Delhi chapter of The Chamber of Tax Consultants Taxation of Expatriates in India December 12, 2015

Transcription

1 Delhi chapter of The Chamber of Tax Consultants Taxation of Expatriates in India December 12, 2015 The better the question. The better the answer. The better the world works.

2 Contents Immigration Residential Status Under Domestic tax law Under tax treaty Incidence of tax Inbounds- Typical Structure and key Issues Outbounds- Typical Structure and key Issues Page 2

3 Globally Mobile Employees - Key issues Social security planning Relocation, Process and Control Admin issues Social Security Comp & Benefits Corporate Tax Issues Package design Assignment policy Pensions Employee Support Corporate Tax Transfer pricing PE issues Service Tax Costs of employment Risk Management Business Case Issues Immigration Services Work permit / visa obligations Assignment contracts, Minimum wage requirements Host & Home Country tax compliance Employment Law Income Taxes Withholding Taxes TDS Compliance Law Page 3

4 Immigration- Key issues Page 4

5 Immigration- Key issues Immigration Most countries are enforcing immigration laws very stringently Inappropriate immigration documents could lead to severe reputational and financial risks No global immigration rules local regulations and policies vary Appropriate visa s to be obtained Employment visa / work permit vs business visa Changes in home / host country regulations are to be monitored Page 5

6 Employment Visa Eligibility/ Conditions: Employment Eligibility/ Conditions: Visa Eligibility/ Conditions Highly skilled and/ or a qualified professional Employment visa will not be granted for: Jobs for which large number of qualified Indians are available Routine, ordinary, administrative or secretarial jobs The foreign national should draw a salary in excess of USD 25,000 per annum Salary includes cash allowances and taxable perquisites (such as Rent Free Accommodation etc.) The foreign national must comply with all legal requirements like payment of tax liabilities, Provident Fund etc Page 6

7 Case Study Eligibility for employment visa Facts: Case Study The salary structure of Mr. Richard is as under: Components ((Amount (In USD) Base Salary 18,000 Eligibility for employment visa Taxable value of rent free accommodation 2,700 Tax gross up (approximately) 9,300 Total Salary 30,000 Is Richard eligible to obtain an Employment visa? Page 7

8 Employment Visa - Extension Employment Potential Issues visa -may be extended by the FRROs in India beyond the initial visa validity period:- Up to a maximum period of 5 years from the date of issue of the initial employment visa The extension will be done on an year to year basis, subject to the following conditions:- Continued employment Filing of income tax returns Salary threshold excess of USD per annum No adverse security inputs Good conduct Renewal beyond extended time of 5 years- Applicant has to return to the country of origin or the country of domicile Page 8

9 Employment Visa - Changing employment while in India Changing Potential employment Issues - while in India : Earlier was not permissible Limited exception has now been provided for : Change of employment between a registered holding company and its subsidiary and vice -versa Change of employment between subsidiaries of a registered holding company Prior approval of MHA is required Holding company to provide a certificate that transferor and/ or transferee company is subsidiary No Objection from the existing employer and justification for change from the holding company is required Change is permitted only once during the validity of visa Page 9

10 Tax Implications Page 10

11 Residential Status Under Income Tax Act, 1961 Period of stay Residential Status Basic conditions > 182 days in India in the tax year Resident if satisfies any one condition > 60* days in the tax year and > 365 days in 4 preceding tax years Secondary conditions Non Resident if he does not satisfy any of the conditions Resident in at least 2 out of 10 preceding tax years > 730 days in 7 years preceding the tax year NOR - if satisfies one ROR if satisfy both * 60 days is substituted by 182 days for - an Indian Citizen, who leaves India in any tax year for the purpose of employment outside India or as a member of a crew of an Indian ship; or an Indian Citizen or a person of Indian origin, who comes on a visit to India in any tax year. Dates of arrival and departure should be included while calculating the days of presence in India Page 11

12 Case Study For the purpose of employment Case Study For the purpose of employment Facts: ABC India sent its employee on a secondment to Netherlands. Part salary paid in India and part abroad. However, entire cost was borne by the foreign company Terms and conditions under which he was seconded were in line with the terms and conditions of the employees of the Indian company working in India The employee spent 98 days in India during the tax year The employee filed a non-resident return contending that he left the country for the purpose of employment and hence he could use the benefit under explanation to Section 6(1) Can the employee claim the benefit of the explanation which provides for for the purpose of employment outside India? Page 12

13 Residential Status Under Tax Treaty The tax treaty for the purpose of determining the residential status refers back to the domestic tax law of the Country which is generally determined by virtue of domicile, residence, place of management, place of citizenship and any other criterion of a similar nature. In case an individual is resident of both countries tie breaker rule determines residency in the following order:- Permanent home Personal and economic relations are closer (centre of vital interests) Habitual abode Nationality (citizen) The competent authorities Page 13

14 Case Study Residential Status as per Tax Treaty Case Study Residential Status as per Tax Treaty Facts: Mr X is a citizen of USA. He is deputed to India to see I co s Indian operations. He has houses in the US and India. The US house is rented out to a third party, while the Indian house is occupied by his wife and children. Assume, Mr X is a tax resident of India and US, how would you determine his residential status as per the tie breaker rule? Page 14

15 Incidence of Tax Page 15

16 Scope of taxation under the Act NR Resident Income received in India; or Income accruing or arising in India; or Income deemed to accrue or arise or received in India NOR Same as Non Resident Income from business controlled in or profession setup in India ROR Global Income Page 16

17 Impact of qualifying as ROR Taxability of global income FTC claim in India Covered under Black Money Act, 2015 Disclosure of foreign assets in the Income-tax return form:- Types of Foreign Assets Details of Foreign Bank Accounts Details of Financial Interest in any Entity Details of Immovable Property Details of Capital Asset Details of Accounts in which the individual has signing authority Details of trusts, created under the laws of a country outside India, in which the individual are a trustee, beneficiary or settlor Page 17

18 Inbounds- Typical Structure and key Issues Page 18

19 Secondment Inbound structures Structure 1 - Payroll with I Co Home entity Foreign Bank Account Deputes expatriate and shifts the employment and payroll to host entity (Option of salary payment to expatriate's foreign bank account can be explored) Remittance by expatriate outside India Home Country Expat s bank account in India India Host entity (India) Deposit of taxes withheld Government treasury Page 19

20 Secondment Inbound structures Structure 2 - Payroll with F Co Home entity Salary payment (net of taxes) Foreign Bank Account Depute expatriate and shifts the employment to host entity Reimbursement of salary Home Country Host entity (India) Deposit of taxes withheld Government treasury India Page 20

21 Inbound Expatriates- key focus Areas 1 Permanent Establishment (PE) risk/withholding tax/ Service tax Implications 2 Treatment of contributions made in overseas social security/ retirement plans 3 Concept of hypothetical tax and exemption under Sec 10(10 CC) 4 Relief available under the Act and the treaty Short Stay exemption/ Foreign Tax Credit Page 21

22 Contribution to overseas social security/retirement plans No specific provisions under the India tax laws Taxability has been subject matter of litigation. Based on judicial precedents*, it would not amount to a perquisite in the hands of the employees, provided the following are satisfied:- Contributions made should be The employees do not have any mandatory in accordance with the laws of right the to claim the amount payable home country of the expatriate under the policy on the date on which the contribution is being made; It should not be a 'company framed Scheme The contributions are not actually paid to the employee or allowed to the employee or due/ accrued to the employee from the employer The contribution made is an obligation of the employer The contribution made is not an Obligation of the employee being met by the employer The receipt of the contributions made to the funds is contingent in nature * LW Russel (1965 AIR 49, 1964 SCR (7) 569) Page 22

23 What is a Hypothetical tax? Hypothetical tax is a concept which is not defined under the Income tax Act, Hypothetical tax is a part of tax equalization policy under which assignee is responsible during the assignment for "hypothetical" or "stay-at-home" tax. Hypothetical tax is projected taxes or "stay-at-home" tax, which would be calculated on the remuneration the Assignee would have earned if the assignee continued to live and work in the home location (i.e. it excludes all assignmentrelated compensation). The company (i.e. the employer) would then pay all required home and host country taxes on company income (including taxes on expatriate benefits) during the assignment. Hypothetical tax will normally be withheld from the assignee's normal pay and is retained by the employer as a "tax reserve". Page 23

24 Hypothetical tax- How to represent? Option 1 The base salary should be considered net of hypothetical tax since the amount withheld is retained by the employer and is not paid to/does not accrue/arise to the employee. Whatever Indian tax is paid on this income is grossed up in the hands of the employee. Option 1 v/s Option 2 Option 2 Hypo tax should not be deducted from salary. For computing the tax perquisite, the amount of hypothetical tax withheld should be set off against the Indian tax Liability borne by employer and balance amount should be grossed up. The preferred option is option 1 which is based on the ruling of Delhi High Court in the case of Yoshio Kubo (wherein reference was also given of Jaydev Raja ruling), it was held that hypo tax is a notional deduction from gross salary for the limited purpose of computing the net tax salary assured by the employer and it could not be treated as taxable income in the hands of the employee. Page 24

25 Exemption u/s 10 (10CC) Section 10 (10 CC) provides for exemption on the tax paid by employer on non- monetary perquisites Recent high court ruling* validated that the tax paid by employer is a non- monetary perquisite Companies Act 2013 repealed Sec 200 of the old companies Act, which prohibited the payment of tax free remuneration to any employee/ officer of a company. Valuation of Company Leased Accomodation would reduce Downside In case this exemption is availed there would be a disallowance, from the corporate profits, of the amount equivalent to the said exemption under section 40 (a)(v) of the Income Tax Act. Basis above, tax borne by employer can be Employer is required to do a cost benefit categorized as a Non- monetary perquisite analysis before claiming the aforesaid instead of allowance. This would result in cost exemption saving as under- Multiple gross up/ tax on tax can be considered as tax exempt * CIT Vs Yoshio Kobu (Delhi High Court) Page 25

26 Short Stay Exemption- Under the Act As per section 10(6)(vi): The remuneration received as employee of foreign enterprise for services rendered in India during stay in India is exempt from tax if the following conditions are satisfied: Employee is foreign citizen Employed by foreign enterprise Foreign entity not engaged in trade / business in India Stay in India 90 days in a tax year Remuneration not liable to be deducted from employer's income chargeable to tax What is trade or business is not defined. It needs to be examined basis dictionary meaning /judicial precedents available Page 26

27 Exemption- Under the treaty Article 16 (2) of India US tax treaty provides that the remuneration will not be taxed in the other state provided following conditions are satisfied:- Employee is a resident* of other state Employee is present in India for a period not exceeding 183 days in the relevant taxable year Remuneration is paid by overseas entity who is not a resident in India Remuneration is not borne by** a permanent establishment or a fixed base or a trade or business which the employer has in India Whether the activities of the employees creates PE for the overseas entity needs to be evaluated carefully to avail short stay exemption *Tax Residency Certificate ( TRC ) is required to be obtained from home country **the expression borne by means deductible or liable to be deducted Page 27

28 Case Study Eligibility of short stay exemption Case Study Eligibility of short stay exemption Facts: An I Co wishes to hire international workers/foreign citizens/resident for a period less than 183 days I Co does not directly hire the workers but through a intermediary set-up abroad Legally, the workers are employees of the intermediary company and not I Co Whether the employees would be eligible to claim short stay exemption in India? Page 28

29 Outbounds- Typical Structure and key Issues Page 29

30 Outbound Assignments Facts and challenges Under a typical secondment assignment- Employees continue to remain on payroll of Indian entity however receive various assignment related allowances outside India or They are localised overseas but continue to remain ROR in India thus taxable on global income Challenges: Employee triggers tax liability both in home country as well as host country under the domestic tax laws leading to potential double taxation of the same income. When to claim tax treaty relief? Implications of becoming ROR? Page 30

31 Elimination of Double Taxation under the DTAA Dependent Personal Services ( DPS ) clause of the DTAA As per the said clause the right to tax salary income lies with the country, of which the individual qualifies as a Resident; where the salary income relates to services rendered in the said country. Thus, exemption of salary income from tax may be claimed in India, if the following conditions are fulfilled: Individual qualifies as a Non-Resident of India; and Individual qualifies as a Resident of the host country; and Salary income received in India relates to services rendered in the host country; and Tax Residency Certificate ( TRC ) issued by the host country evidencing the residential status of the employee in the host country is available. Page 31

32 Elimination of Double Taxation under the DTAA Foreign Tax Credit ( FTC ) clause of the DTAA Article 24/25 of the DTAA provides for relief from double taxation by way of credit of taxes already paid outside India, from the taxes payable in India. Thus, FTC can be claimed if: Individual qualifies as a Resident of India; and Individual derives income which is also taxable in the other contracting state as per the provisions of the DTAA Therefore, FTC may be claimed by a person whose income is doubly taxed as per the provisions of the relevant tax treaty. Challenges Different tax years followed by different countries Tax return filing deadlines vary from country to country Proof of actual tax payment not available at the time of filing of India tax return Revision of return maybe required actual taxes paid vary from tax paid certificate (i.e. W2)/pay slips etc. Page 32

33 Tax Treaty Relief under different scenarios S.No. Tax residency in India- as per the domestic tax laws of India Tax residency in Host Country- as per the tax laws of Host Country Relief taken under the DTAA between India and Host Country (i) Non Resident Resident Exemption may be taken for the Indian income under the Dependant Personal Services Clause of the India Host Country DTAA (ii) Non resident Non resident No Treaty relief is available (iii) Resident Non resident Tax credits may be claimed in India on the income taxed both in India and Host Country (iv) Resident Resident Tax credits may be claimed in India on the income taxed both in India and Host Country on the assumption that the individual would be a tax treaty resident of India Page 33

34 Contact us Ahmedabad 2nd floor, Shivalik Ishaan Near C.N. Vidhyalaya Ambawadi Ahmedabad Tel: Fax: Bengaluru 12th & 13th floor UB City, Canberra Block No.24 Vittal Mallya Road Bengaluru Tel: Fax: (12th floor) Fax: (13th floor) 1st Floor, Prestige Emerald No. 4, Madras Bank Road Lavelle Road Junction Bengaluru Tel: Fax: Chandigarh 1st Floor, SCO: Sector 9-C, Madhya Marg Chandigarh Tel: Fax: Chennai Tidel Park, 6th & 7th Floor A Block (Module 601, ) No.4, Rajiv Gandhi Salai, Taramani Chennai Tel: Fax: Hyderabad Oval Office, 18, ilabs Centre Hitech City, Madhapur Hyderabad Tel: Fax: Kochi 9th Floor, ABAD Nucleus NH-49, Maradu PO Kochi Tel: Fax: Kolkata 22 Camac Street 3rd floor, Block C Kolkata Tel: Fax: Mumbai 14th Floor, The Ruby 29 Senapati Bapat Marg Dadar (W), Mumbai Tel: Fax: th Floor, Block B-2 Nirlon Knowledge Park Off. Western Express Highway Goregaon (E) Mumbai Tel: Fax: NCR Golf View Corporate Tower B Near DLF Golf Course Sector 42 Gurgaon Tel: Fax: th floor, HT House Kasturba Gandhi Marg New Delhi Tel: Fax: th & 5th Floor, Plot No 2B, Tower 2, Sector 126, NOIDA Gautam Budh Nagar, U.P. India Tel: Fax: Pune C-401, 4th floor Panchshil Tech Park Yerwada (Near Don Bosco School) Pune Tel: Fax: Page 34

35 Ernst & Young LLP EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata Ernst & Young LLP. Published in India. All Rights Reserved. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.