot claim medical tax credit or advance tax arising out of tax withheld by withholding agent.

Location of business Tax (per annum)
For resident natural persons operating business in Metropolitan and SubMetropolitan areas Rs 5,000
For resident natural persons operating business in Municipality areas Rs 2,500
For resident natural persons operating business in other areas Rs 1,500

Income Tax for Person choosing to pay Tax based on Turnover

Resident Natural Persons who derives income only from business having source in Nepal with annual business turnover exceeding Rs. 20,00,000 and which is below Rs. 50,00,000 and not registered for VAT purpose shall have to pay tax as below.

Nature of Business Rate of Tax
Person dealing in goods, which are sold on the basis of commission- the rate of commission of which is up to 3%, or sold by adding up to 3% value while selling such goods including gas, cigarette 0.25% of Turnover
Person dealing in goods not specified above 0.75% of Turnover
Person dealing in Services* 2% of Turnover

* The person who derives income from consultancy or expert services that are provided by a natural person including doctor, engineer, auditor, lawyer, sportspersons, artist or consultant cannot choose to pay turnover tax.

Additional Deductions for businesses

  • Any entity may deduct 50% of capital amount for power generating assets to be used for production of power to be consumed for own use in the year of acquisition as additional depreciation.
  • Capital expenditure incurred for purchasing fiscal printer and cash machine can be claimed as depreciation in the year of purchase.

Carry forward of normal business loss

Losses arising from business in an income year may be set off against income from any other business or investment in that year of the same person. Investment loss cannot be set-off from business income. A business loss may be carried forward and set off against future business profits in the next seven assessment years. Similarly, investment loss may be carried forward and set off against future investment profits in the next seven assessment years. Foreign sourced loss can be set-off only with foreign sourced income.

In certain business such as projects involved in construction, generation and transmission of electricity; projects involved in construction and operation of public infrastructure projects under BOT and persons dealing in Petroleum under Petroleum Act 2040; the business loss is allowed to be carried forward to be set off for next 12 Income years.

Any business loss that is not set-off in seven years can be carried forward indefinitely to set off against gain from disposal of business assets and liabilities. In case of natural persons, any business loss and investment loss that is not set-off in seven years can be carried forward indefinitely to set off against gain from disposal of non-business chargeable assets.

Loss on disposal of Assets

The Income Tax law has classified assets of an entity into stock, depreciable assets and business assets. Personal assets of Natural persons may be taxed as Non Business Chargeable Assets if they meet certain criteria.

  • Loss from stock is adjusted in cost of goods sold.
  • Depreciation is calculated on pool basis, with assets classified into five pools. Gain or loss on disposal of depreciable assets is not calculated separately for each asset, but considered on pool basis. If there is loss on disposal of a pool of depreciable assets, it is deductible as normal loss in the concerned income year.
  • Non depreciable capital assets are categorized as business assets. Any loss from disposal of business assets can be claimed as deduction in the same year as normal loss. But while calculating gain from disposal of business assets in a year, any unrelieved business loss of previous years (due to seven years limit) can be claimed for setoff. The same provision applies for disposal of business liability.


Advance Income Tax

Income Tax for fiscal year should be paid in 3 installments as follows:

Instalment Time Period Amount
First Poush end 2075 (14th January 2019) 40%
Second Chaitra end 2075 (13th April 2019) 70%
Third Ashad end 2076 (Mid July 2019) 100%

Every person liable to pay installment tax is required to file an estimated tax return within 30th Poush 2075 (14 th January 2019).

Advance tax (in installment) is to be paid by every person having or likely to have assessable income from business or assessable income from investment in an income year. However, in case a person’s total estimated tax liability is below Rs. 5,000 advance tax in installments need not be paid.

Carry Forward of Loss

Losses arising from business in an income year may be set off against income from any other business or investment in that year of the same person. Investment loss cannot be set-off from business income. A business loss may be carried forward and set off against future business profits in the next seven assessment years. Similarly, investment loss may be carried forward and set off against future investment profits in the next seven assessment years. Foreign sourced loss can be set-off only with foreign sourced income.

In certain business such as projects involved in construction, generation and transmission of electricity; projects involved in construction and operation of public infrastructure projects under BOT and persons dealing in Petroleum under Petroleum Act 2040; the business loss is allowed to be carried forward to be set off for next 12 Income years.

Any business loss that is not set-off in seven years can be carried forward indefinitely to set off against gain from disposal of business assets and liabilities. In case of natural persons, any business loss and investment loss that is not set-off in seven years can be carried forward indefinitely to set off against gain from disposal of non-business chargeable assets.

Annual tax returns

Annual tax return should generally be filed within 3 months from the end of an income year. So, the due date of filing annual tax returns for the income year 2075/76 (2018/19) is Asoj end 2076 (Mid October, 2019). However, a taxpayer may have this due date extended for a maximum period of 3 months i.e. up to Poush end 2076 (Mid January, 2020) in case he files an application in the IRD with bonafide reasons for such extension. This extension only applies to tax return submission and not for payment of tax.

Fees and Interest

Particulars Fees and Interest
For failure to submit estimated income statement Rs 2,000 for each of such statements.
For delay in filing annual tax return

For Small Tax Payers Rs 100 per month

For Others Fee at the rate of 0.1% on gross assessable income* or Rs 100 per month, whichever is higher.

For failure to keep documents as required by Act Fee at the rate of 0.1% on gross assessable income* or Rs 1000, whichever is higher.
Failure to submit financial statements within 3 months of Income Year end by Exempt Organization 0.1% p.a. of “Amount disclosed as Revenue” by the organization
For non submission of TDS return as per Sec. 90 2.5% of TDS to be deposited per annum
For non submission of Advance Tax Collection return as per Sec 95Ka 1.5% p.a. of amount on which the advance tax is to be collected
For under estimation of advance tax installments Interest at 15% per annum on shortfall amount. The difference amount shall be calculated as 100% of installment, had the estimation been correct and the actual amount deposited; only if the deposited amount is lower than 90% of actual tax liability
For failure to pay tax Interest at 15% per annum for the period of failure to pay tax, considering part of a month as a complete month.


Tax Deduction at Source (TDS) rates

Resident employer should withhold tax while making employment income payment with sources in Nepal to an employer as follows. 


(Monthly TDS = Annual Tax calculated as per schedule 1 on annual employment income divided by 12)

 

Particulars Tax Rates
On Interest, Royalty, Service Charge, Commission, Sales Bonus, Natural Resource Payment, Retirement Payment having source in Nepal, except mentioned below 15%
Payment made to resident person on Service Fee invoiced in VAT bill 1,5%
On Nepal sourced Interest by Banks and financial institutions and/or listed companies, cooperatives or entities issuing debentures to a natural person, except made in connection with business 5%

On payment made by a resident person for rent having source in Nepal.

 

No TDS is required house rent income of a natural person

10%
On payment made by a resident person for rental service provided by a Vehicle Rental Service Provider registered for VAT purpose and issuing VAT Invoice 1,5%
On payment of gain from Investment Insurance 5%
On payment of gain from retirement fund 5%
On payment of commission by resident employer company to a non resident person 5%
On payment of lease rental of aircraft 10%
On payment of returns to natural person by mutual fund 5%
On payment of lease of satellite, bandwidth, optical fiber, telecommunication equipment or transmission line 10%
On payment of rent related to transport service 2,5%

On windfall gains- except national and international level prizes as prescribed by Nepal Government.

 

No windfall gain tax on national and international prizes/awards up to Rs. 500,000 in case of awards achieved in recognition of contribution towards literature, art, culture, sports, journalism, science, technology and public administration.

25%

On contract payments exceeding Rs 50,000. Contract refers to agreement entered into for supply of goods or labor or construction/erection/ establishment of tangible assets or structure or any work prescribed as contract by the Inland Revenue Department.

The limit of Rs. 50,000 is calculated by adding contract payments of last 10 days to the same person on same contract.

1,5%
On dividend paid by resident entity and partnership firm 5%
On dividend paid by other entities No TDS
On contract work carried out through consumer committee, the payment of which exceeds Rs. 5,000,000 1,5%

On contract payments made by resident person to non-resident persons:

 

 

 

- On repair and other contracts of aircrafts 5%
- Premium paid to non-resident insurance company 1,5%
- In other cases, if written notice is issued to the payer resident person As per pate prescribed in notice

Exceptions- WHT not required

  • Payments made by natural persons other than conducting business.
  • Payment of remuneration to the writer of the articles published in Newspaper & magazines.
  • Interregional interchange charges paid to a bank issuing Credit Cards.
  • Payment of interest to a resident bank or other resident financial institution
  • Payments that are exempt from tax
  • Payment of dividend or interest to Mutual Fund

Nepal vat (Value Added Tax)

Value Added Tax is applicable on all goods and services supplied in Nepal, imported into or exported from Nepal, except those listed in Schedule 1 of Value Added Tax Act of Nepal.

General rate of VAT is 13%, whereas export and some specific supplies listed in Schedule 2 of Value Added Tax Act are subject to 0% VAT rate.