tax implications of expatriates working in india forum for expatriate management january 31, 2012...
TRANSCRIPT
Tax Implications of
Expatriates working in India
Forum for Expatriate Management
January 31, 2012
Mahesh Kumar
Topics for discussion
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1. Framework of analysis / planning
2. Determining tax residence
3. Taxation of expatriate’s income
4. Estate planning
5. Tax risks for foreign employer
6. Salary splits
7. Impact of Direct Taxes Code, 2010
8. Case studies
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Strategy
LawTax
The Framework
Determining tax residence
Residence under domestic law
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NotOrdinarily Resident
NotOrdinarily Resident
NO
YES
182 days in the relevant FY
60 days in the relevant FY* + 365 days in the
4 preceding years
Non-resident for 9 out of 10
preceding years
In India for < 729 days in 7
preceding years
YES
Ordinarily Resident
NO NO
NO
YES
Non-Resident
YES
* 182 days for citizens/PIOs
Dual residence tie-breaker
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Permanent home
Centre of vital interests
Habitual abode
Nationality
Mutual agreement procedure
Taxation of expatriate’s income
Scope of taxation
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Accrual of income (Domestic law)
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• Salaries earned in India
Services rendered in India
Income during rest / leave period succeeded by services rendered and forming part
of services contract
Employer’s location not relevant
• Fees for technical, managerial or consultancy services
Services are utilized in a business or profession in India
Non-resident need not have a place of business / business connection in India
Non-resident need not render services in India
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Accrual of income (Treaty law)
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• Dependent personal services
India does not have a right to tax income if:
o Employee is in India for a period lesser than 183 days
o Remuneration is paid by or on behalf of an employer who is a resident of the home
country
o Remuneration is not borne by a PE or fixed base which the employer has in India
• Independent personal services
Professional services include: independent scientific, literary, artistic, educational or
teaching activities as well as the independent activities of physicians, surgeons, lawyers,
engineers, architects, dentists and accountants
India may tax income only if:
o Non-resident has a fixed based in India
o Non-resident stays in India for a period exceeding day threshold (Eg: 90/183 days)© Nishith Desai Associates
Specific exemptions
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• Salary received by foreign employee if:
Foreign enterprise not is not engaged in any trade or business in India
Stay in India does not exceed 90 days
Employer does not claim deduction
• Salary for services rendered in connection with employment on a foreign ship where total stay
in India is lesser than 90 days
• Other select exemptions. Eg:
leave encashment
gratuity
house rent allowance
voluntary retirement compensation
per diem allowances
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• Tax slabs (FY 2011 - 2012)
• Dividend income exempt in the hands of shareholder. Company subject to DDT
• Capital gains
Long-term: 20% (NRI: 10%)
Short term: 30%
Sale of shares on floor of stock exchange: Exempt
Tax rates
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Double taxation relief
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• Foreign tax credit under home country’s domestic tax law
• Double taxation relief under applicable tax treaty
• Tax equalization arrangements
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Withholding Tax
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• Tax withholding by person making payment of salary income on the basis of employees
estimated income for the FY
• Is a non-resident employer required to withhold tax ?
Impact of Supreme Court’s decision in the Vodafone case (dated Jan 20, 2012) ?
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Estate planning
Estate Planning
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• Developing tax efficient structures taking into account:
Residency and tax credit issues
Deemed disposal taxes
Estate duty
Gift taxes
Wealth tax
Controlled foreign corporation regulations
Tax filings and other compliances
Regulatory considerations
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Tax exposure for foreign employer
Scope of Taxation
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• Domestic law
Foreign enterprise liable to tax on income arising from a business connection in India
• Treaty law
Foreign enterprise liable to tax in India on income arising through a permanent
establishment situated in India
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Permanent Establishment
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• Fixed place of business through which the business of the foreign enterprise is carried on
• Includes place of management
• Presence of employees in India may give rise to a service PE
• For example, under the US tax treaty, service PE is constituted if services are provided through
employees or other personnel if:
activities in India continue for a period exceeding 90 days; or
services are performed for a related enterprise
• Attribution of profits to PE
No further attribution if there is arm’s length compensation (Morgan Stanley case, 292 ITR
416)
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Cross-border salary splits
Salary split arrangements
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• Setting up of subsidiary in India
• Secondment / dual employment
• Employee leasing
• Consultancy services
• Objectives of salary splits:
Mitigate PE risks
Manage tax residence
Taking advantage of different tax regimes
Non-tax / regulatory compliances
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Direct Taxes Code, 2010
• Revised Tax slabs
• RNOR concept done away with. Exemption for offshore income retained
• NRIs subject to a 60 day residence threshold (not 182 days)
• Removal of exemptions: house rent allowance, tax on non-monetary perquisites, per diem
allowances
• Short stay exemption retained
• Wide service PE exposure under domestic law (with potential treaty override)
Salient proposals
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Case studies
Case Study 1
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• Expat was born in Canada and is a
Canadian citizen
• He spend around 120 days in Canada
where his family home is situated
• Around 245 days are spent in India
from where he conducted his business
• While in India, he stayed with his
Indian girlfriend. He also kept his car
at her house and this address figures
in his Indian driver’s license
• He is considered to be a resident
under the tax laws of both Canada
and India
• Based on the tie-breaker test, what is
the expat’s country of residence?
India
Canada
Case Study 2
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• Dutch company provides technical
services to its Indian clients through
various project offices
• It sends its employees to India who
work from these project offices
• Employees receive remuneration from
the head office (outside India)
• Dutch company taxed on a
presumptive basis in India
• Is the salary income received by the
employees taxable in India ?
Dutch Company
A B C
Indian Project Offices
Case Study 3
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US Affiliate
US Parent Company
Indian Subsidiary
• Indian subsidiary provides back-office
services to its US parent
• US affiliate seconds 3 employees to
the Indian subsidiary: 1 managing
director + 2 supervisors
• US affiliate pays all salaries, bonus,
etc and is reimbursed by the Indian
subsidiary
• Employees act exclusively under the
direction, control and supervision of
the Indian subsidiary, but remain on
the rolls of the US affiliate
• Are salary payments by US affiliate
taxable in India ?
• Are reimbursements made to the US
affiliate taxable in India ?
Case Study 4
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US Company
Indian Company
• US company supplies personnel to
Indian company on a hire-out basis
• Personnel work under the supervision
of the Indian company, but are still
employed by the US company
• Fees paid by Indian company to US
company captures personnel’s salary
entitlement
• Does the US company have a PE in
India ?
• Are the fees payable by the Indian
company to the US company taxable
in India ?
Case Study 5
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Dutch Company
Indian Company
Indian JV Company
• Dutch JV partner seconds 4
expatriates to the Indian JV company
• Expats were fully engaged in
providing services to the JV company
• JV company directly paid salaries to
the expats and withheld appropriate
tax
• Expats remained on the rolls of the
Dutch company and received
additional salary outside India
• Is the home salary taxable in India ?
• If so, should tax be withheld on such
salary and by who ?