Expatriates Incoming Seminar on Taxation of Expatriates ICAI, Bangalore Chapter, 18 May 2007 Agenda Residential Status Alternative Income Streams Tax Implications Avoidance of double taxation - Tax Credits Tax Equalization Vishnu Bagri
Introduction Expatriates are usually only temporarily placed in the host country and most of the time plan on returning to their home country General cross-border taxation principle Treaty determines the taxing rights of the countries Most India treaties Host country taxes income sourced in their land Home country taxes worldwide income and gives credit for taxes paid in Host country Where is the home?..who is the host?..sometimes the host becomes the home
India Tax Incidence India tax incidence dependent upon Residential status Resident [Ordinary (ROR) or Not Ordinary (RNOR)] Non-resident Scope of Taxable Income ROR liable to tax on worldwide Income Treaty provides for taxation rights for different income streams Host country can also tax subject to treaty limitations Avoidance of double taxation
RESIDENTIAL STATUS
Residency under Domestic Law Resident Individual is present for atleast 182 days in India during the previous year; or Present atleast 60 days (182 days in certain cases involving persons of India origin) during the previous year and 365 days in the four years immediately preceding the previous year ROR - A person who is not a RNOR RNOR Has been non-resident for 9 out of the 10 years preceding the previous year; or During the seven years preceding the previous year been in India for 729 days or less While computing the number of days of stay in India, whether the day of arrival into, and/or, the day of departure from India, should be considered? (223) ITR 462 (AAR)
Residency under Treaty Any person who under the laws of the State is liable to tax therein by the reason of his domicile, residence, place of management or any other criteria of similar nature Liable to tax vs. subject to tax vs. actual payment of tax Indian software company is exempt from income tax, so will it be entitled to treaty relief s? Individuals domiciled in UAE Language could be different amongst treaties e.g. Singapore
Residency under Treaty Does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein (OECD model, US treaty; absent in Singapore, UK) Do RNOR qualify as residents under the treaty?
Residency under Treaty If an individual is a resident of both the Contracting States then the tie-breaker rules are applied to determine residency 1. Country in which permanent home available to him 2. If permanent home available in both states, then closeness of personal and economic relations with State (centre of vital interests) 3. If does not have a permanent home in either states, or centre of vital interest cannot be determined then the country in which he has a habitual abode 4. If habitual abode in both states or cannot be determined then the country of which he is a national 5. If national in both states or cannot be determined then to be settled by Mutual Agreement Procedure
Residency under Treaty OECD commentary suggests Tie-breaker rules application to be based on the facts existing during the period when the residence of the taxpayer affects tax liability, which may be less than an entire taxable period For example, in one calendar year an individual is a tax resident of UK for the period 1 April 06 to 30 June 06, then moves to India. For 06-07, the individual qualifies as a resident in India. Applying the rules to the period 1 April 06 to 30 June 06, the individual was a resident of UK. Therefore, both UK and India should treat the individual as a UK resident for that period, and as an Indian resident from 1 July to 31 March Acceptance of split-residency under Indian tax laws to be tested
Case Study X has been deputed by its US employer to work for its Indian subsidiary. He qualifies as a ROR for 2006-07 (he came to India in 2002-03) and thereby liable to tax on worldwide income X is also a US citizen and thereby liable to tax on worldwide income Other details X plans to stay in India till 2011. His wife has accompanied him to India. His 2 sons and his parents continue to reside in the US X stays in India in a company leased accomodation. The agreement is till his period of service in India X renders services to Indian company and draws his salary income from the Indian company X owns a house in the US which is not rented out X has other substantial investments in the US in the form of stock and investment trusts
Case Study As per treaty X is a resident in India and US, so tiebreaker rules will apply Where is his permanent home? Principles Permanence of the home is essential; it can be owned or rented the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay - OECD To be understood in an objective sense as an opposite of for a limited period AAR in Dr. Rajnikant Bhat s case (222 ITR 562) Appears that the homes in US and India both could qualify as permanent home
Case Study Next test would be to check on where is the centre of vital interests? Closeness of personal relations Difficult to determine since wife in India but Parents/Children in US Closeness of economic relations While value of investments is higher in US, the services are being rendered in India. So which country is his economic relations closer to?
Case Study Since cannot determine centre of vital interests the next test of his habitual abode would need to be applied Principle The comparison must cover a sufficient length of time for it to be possible to determine whether the residence in each of the two States is habitual and to determine also the intervals at which the stays take place Given the employment relationship with India, it appears that India would qualify as the habitual abode THUS, WILL QUALIFY AS A RESIDENT OF INDIA
ALTERNATIVE STREAMS OF INCOME TAX IMPLICATIONS - TREATY
Scope of Taxable Income Whether non- resident in India? Yes Liable to tax on India sourced income No Whether ordinary resident in India? Yes Liable to tax on worldwide India No Liable to tax on India sourced income plus overseas income derived from business controlled from India
Alternative Streams of Income Income Stream Salary Dividend Interest Capital Gains Tax Position (Assume Non-resident in India as per treaty) India will have a right to tax if employment exercised in India, subject to short stay exemptions India will have a right to tax if income sourced in India. However within the limitations provided by the treaty. India will typically have a right to tax if asset situated in India (exceptions Mauritius, Cyprus, Singapore treaty) Treaty Reference (OECD Model) Article 15: Income from Employment (also referred to as Dependent Personal Services) Article 10: Dividends Article 11: Interest Article 13: Capital gains
Salary Income Domestic Law Income from salary earned in India is deemed to accrue or arise in India If services rendered in India, the remuneration would be earned in India Treaty Position Salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State.
Short Stay Exemption (Treaty) Non resident expatriates can consider claiming the short stay exemption benefit He/she is present in India for a period or periods not exceeding in the aggregate 183 days in any twelve month period (some treaties refer to the tax or fiscal year e.g. US) commencing or ending in the fiscal year concerned; and the remuneration is paid by, or on behalf of, an employer who is not a resident of India; and the remuneration is not borne by (some treaties adopt the words deducted/deductible) a PE which the employer has in the other State
Short Stay Exemption (Treaty) While planning, Caution to be exercised on the short stay exemption for expatriates vis-à-vis potential PE exposure for foreign employer in India Resident expatriates could consider use of short stay exemption under domestic law (applies to individuals who are not citizens of India)
Case Study X is employed with an Indian company and qualifies as RNOR under the domestic law Under tie-breaker rule in treaty X qualifies as a nonresident of India. He chooses this position for determining his tax incidence on employment and dividend income streams X earns long term capital gains from the transfer of listed securities Can X take benefit of the preferential rate of 10% (under Sec 112) applicable for residents?
Case Study Does Treaty residence override domestic residency? Role of Section 90(2): in relation to the assessee to whom such agreement applies the provisions of this Act shall apply to the extent they are more beneficial to that assessee Residency under treaty (Article 4) states the residency is for the purposes of the convention
Case Study Klaus Vogel and Philip Baker comment that residency under treaty does not directly affect the status of the person under domestic law Kulandagan Chettiar 2004 (267) ITR 654 (SC) The Treaty will have to be interpreted as such and prevails over Sections 4 and 5 of the Act Taxation policy is within the power of the Government and Section 90 of the Income Tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income Tax Act
AVOIDANCE OF DOUBLE TAXATION TAX CREDITS
Avoidance of Double Taxation Unilateral tax credits available under domestic law in case of countries with which India does not have a treaty (Section 91) Treaty countries provide for credits by the resident country i.e. Country of which the expatriate is a resident should typically allow a credit (deduction) for taxes paid in the host country. Such deduction shall not, however, exceed that part of the income tax which is payable in the resident country on such income
Issues on FTC Timing mismatch Computational and procedural issues for claiming tax credits where the fiscal/tax years in the two jurisdictions are different Situations where one tax authority perceives that taxation in the other Contracting State is not in accordance with the provisions of the DTAA Consideration of foreign tax credits while computing withholding taxes Definition of tax Taxation of ESOPs under new law (FBT) Can employee claim credit for FBT initially paid by employer and recovered from employee
TAX EQUALIZATION
Tax Equalization Expatriate should be neither better nor worse off from a tax point of view by accepting an overseas assignment. He will continue to be subject to the same level of tax as if he had remained at home The tax impact of the assignment is therefore neutralized for the expatriate The mechanism to ensure that the expatriate employee continues to bear the same level of tax involves the deduction of so called "hypothetical" home country tax This hypo tax is used by the employer settle the applicable host and home country taxes. In addition the employer will pay any taxes due over and above the hypo tax If the home and host country taxes are less than the hypo tax then the employer enjoys the benefit
Tax Equalization Home Country (Tax Rate 20%) Taxable Salary 100 100 Tax payable 20 30 Net pay 80 70 Host Country (Tax Rate 30%) Employee worse off by 10 (80-70) by accepting international assignment Thus a tax equalization could be considered
Tax Equalization How it works Salary in home country 100 Less hypo tax (20%) 20 Net salary 80 Add tax in host country (30/70* 80) 34.28 Revised Salary 114.28 Tax in home country @ 20% Credit for taxes in host country so no tax outflow in home country 22.85 Net take home (114.28 34.28) 80 Can it be argued that the taxable income in India (say host country) is 94.28 (114.28-20), since hypo tax has been diverted at source?
Thank You email: vishnu@accretiveglobal.com Tel: 91.80.4153 8287