BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY · PDF fileRESIDENTIAL STATUS-DTA 6 Taxation of Expatriates ... ( Relevant for Inbound and outbound expat !!!!) 21 Taxation of Expatriates 9

BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY

T A X A T I O N O F

E X P A T R I A T E S

BY SUSHIL LAKHANI

ON APRIL 9 , 2014

1

CONTENTS

• Part A – Inbound Expat

• Part B – Certain issues w.r.t. an Outbound employee

• Part C – With holding tax and Procedures For Expats

2

•Meaning of Inbound Employee.•Residential Status-Income Tax Act 1961 , & DTAA.•Scheme of Taxation of remuneration under ITA & DTAA.

Components of Salary of Inbound Expat• Per Diem Allowance• Hypothetical Taxes• Social Security and Pension • ESOP• Medical Insurance, tax consultants’ fees etc.

Issues which can be considered for taxation of Inbound

Employees:

Part A

3

MEANING OF INBOUND EMPLOYEE

Inbound Employee is commonly referred to as an “expatriate”.

The word “expatriate” is not defined under the Indian Tax laws.

Usually it refers to an employee working abroad and who comes to workin a country for a short period (say between 6 months and 5 years). Theydo not intend to become permanent residents.

Under Indian context, it includes NRIs as defined u/s 115C of Income TaxAct, 1961.

4Taxation of Expatriates

By Sushil Lakhani9th April, 2014

Not ordinarily

resident (‘NOR’)

Scope of taxable income

ResidentNon-resident

(‘NR’)

• Worldwide income

• Income received in India

• Income sourced from India

• Income from business controlled from India

• Income received in India

• Income sourced from India

RESIDENTIAL STATUS-INCOME TAX ACT, 1961



DTA does not prescribe residential status.

Follows domestic law to determine residency

A person can be a resident of two countries (specially in the year ofdeparture / arrival).

If there is no DTA, a person may be taxable in both countries onGlobal income.

The relevant treaty to be applied is the treaty with the country inwhich employee is resident and not where the employer is resident .

RESIDENTIAL STATUS-DTA



Dual Residence:

The ‘Tie-breaker’ Rule is as under:

Permanent Home;

Centre of vital interests (Personal & economic relations);

Habitual Abode;

Nationality;

Mutual Agreement Procedure.

(These tests should be applied sequentially !)

RESIDENTIAL STATUS-DTA



TAXABILITY OF REMUNERATION UNDER THE ACT

Employee of Indian company ( WOS (or) JV. Company)

Employee of foreign company

(Deputed to P.E. or project in India or for rendering service to Indian entity)

Remuneration taxable u/s 5 as income accrues or arises or is received in India

( Where services rendered outside India , mere receipt of salary in India not “receipt” as “constructive receipt” was outside India .

(Arvind Singh Chauhan Vs. ITO (42 taxmann.com 285 –Agra ITAT)

•Sec 9(1)(ii) –Income is deemed to accrue in India for services ‘rendered’ in Indiaincluding rest periods .

•Indian salary plus foreign salary is taxable in India.

•Also applies to salaries paid by foreign governments .

Duration of employment is not relevant.



Exemption for short visits –Sec 10(6)(vi) :

Salary is exempt if all the following conditions are satisfied:

Foreign enterprise not engaged in trade or business in India,

Employee ‘s stay < 90 days in a previous year in India, and

Salary not deductible from the employer’s income chargeableunder Income-tax Act.

(Expat also entitled to ship stay exemption S.10(6)(viii); exempt allowances

Sec.10(14) and exemption for tax on perquisites Section 10(10CC)

SHORT STAY EXEMPTION UNDER ACT



TAXABILITY OF REMUNERATION UNDER DTAA

Article 15 (UN and OECD model) deals with employment income.

Primarily salary is taxable in the Country of Residence (say Foreign country)unless, the employment is exercised in the other country (say India). [Article15(1)].

If the employment is exercised in India, then salary is also taxable in Indiasubject to three conditions being cumulatively satisfied.

Article 15 applies only to private sector employees. It does not apply to:

Director’s fees.

Artist’s & sportsperson’s remuneration.

Pension.

Salary& pension of Government employees.

Payments to students, professors &

foreign teachers in some cases.



TAXABILITY OF REMUNERATION UNDER DTAA (ART 15(1) R.W ART 15(2))

Country of residence (and not India) has theexclusive right to tax salaries etc derived in respectof employment exercised in India if all thefollowing three conditions are satisfied:

•Employee’s stay in India < 183 days in 12 month period;

• Rem. is paid by a non-resident employer; and

• Remuneration is not borne/deductible by PE

(Corollary – If any of the above three conditions are not satisfied, Indiawould also get a right to tax the remuneration)

(“derived” –thus taxation right continues even if received before or afterpresence)

(Art. 15(3) provides for taxation in country of effective management of theshipping company for taxation of remuneration for employees of a ship)

11Taxation of Expatriates By Sushil Lakhani9th April, 2014

Alternate Employment Arrangements followed by Expats

• Secondment : Remains Employee of Foreign Company

(Triggers tax issues of PE and FTS for foreign employer)

• Deputation: Severs employment with foreign company

(Safe from taxation point of view from foreign employer)

• Dual Employment : Employee of both

(Only remuneration commensurate to services rendered in India taxable)

12

• An employer is someone to whom an employee is committed to supply hiscapacity to work and under whose directions the latter engages in his activitiesand whose instructions he is bound to obey” ( page 899 Klaus Vogel)

• A key consideration will be which enterprise bears the responsibility ofrisks produced by individual ‘s work. ( OECD)

• Distinction between “contract of service” and “contract for service”(OECD Commentary)

• Performance of duties subject to directions, instructions andsuperintendence of the employer and various other tests laid down byIndian Courts.

(Lakshminarayan Ram Gopal (25 ITR 449); Piyare Lal Adishwar Lal (40ITR 17); Ram Prashad (86 ITR 122))

INTERPRETATION OF KEY TERMS –ARTICLE 15(1)



(I) “EMPLOYER” –Meaning

WHO IS THE EMPLOYER ?

Economic Employer—Judicial PrecedentsIn Favour of Assessee IDS Software Solutions (2009 –TIOL-82-BANG)

HCL Info systems 274 ITR 261 (Del)

Abbey Business Services (India) (P.) Ltd v DCIT [2012] 23

taxmann.com 346 (Bangalore – Trib.)Against Assessee Verizon Data Services India (AAR)

AT&S (287 ITR 421)

Centrica India Offshore Pvt. Ltd. [2012] 249 CTR11(AAR)

Target Corporation India Pvt. Ltd. [2012] 348 ITR 61 (AAR)



• Place where “Services Performed” [US Model Commentary (2006)]

• Place where the employee is physically present when performing [OECD Model

Commentary (2008)]

• Gallotti Raoul (61 ITD 453 –Mum)—rem for period he visited home country for work

related to host country employer not taxable in India under Art 15(1) of India-France

DTAA

(Time or place of payment of Salary and place where results exploited

irrelevant . The term used in Art 15(1) is “derived”)

(Canadian Court determined pilots’ country of exercising employment in a

novel manner!!! (16 taxmann.com 217)

Interpretation of Key Terms –Article 15(1)



II. Meaning of “employment exercised in othercontracting state” i.e. source country

III. Computing no of days

Possible interpretations:a) Day of arrival is to be excluded for calculating number of days

Manoj Kumar Reddy, [2011] 201 Taxmann 30 [2009] 30 SOT 18 –B’lore) ;

Fausta C. Cordeiro [2012] 53 SOT 522. (Mumbai ITAT)

b) Both days should be counted as “in India”.

Advance Ruling (233 ITR 462) –

c) Only day of departure has to be considered as “in India”.

Jaipur Tribunal (No. 1230 dated. 22.8.86) (ITO V/s. Dr. R. K. Sharma)

INTERPRETATION OF KEY TERMS -ARTICLE 15(2)



OECD Commentary – “days of physical presence” method

Inclusions:

• Both days to be added ;

• all other days spent inside the State of activity such as Saturdays and Sundays,

national holidays, holidays before, during and after the activity, short breaks

(training, strikes, lockout, delays in supplies), days of sickness and death or

sickness in the family

Exclusions:

• Days in transit

• Any entire day spent outside the State S, whether for holidays, business trips,

or any other reason, should not be taken into account

COMPUTING NO OF DAYS -



IV. “BORNE BY”/ “Deductible”—Meaning?

An economic concept rather than an accounting concept. Remunerationhaving Direct and proximate relation with the PE and attributable to PE is“borne by “ PE (OECD and Klaus Vogel)

Emphasis on deductibility and not on actual deduction. Some DTAs use thewords “deductible”. (Indian DTAs with Australia, Belgium, UK.)

The expression “borne by” encompasses all expenses that are economicallyincurred by PE and not merely expenses that are “tax deductible”. ( USTechnical Explanation)



Judicial Precedents :• PE commercially liable or actually pays for the expense

(Ensco Maritime Ltd vs DCIT (2004) 91 ITD 459 (Del));

• Expense has a direct and proximate connection with PE and is deductible in hands ofPE.(Covers presumptive taxation)DHV Consultants BV 227 ITR 97 (AAR))Lloyd Helicopters International Pty. Ltd., [2001] 249 ITR 162 (AAR)

• Expense is actually deducted when profits (and not gross receipts) are taxed on deemedbasis. [Nakazono vs. ACIT (2003) SOT 31(Del)]; (Pride Foramer SA V/s ACIT 2007 15 SOT 562(Delhi)]

• Expense is actually paid(CIT v. Elitos S.P.A (2005) 145 Taxman 210 (Allhbd. HC

• If the expense is attributable to or deductible by PE , it should be considered as “borneby”. whether deduction claimed or not irrelevant

[Sedco Forex International Inc v. CIT (2005) (147 Taxman 389)(SC)]

WHAT DO YOU MEAN BY - “BORNE BY”



• Per Diem Allowance

• Hypothetical Taxes

• Social Security and Pension

• ESOP

• Medical Insurance, tax consultants’ fees etc.



TAXABILITY OF CERTAIN COMPONENTS OF SALARYSTRUCTURE OF AN INBOUND EXPAT

PER DIEM ALLOWANCE

Conditions for claiming exemption u/s 10(14)(i) r.w. Rule 2BB :

• The allowance must be granted to meet expenses in the performance of the duties of an office;

• The allowance is granted to an employee on tour or transfer;

• The allowance is granted to meet the ordinary daily charges;

• The said charges are incurred on account of absence from his normal place of duty; and

• The exemption is available only to the extent to which the expense is actually incurred.

(Caution: The allowance must be granted as a reimbursement rather than a personal advantage)

( Relevant for Inbound and outbound expat !!!!)



PER DIEM ALLOWANCE – SOME JUDICIAL PRECEDENTS

In CIT vs. S. G. Pgnatale [1980] 124 ITR 391(Gujarat), it has been held thatexpenses given as reimbursement of the money which would be required bythe expatriate to spend for his stay in India rather than a personaladvantage was not a "perquisite" within the meaning of section 17(2) and/or"salary" within the ambit of section17(1)(iv), it would not be taxable.

Supreme Court in the case of CIT vs. Goslino Mario [2000] 241 ITR 312 heldthat where the employees were required to stay away from their homes, dailyallowance given to them to incur expenditure, wholly, necessarily andexclusively for the purpose of duties and such expenditure was in nature ofreimbursement, the same will be excluded from the net cast by the Act

Supreme Court in the case of CIT vs. Morgenstern Werner[2003] 259 ITR486 held that daily allowance received by an employee and incurred by himon account of absence from normal place of duty was not taxable in hishands

( Note: Definition of Income retrospectively amended to include theseallowances )



PER DIEM ALLOWANCE—SOME JUDICIAL PRECEDENTS

•AAR in Hindustan Powerplus (271 ITR 433) held living expenses, furnishedhouse, airfare and per diem for rest period, home travel, car etc exemptu/s 10(14)(i) in hands of foreign deputees

•ITO vs. Saptarshi Ghosh [2011] 15 Taxmann 328 (Kolkata) - employeesshould be considered to be on tour where employees were sent ondeputation by TCS Ltd, an Indian company to USA as they are nottransferred to USA. Further, the period of deputation or the fact that thefamily accompanies during the deputation does not alter the position evenif they are sent for more than 12 months.

•(Whether transfer of employment from one company to another withinthe same group would qualify as “transfer” in Section 10(14)(i) ??)



HYPOTHETICAL TAX AND TAX EQUALISATION

Suppose an employee is drawing asalary of USD 10,000 per monthand is liable to income tax @ 35%in the Home country. In such acase his post-tax income would beUSD 78,000 computed as follows:

Now, suppose the employee istaxed @ 40% in the Host country.In such a case, his post-tax incomewould be USD 72,000 computedas follows:-

Particulars USD

Original Salary 120,000

Less : Income Tax @ 35% (42,000)

Net Salary 78,000

ILLUSTRATION

Particulars USD

Original Salary 120,000

Less : Income Tax @ 40% (48,000)

Net Salary 72,000

Thus, an employee is worse off by USD 6,000 (USD 78,000 - USD72,000)if he accepts the assignment of going abroad on the same terms.



HYPOTHETICAL TAX AND TAX EQUALISATION

Particulars USD

Salary in home country 120,000

Less :Hypo Tax @35% (42000)

Net Salary 78000

Add Tax in host Country (78000*40/60) 52000

Revised Salary (includes tax equalisation of 10000) 130000

Income Tax @ 40% in host countryLess : Credit for tax in host country (restricted to 42000)

52,000

Thus, the tax payable in the Home Country is USD 42,000 against which isavailable a credit of $ 52,000 paid in the Host Country and as a result of thisno tax is payable in the Home country.



AMOUNT TAXABLE AS REMUNERATION IN INDIA

Particulars USD

Gross Salary Receivable in Host Country 130,000

Less: Hypo Tax exempt u/s 10(10CC) Reimbursement Receivable

42000

Taxable Salary in India 88,000

Note :Had all conditions specified in Article 15 (2) are satisfied,entire remuneration would have been taxable only in the homecountry



ISSUES WRT DEDUCTION OF HYPOTHETICAL TAX

Hypo tax held deductible in:

• Yoshio Kubo ( 357 ITR 452 (Del) and Jaydev

Raja ( 357 ITR 292 (Bombay) and

• CIT vs. Dr Percy Batlivala and others (2010

TIOL 175) (Delhi)

“In our opinion, the income arising in India in the

present case is actual salary plus the

incremental tax liability arising on account of

Indian assignment. Hypo Tax never accrued to

the assessee and thus is deductible” . Reliance

was placed on E.D. Sasoon & Co. Ltd. ( 26 ITR

27 (SC) for meaning of “accrued”.



TAXABILITY OF SOCIAL SECURITY CONTRIBUTION OF HOME COUNTRY FOR EXPATRIATE

Mandatory contribution - tax deductible / not taxable –’ diversion by overriding title’

Favorable court rulingsCIT, Delhi – XVII v. NHK Japan Broadcasting Corporation [Civil Appeal No. 1712 of 2009 (SC)

ACIT vs Harashima Naoki Tashio, ITA No. 4634/Del

ACIT vs Eric Matthew Gottesman (2007) 15 SOT 301 (Del)

ACIT, Circle 47(1) vs Hideki Ishihara in ITA No. 1906/Del/08

ITO vs Lukas Fole (2009) 124 TTJ (Pune) 965

Gallotti Raoul vs ACIT 61 ITD (Bom.) 453

Voluntary contributions

By employer – taxable on accrualL.W. Russel (1963) 53 ITR 91Dr. Jan Nuyten (1999) 112 Taxmann 238

By employee – not tax deductible / taxable

NotTaxable

Taxable



TAXABILITY OF SOCIAL SECURITY CONTRIBUTION OF HOME COUNTRY FOR EXPATRIATE

Guiding principles:

• Compulsory / mandatory nature• The employer should be authorised to deduct the social security

contribution from the monthly remuneration payable to theemployee

• Contributions are required to be made by all employeescompulsorily

• Certain penal implications for default• No vested right conferred on an employee• Contributions are required to be made by all employees

compulsorily.• Overriding title on income from remuneration

• It should not be a “company framed scheme”

• Guarantee the workers and their families against all types of riskssusceptible to reduce the earning power.



EMPLOYER’S CONTRIBUTION TO PENSION

Employer’s contribution to the Pension Funds is not taxable in theyear of contribution as it does not vest in employee till a much laterdate :

• CIT vs. L W Russell [1964] 53 ITR 91 (SC)

• Yoshio Kubo vs. CIT, 2013 [2013] 357 ITR 452 (Delhi)

• CIT vs. Vinay Bharat Ram [1981] 129 ITR 128 (Delhi)

• CIT vs. Cama Motors Pvt. Ltd. [1998] 234 ITR 699 (Guj)

• CIT vs. Bharat Ram Charat Ram P. Ltd. [1986] 157 ITR 199 (Delhi)

However the employers’ contribution would be taxed at the time ofreceipt of the retirement benefits to the extent it relates to servicesrendered in India as per the ITA (subject to treaty provisions) .



MEDICAL INSURANCE, TAX CONSULTANTS’ FEES ETC.

• Payment of Medical Insurance by employer for the expatemployee—not perquisite ( Yoshio Kubo Vs.CIT—36 Taxman.comDelhi HC)

• Payment by employer of tax consultants fees for filing expat’sreturns not perquisite as tax was to be borne by employer( YoshioKubo Vs.CIT—36 Taxman.com Delhi HC)

• Tax refund received by expat employee not income in his hands astax was to be borne by employer and thus the refund was a loan toemployee (Yoshio Kubo Vs.CIT—36 Taxman.com Delhi HC)



Grant of Options No Tax

No TaxVesting of Options

No TaxExercise of Options*

Taxable PerquisiteAllotment of Shares

Capital GainsSale of Shares

Events Tax Impact

* Relevant from valuation perspective

TAXATION OF ESOPS W.E.F. AY 2010-11—SECTION 17(2)(VI) R.W. RULE 3(8)



ISSUES IN ESOP

• ESOPs to employees of Indian Sub by foreign parent held taxable asperquisite ( Microsoft (235 ITR 565 AAR)

• Whether entire value of ESOP received by RNOR is taxable in India?

Delhi ITAT in Robert Arthur Keltz [2013] 59 SOT 203 (Delhi - Trib.) heldthat only a proportionate stock option benefit, which is relatable tothe service rendered in India is taxable in India .

OECD Commentary :If the shares are in relation to a particularemployment then the same should be taxed in the country wheresuch employment is exercised

• Proportionate value of ESOP continues to remain taxable in country ofemployment even if employee has shifted to another country ( JamesMullen Vs. Her Majesty the Queen—Tax Court of Canada –23Taxmann.com 171)



Taxation of Outbound Employees

Part B

• Residential Status-Income Tax Act 1961

• “Leaving India for Purpose of Employment”-Meaning of.

• TDS obligation under ITA v/s exemption under DTA.

• TDS obligation under ITA v/s Foreign Tax Credit.

34

RESIDENCY UNDER DOMESTIC LAW

*60 days substituted for 182 days for-

1.Indian citizen leaving India as a member of a crew of an Indian ship or for the purpose of employment outside India

2.Indian citizen or POI comes on visit to India

None of the

conditions

satisfied

Any one of

the two

conditions

satisfied

R NR

Basic conditions:

(a) 182 days or more in a financial year; OR

(b) 60 days* or more in a financial year plus 365 days or more in four financial years preceding the relevant financial year



RESIDENCY UNDER DOMESTIC LAW

One or both

the

conditions

satisfied

None of

the

conditions

satisfied

ROR NOR

Additional conditions:

(a) “Non-resident” in India in nine out of ten financial years preceding the relevant financial year; OR

(b) Present in India for 729 days or less during the 7 financial year preceding the relevant financial year

Generally, an expatriate coming to India for the first time will qualify as ROR from 3rd year onwards.



OUTBOUND EMPLOYEES

‘leaving India for the purpose of employment outside India’ –Meaning of

Expln. To Section 6(1)( c)

i) Neednot be unemployed earlier -- British Gas India Pvt. Ltd., In re [2006]

285 ITR 218 (AAR)-- the requirement of the Explanation is not ‘leaving India

for employment’ but it is leaving India for the purposes of employment

outside India.

ii) Individual who leaves India on deputation is covered by this Explanation

(Ram Sagar Choudhary vs. III ITD [1989] 31 ITD 21 (B’lore)

iii) ITO Vs. Abbott Industries (31 ITD 183) (Mum)(SB) and ITO Vs. K.Y. Patel (33ITD 714)

“employment outside India” refers to “posting” outside India permanentlyor temporarily. Merely foreign tours do not imply employment outside India

iv) “employee” covers cases of consultants and technicians for Section 80RRA(SC in Aditya Birla [1988] 170 ITR 137 )



DETERMINATION OF RESIDENCE U/S 6( 1) ( C) –“COMES ON A VISIT TO INDIA”

• For determining residential status u/s 6(1)( c)of ITA , period spent on visit to India to beexcluded (DIT,B’lore Vs.Manoj Kumar Reddy12 taxmann.com 326 Kar HC)

• Smita Anand ( AAR 1091 of 2011 ) ---Benefitof Explanation (b) to Section 6(1)( c) notavailable to an employee who shifts back toIndia on giving up employment .



Part C

WITHHOLDING TAX, TAX RETURNS ETC. OF EXPAT’S REMUNERATION

39

WITHHOLDING TAXES 1. Is tax required to be deducted at source from salaries of expatriates working in India

even in cases where such salaries were paid abroad?

Yes, the Supreme Court in the case of Eli Lilly& Company (India) Pvt. Ltd. [2009] 312ITR 225 has ruled that salary payable for services rendered in India should besubjected to tax deduction at source/ withholding tax provisions, even on that part ofthe salary which is paid overseas.

2. Is Section 192 to be interpreted to impose a liability to collect tax which is eventuallynot payable at all?

Andhra Pradesh High Court in the case of Rajagopal (P.V.) vs. Union of India (233 ITR678), held that “a scheme cannot be abused by collecting more than the tax leviableand driving the assessees to wait indefinitely for refunds.”

AAR in its ruling in the case of British Gas [2006] 287 ITR 462 held that the IndianCompany was not required to withhold taxes on the salary paid in India toemployees deputed to UK if it is satisfied that such salary is taxable in UK and not inIndia.

3. TDS u/s 192 not applicable to Overseas Allowance paid by Indian company toemployees seconded by foreign company ( CIT Vs. Petroleum India ( 29 taxmann.com250—Bombay HC)



WITHHOLDING TAXES

4. Can Interest/ penalty be levied on the employer who fails to deduct tax at source, if theemployee has paid tax by the way of advance tax or self-assessment tax?

If all conditions of proviso to Section 201 are satisfied, no interest/penalty are leviable.The Supreme Court in the case of Hindustan Coca-Cola Beverages Pvt. Ltd. vs. CIT [2007]293 ITR 226 also held that penalty cannot be levied on the employer who fails todeduct tax at source, if the employee has paid tax by the way of advance tax or self-assessment tax.

5. Are Reimbursement of expatriate’s salary payments in the nature of FTS?

YES - AT&S India Pvt. Ltd. [2006] 287 ITR 421 (AAR)

Verizon Data Services India Pvt. Ltd. [2011] 337 ITR 192 (AAR)

Centrica India Offshore Pvt. Ltd. [2012] 249 CTR 11 (AAR)

Target Corporation India Pvt. Ltd. [2012] 348 ITR 61 (AAR)



WITHHOLDING TAXES

6. Reimbursement of expat salaries by Indian Company not FTS –

ADIT vs. Mark & Spencer Reliance India Pvt. Ltd. [2013] 27 ITR(T) 448 (Mumbai ITAT)

Cholamandalam MS General Insurance Co. Ltd. [2009] 309 ITR 356 (AAR)

IDS Software Solutions vs. ITO [2009] 32 SOT 25 (Bengaluru)(URO)

Tekmark Global Solutions LLC [2010] 131 TTJ 173 (Mumbai)

ACIT vs. Karl Storz Endoscopy India Pvt. Ltd. (ITA No. 2929(Del)/2009)

Cerner Healthcare Solutions Pvt. Ltd. vs. ITO (ITA No.627(Bang)/2011)

Caterpillar India P Ltd. vs. DDIT (ITA No.630(Bang)/2010)

Ariba Technologies India Pvt. Ltd. vs. Dept. of Income-tax (ITA No. 616(Bang)/2011)

Abbey Business Services (India) (P.) Ltd. [2012] 53 SOT 401 (Bengaluru)

CMS (India) Operations & Maintenance Co. (P.) Ltd. [2012] 135 ITD 386 (Chennai)

Temasek Holdings Advisors (I) P. Ltd. vs. DCIT [2013] 60 SOT 134 (Mumbai ITAT)



TDS OBLIGATION UNDER ITA V/S EXEMPTION UNDER DTA

Can the employer consider the relief available to the employee under the

relevant DTA while deducting TDS from salary payments?



TDS OBLIGATION UNDER ITA V/S FOREIGN TAX CREDIT

Should an employer consider FTC while deducting tax at source on

salary income paid to resident employees who are on assignment

outside India?



TAX RESIDENCY CERTIFICATE-ESSENTIAL FOR AVAILING TREATY BENEFIT

Assessee, who is not a resident and to whom DTAA applies, shall not be entitled to claim anyrelief under a DTAA unless a certificate is obtained by him from the Government of the countrywhere he is a resident. {Section 90(4) and 90 A(4)}

Insertion of Rule 21BA and Forms 10FA and 10FB

Rule 21BA prescribes that in case the Tax Residency Certificate (TRC) issued by the foreigncountry the following particulars, the NR would also have to provide Form No. 10F

• Name of the assessee;

• Status (individual, company, firm etc.) of the assessee;

• Nationality (in case of individual);

• Country or specified territory of incorporation or registration (in case of others);

• Assessee’s tax identification number in that

• Residential status for the purposes of tax;

• Period for which the certificate is applicable; and

• Address of the applicant for the period for which the certificate is applicable

Form 10F not required if aforesaid information is already contained in the TRC



REPORTING OF FOREIGN ASSETS IN THE INDIA TAX RETURN

Introduction of new schedule to the Income tax return (ITR) for the FY 2011-12

To be filled only by a ROR assessee

Applicable to both Indian as well as Foreign Citizens

Declaring Assets in Foreign Country which includes:

• Foreign bank accounts(Peak value during the year)

• Financial interest in any entity,

• Details of immovable property or other assets located outside India. Peak value during the year)

• Details of any account located outside India in which the assessee has signing authority.



CONVERSION RATE FOR SALARY EARNED IN FOREIGN CURRENCY

• RULE 26 vs. RULE 115

• Rule 26:

For the purpose of deduction of tax at source on any income payable in foreigncurrency, the rate of exchange for the calculation of the value in rupees of suchincome payable to an assessee outside India shall be the telegraphic transferbuying rate of such currency as on the date on which the tax is required to bededucted at source under the provisions of Chapter XVIIB by the person responsiblefor paying such income.

• Rule 115:

The rate of exchange for the calculation of the value in rupees of any incomeaccruing or arising or deemed to accrue or arise to the assessee in foreign currencyor received or deemed to be received by him or on his behalf in foreign currencyshall be the telegraphic transfer buying rate of such currency as on the specifieddate.



OTHER INCOME TAX ISSUES - PAN, RETURN FILING, NOC

PAN:

• All Inbound employees are required to obtain a PAN by making anapplication to the tax authorities.

RETURN FILING:

• All Inbound employees must file their tax returns in the prescribed form onor before 31 July. The income tax payable as per the tax return must becomputed and paid before the return is filed.

NOC ( Section 230) :

• Every person, who is not domiciled in India and who has come to India inconnection with business, profession or employment, is required to obtain aNo Objection Certificate from the tax authorities before departing fromIndia.

• For this purpose, employees will have to furnish an undertaking obtainedfrom the employer to the effect that the tax payable by such person shall bepaid by the employer.



WEALTH TAX

Wealth Tax:

• Assets, as defined u/s 2(ea) of Wealth Tax Act, 1957, outside India are

taxable in case of an ordinary resident.

• Sec 6(i) – Assets outside India of foreign citizen and NOR, are exempt

from wealth-tax.



SUSHIL LAKHANILakhani & Associates, Chartered Accountants4th Floor, Bharat House,104, Mumbai Samachar Marg,Fort, Mumbai-400023Tel: +91-22-40693946(M) : 9821111852E-mail : [email protected]

50

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BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY · PDF fileRESIDENTIAL STATUS-DTA 6 Taxation of Expatriates ... ( Relevant for Inbound and outbound expat !!!!) 21 Taxation of Expatriates 9