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Payment on account of Remuneration
- Taxability and Remittance ProceduresCA Rutvik Sanghvi
Workshop on Taxation of Foreign Remittances
The Chamber of Tax ConsultantsMaharashtra Chamber of Commerce & Industry
20th January 2017
Contents
Taxability under the Act
Taxability under Double Tax Avoidance Agreements
Employee Stock Options
Leave salary
Tax Equalisation & Hypothetical tax
Social Security contributions
Pensions
Deduction of tax at source
Other areas of concern
2CA Rutvik Sanghvi
Taxability of salary income in India
Governed by Sections 5 & 6 r.w. Section 15 of the Income-tax Act
Connecting Factors of Residence & Source
If Employee is Resident of India, salary income is taxable irrespective of whether it was sourced in India or outside India
If Salary income is Sourced in India, it is taxable irrespective of whether the employee is a resident or a non-resident of India
Short stay exemptions in Act and Treaty
3CA Rutvik Sanghvi
Taxability in India – Resident in India
An individual is Resident in India if
He is in India for more than 181 days during that year; or
He is in India for more than 365 days in the preceding 4 years and more than 60 days during that year
Second condition ineffective for
A citizen of India who leaves India for the purposes of employment &
A citizen of India or a person of Indian origin who being outside India comes on a visit to India
Incomes taxable on world-wide basis
An individual can be Resident but Not Ordinarily Resident if
He is Non-resident of India for 9 out of 10 preceding years; or
He has been in India for less than 729 days during preceding 7 years
RNOR not taxable on incomes accrued outside India unless earned from a business or profession in India
Benefit available from 1 to 3 years post shift to India
4CA Rutvik Sanghvi
Residential Status – Flow Chart
CA Rutvik Sanghvi5
Resident in India
Outbound assigneesLeave India for the purposes of employment
Only for citizens
Timing very crucial
Inbound assigneesCame on a visit to India?
Only Citizens and PIOs covered
Disclosure of foreign assets
Taxability of other foreign incomes
CA Rutvik Sanghvi6
Dual Residence
Resident both in COR and COS
Tie-breaker test if DTAA available
7
Permanent Home
Centre of vital interests (Personal & Economic relations)
Habitual abode
Nationality
Mutual Agreement Procedure
CA Rutvik Sanghvi
Taxability in India – Sourced in India
“Sourced” in India means salary incomes which Accrue or arise in India; or Are Received in India
“Accrue” or “arise” in India (Section 5) if: Involve the concept of receivability or the right to receive in a particular place
and do not refer to income being earned in that place or being derived from a source of income situated in that place
In other words, the “Employment Base” of the employee is in India – where right to receive the salary arises, where the employee’s services functions are supervised; where the employer utilises the employee’s services; takes decisions regarding the employee’s employment; maintains employee records; etc.
Deemed to Accrue in India (Section 9) Salaries “earned” in India, i.e., for services rendered in India Salaries payable by the Government to an Indian citizen for service outside India
“Received” in India means where the first receipt of income happens in India Remittance after first receipt is of money, not income
8CA Rutvik Sanghvi
Incomes taxable in India
9
Indian Resident: World-wide salary taxable irrespective where it is sourced.
Non-residents: Only salary incomes accrued or received in India are taxable.
R
NR
CA Rutvik Sanghvi
Taxation of Salary income – Where and When
Section 5
Determines scope of salary income – where it will be taxed
Salary taxable in India for NR only if it accrues or is received or is deemed to accrue in India
Section 15
Determines categorisation & time of taxation – when it will be taxed
Salary income taxable in Previous Year (PY) if:
Salary is due in the Previous Year, whether paid or not
Salary is paid in the PY though not due or before it became due
Arrears of salary paid in PY; if not charged to tax earlier
10CA Rutvik Sanghvi
Salary income - Accrual vs Receipt
Case Study:Mr. X, an NR, employed with a HK Co. renders service in HK,
but salary received in IndiaSalary accrues outside India, but taxable in India on receipt basisSalary taxable in India if first receipt in India
If salary received outside India and then remitted to India - no tax in India
Typical issue faced by employees on board ships in international waters Tapas Kr. Bandopadhyay [70 taxmann.com 50 Kolkata - ITAT] Avtar Singh Wadhwan [247 ITR 260] Prahlad Vijendra Rao [198 taxmann 551] Arvind Singh Chauhan [42 taxmann.com 285 Agra ITAT]
Actual Receipt vs Constructive receipt
Taxability may be different under DTAA situation11
CA Rutvik Sanghvi
Salary income - Accrual vs Receipt
Case StudyMr. Y, an NR, employed with Indian Co., renders service in
HK, and receives salary in HKSalary accrues in India under Section 5(2) as “employment
base” in India Salary taxable in India though earned and received outside
India Similar issue if employment agreement entered into with Indian
Branch of Foreign Co.
Salary accrues in India under Section 5(2) and hence taxable in India, irrespective of where services are rendered, salary is earned or received Phra Phraison Salarak (3 ITC 237) Diwan Bahadur Sir T. Vijayarahavacharya (4 ITR 317) V G Every (5 ITR 216)
However, taxability under DTAA may be different12
CA Rutvik Sanghvi
Taxability under the DTAAs
Article 15 – Dependent Personal Services
The article applies to employment income. Anemployee who is a resident of one country & works inanother country, is covered by this article.
The article is subject to the provisions of other articles ondirector’s remuneration, Government service, pension,artists and sportsperson.
OECD Model commentary uses the words “Incomefrom Employment” after deletion of IPS article.
13CA Rutvik Sanghvi
Article 15 – Dependent Personal Services
Primarily all income is taxable in the country ofresidence
However, if the employment is exercised inthe source country, & some conditions inarticle 15(2) are satisfied, then income istaxable in the source country
Employment exercised on board a ship or aircraftoperated in international traffic taxed in the countrywhere effective management of enterprise is situated
14CA Rutvik Sanghvi
Article 15 – Dependent Personal Services
What kind of employment income is covered?Private individual employment
What is NOT covered by this article? Director’s fees (and Director’s salary, etc. in some cases)
Artist’s & sportsperson’s remuneration
Pension
Payments to students, professors & foreign teachers in some cases
Salary& pension of Government employees.
Does not include employment with Government companies /bodies; and with businesses run by Government – sovereign wealthfund, Railways, etc.
15
Thus only current employment income of “Non-Government” sector employees is covered
CA Rutvik Sanghvi
Article 15 – Dependent Personal Services
Article 15(1):
Salaries, wages & other similar remuneration
derived by a resident of say, UK,
in respect of employment,
shall be taxed only in UK.
unless,
the employment is exercised in India.
Salary is primarily taxable in Country of Residence - UK.
If the employment is exercised in India, thenremuneration may be taxed in India also.
Thus salary can be taxed in UK & India.16
CA Rutvik Sanghvi
Article 15 – Dependent Personal Services
Difference between Independent Services &Employment – not explained.
Where is employment exercised – normally where theemployee is physically present when performing hisactivities. Not where results are exploited.A short visit to India – is employment exercised in India?
Salary includes perquisites.
Time of payment is immaterial. All payment for exerciseof employment is taxable.
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Article 15 – Exemption in COS
Article 15(2):Notwithstanding what is mentioned in article 15(1),salary of a resident of U.K., will be taxed ONLY in U.K.,even if employment is exercised in India if,
i. the employee is resident in India for a periodnot exceeding 183 days in any twelve month periodcommencing or ending in the fiscal year, and
ii. remuneration is paid by an employer who is a non-resident of India (foreign employer), and
iii. remuneration is not borne by a PE or FB of theemployer in India.
All conditions are cumulative.
18CA Rutvik Sanghvi
Article 15 – Exemption in COS
In other words, India can tax the employment income, ifany of converse conditions are satisfied, i.e.,
if number of days of employee in India exceed 183, or
if remuneration is paid by an Indian resident, or
if remuneration is borne by the employer’s PE or FB inIndia.
Purpose - Short duration employment, & where noexpenses are claimed in India (no base erosion in India) –No tax in India
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Article 15 – Short stay exemption
Exemption under Act & Treaty
20
Under ITA – Sec 10(6)(vi) Under DTAA – Art. 15(2)
Foreign citizen Tax Resident of Home Country
Employee of a Foreign Enterprise Employee of a Foreign Employer
Stay does not exceed 90 days Stay does not exceed 183 days
Such remuneration is not liable to be deducted from the income of the employer chargeable under ITA
Remuneration is not borne by a PE or FB of the employer in India
Foreign company is not engaged in any trade or business in India
Foreign employer can have a PE or FB in India, only remuneration should not be borne by such PE
CA Rutvik Sanghvi
Article 15 – 183 day test
The test applies to any twelve month periodPhysical presence is considered for counting the
number of days. Following days are included:Part of a dayDay of arrivalDay of departureHolidaysSickness
unless he is prevented to leave the country due to sickness, & hewould otherwise qualify for exemption
Days in transit for trip between 2 points outside India isNOT counted as in India.
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Thus only full days outside India are not considered in 183 days test
CA Rutvik Sanghvi
Article 15 – Important Terms
Employer should be a non-resident.
An employer with residence in India only due to tie-breaking status is irrelevant. If employer is NR as perIndian law, it is sufficient.
Salary should not be borne by a PE or FB in India of theemployer.
What is the meaning of “borne by”?
Economic concept rather than an accounting concept
Direct and proximate relation
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Article 15 –Employment on Ship, etc.
Article 15(3):
Notwithstanding anything contained in articles 15(1) &15(2),
if salary is derived from employment exercised aboard aship or aircraft operated in international traffic, or a boatengaged in inland waterways, it may be taxed in thecountry where the effective management of theenterprise is situated.
This is keeping in line with article 8 on internationaltraffic.
Salary is taxed in the country of effective managementof the enterprise.
Country of Residence of employee can also tax theincome.
23CA Rutvik Sanghvi
Article 15 – Employment on Ship, etc.
If the ship comes to India, can salary of employee betaxed in India?
Only employment “on board” is covered
Generally treaty benefit not available for employees onboard shipsAs employees are not tax resident of any country - Nomads
Is it avoidable?
CA Rutvik Sanghvi24
Taxability of Salary Income
Section 5 of ITA
• Accrues or arises in India
• Received in India
Section 9 of ITA
• Deemed to Accrue or Arise in India:
• Salary “earned” in India
• Salary paid by Government
Section 15 of ITA
• Taxable on due or receipt basis whichever is earlier
Relevant DTAA
• Taxable in Country of Residence
• Alsotaxable in COS if all conditions met
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Provisions of the Act or DTAA, whichever are more beneficial, prevail
CA Rutvik Sanghvi
Payment after employment termination
Typical Situation – Employment is in COS. Aftertermination, employee goes to COR.
Usually if it is linked to past employment, it is considered tobe derived from such employment.
As per OECD MC following remuneration is considered asremuneration of past 12 months in absence of data:
Unused / sick holidays
Severance pay
Payment due to inability to work due to injuries (unless it islike pension, compensation, etc.)
26CA Rutvik Sanghvi
Payment after employment termination
Following remuneration would be taxable in COS
Notice period – where he works / where he would have worked
Payment for violation of employment contract if it is in the form of notice or severance pay
Final remuneration under the garb of pension
Refund of pension contributions of employee
Incentive remuneration
Medical / life insurance coverage
Payment in lieu of commission to salesman
Reduced pay due to lack of work
Following remuneration would be taxable as per Article 21(Other income)
Punitive damages27
CA Rutvik Sanghvi
Payment after employment termination
Following remuneration would be taxable in COR
Payment for not working for employer’s competitor – asit pertains to future employment.However if the payment does not make any real difference to the
ex-employer, it will be taxable in COS.
Difficulties for tax credit in COR in case of timingdifferences
28CA Rutvik Sanghvi
Accrual vs Receipt – Different Years
Case Study:
Mr. A, NR, was employed with HK Co. from 1st April 2015 to 31st March 2016
Renders services in HK during FY 2015-16
Mr. A leaves employment, and returns to India in April 2016
Mr. A is R&OR for FY 2016-17
He receives salary for March 2016 in April 2016 in India
Salary accrued outside India when NR, but received in India when R&OR
Taxability of salary earned for March 2016?29
CA Rutvik Sanghvi
Accrual vs Receipt – Different Years
Salary for March 2016 earned on rendering of services outside India for a foreign employer – salary income accrued outside India - Section 5(2)
Salary taxable on due basis in FY 2015-16 whether paid or not -as per Section 15(a)
Mr. A non-resident of India during FY 2015-16
Hence, salary not taxable in India on accrual basis in FY 2015-16
Salary received in India in FY 2016-17
But salary taxable on due basis and not receipt basis
Once salary considered for scope of taxation on accrual basis, cannot be brought to tax again on receipt basis
Relevant also for incomes from ESOP, leave salary, retirement benefits, etc.
30CA Rutvik Sanghvi
Taxability in India of Employee Resident in India
Employer based Services rendered Taxability
In India In India Fully taxable in India
Outside India In India Taxable in India as worldwide income liable to tax. Credit of foreign taxes difficult.
Outside India Outside India Taxable in India as worldwide income liable to tax. Credit of foreign taxes should be available
In India Outside India Taxable in India as worldwide income liable to tax. Credit of foreign taxes should be available
31CA Rutvik Sanghvi
Taxability in India of Non-resident Employee
Employerbased
Services rendered
Salary received Taxability
In India In India In India and/or outside India
Taxable in India, credit of Indian taxes should be available in COR
Outside India
In India In India and/or outside India
Taxable in India only in respect of services rendered in India subject to short-stay exemption
Outside India
Outside India
Outside India
In India in same year
In India in later year(s)
Not taxable in India
Taxable in India on receipt basis
Not liable to tax in India in year of accrual; not taxable in year of receipt as already subject to tax
In India Outside India
In and/or outside India
Taxable in India as employment base in India
32CA Rutvik Sanghvi
International Hiring-out of labour
33
Employer(Employee contractor)
Indian Resident
Employees for less than 183
days
Employees work under supervision of Indian client.All conditions of Article 15(2) satisfied
PaymentContractIndia
Gibraltar
CA Rutvik Sanghvi
International Hiring-out of labour
Meaning of employer One who bears responsibility & risks of employees;
One who directs & supervises the work of employees;
One who enjoys the fruits of employee’s work.
An employer is someone to whom an employee is committedto supply his capacity to work and under whose directionsthe latter engages in his activities and whose instructions he isbound to obey”(page 899 Klaus Vogel)
A key consideration will be which enterprise bears theresponsibility of risks produced by individual’s work.(OECD)
Distinction between “contract of service” and “contract forservice” (OECD Commentary)
Substance over form should prevail.
Software people working on-site – who is the employer?
34CA Rutvik Sanghvi
Frontier Workers
Employees staying near the border, & going to work inthe country across the border – where is salary taxable?
OECD / UN models do not prescribe anything. It is leftto the countries concerned.
35CA Rutvik Sanghvi
Employee Stock Options
Distinguish employment benefit from capital gains.
Gains up to exercise of option is salary income underArticle 15.
Gain after exercise is capital gain under Article 13.
ESOPs given by foreign holding companies toemployees of Indian subsidiary are taxable.
36CA Rutvik Sanghvi
Employee Stock Options
Option Grant
Option Vest
Option Exercise
Allot Shares
Sell Shares
37
Perquisite taxable as Salary incomeTaxable under Article 15
Capital Gain taxable under Article 13
Key considerations:Time of taxation (left to COS).
Link to employment.
Tax Principles for point of taxation and type of income can differ
Double taxation easily possible
CA Rutvik Sanghvi
ESOPs – Post Exercise Gain
Exercise of Option
Allotment of Shares
Comes to India
Sale of Shares
38
If foreign employees come to India, & become residents; &then sell shares – India can tax Capital Gains.
Home country can tax appreciation post exercise till employeeleaves the country.
Home Country can tax
India can tax
…Appreciation in Value of shares...
CA Rutvik Sanghvi
ESOPs – For Future or Past Employment?
ESOPs are generally for retaining employees, i.e., futureemployment.
Generally after the minimum period of employmentnecessary for ESOPs, the benefit should not be related to theservices after the minimum period is over.
Difference between minimum period of employment (ESOPbenefit), & blocking period (Not ESOP benefit).
ESOPs could be granted for past employment. If pastemployment is in India, ESOP benefit can be taxed in India.
Some ESOPs may suggest that it applies for past employment,& for future services. The benefit should be divided. Division can be pro-rata based on time spent in each country
39CA Rutvik Sanghvi
Leave Salary
Salary for leave periods not utilised during the period of service received on termination of service or on retirement
Income accrues during the period of service; and not when received Not taxable under ITA if at the time of accrual employee was
Non-resident
DTAA benefit results in same tax treatment
Allocation to be done between service rendered in India and outside India
40CA Rutvik Sanghvi
Leave Salary
Case Study:
Mr. A was employed from 1st April 2000 with Co. XYZ, an Australian company
Deputed to India on 1st June 2010 and services rendered in India thereon
Mr. A resigned from Co. XYZ on 31st May 2016
Leave salary accumulated from 2010 paid on retirement
Taxability of leave salary in India?
Leave salary earned in Australia accrued when Mr. A was NR
Not taxable on receipt basis in India on retirement
Only portion relating to services rendered in India taxable in India
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Tax Equalisation & Hypothetical tax
Tax EqualisationCompensation method designed to make income taxes a
neutral factor in the expatriates’ compensation package.Expatriates will continue to incur tax burden equal to home
countryLocation agnostic - the employee has no benefit from low host
country taxes; nor is disadvantaged if assigned to a high taxcountry
Hypothetical taxNotional tax that an assignee would have paid if living and
working at homeMany companies limit the tax that an assignee must
personally bear during the assignment to the hypothetical taxHypo tax is deducted from the salary and total tax in host and
home countries are paid by employer
42CA Rutvik Sanghvi
Tax Equalisation & Hypothetical tax
Hypo Tax held deductible in:
Yoshio Kubo (357 ITR 452) (Del)
Jaydev Raja (357 ITR 292) (Bombay)
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”
CA Rutvik Sanghvi43
Social Security contributions
Compulsory / mandatory natureThe employer should be authorised to deduct the social security
contribution from the monthly remuneration payable to the employee
Contributions are required to be made by all employees compulsorily
Certain penal implications for default
No vested right conferred on an employee
Overriding title on income from remuneration
Social Security AgreementsApplicable to ‘International Workers’
Provide for Detachment, Exportability and Totalisation
Certificate of Coverage required
44CA Rutvik Sanghvi
Pension income
Employer’s contribution to the Pension Funds is not taxable in the year of contribution as it does not vest in the employee till a much later date
Employer’s contribution would be taxed at the time of receipt of retirement benefits to the extent it relates to services rendered in India as per the ITA
Article 18 of the UN and OECD Models
Primary right of taxation with COR
Pensions received from Government may be taxable only in COS and not COR Check Article 19 – Government Service
Private pensions taxable in COR
45CA Rutvik Sanghvi
Deduction of tax at source
Section 192 applicable for incomes covered under the head “salaries”Section 195 not applicable
Deductible on payment basisTiming difference for salary “due” and “paid”
Tax computation based on Part III of Schedule 1 to the Finance ActTax computed on annual income basis and pro-rata deduction
20% rate if no PAN available; or wrong PAN cited - Sec 206AA
Can DTAA relief be considered while computing TDS?
Can Foreign Tax Credit be considered while computing TDS?
Reimbursement of salary
46CA Rutvik Sanghvi
Deduction of tax at source
Person responsible to deduct tax at sourceEmployer
In case of company – the company and its principal officer
Indian employer to deduct tax at source on salaries received by foreign expatriates deputed to it on the whole amount including portion received abroad – Eli Lilly [312 ITR 225 SC]
Sec. 192(1A) – employer has option to pay tax on non-monetary perquisites without TDSTax to be paid at the time of payment of perquisite
Benefit exempt from tax in hands of employee – Sec 10(10CC)
Tax borne by employer not available as deduction – Sec 40(a)(v)
47CA Rutvik Sanghvi
Deduction of tax at source - Compliance
TDS to be deposited with Government by 7th of next monthFacility for quarterly deposit can be made vide application
Quarterly statements to be submitted to tax authorities
Annual Form 16 to be issued to employee
48CA Rutvik Sanghvi
Deduction of tax at source - Consequences
Consequences on shortfall or non-deduction of tax
Employer deemed to be assessee in default – Sec 201(1)Exemption for Resident employee who pays up tax on own
Rule 31ACB and Form No. 26A
Hindustan Coca Cola Beverage (293 ITR 226)
Circular No. 275/201/95- IT(B) dated 29.1.1997
Interest – Sec 201(1A) and Penalties leviable –Sec 221 & Sec 271C
Prosecution, rare but possible – Sec 276B
Disallowance of salary expense – Sec 40(a)(iii)
Interest under 234B and 234C payable by employee for shortfall in TDS by employer? Ian Peter Morris [2016] 76 taxmann.com 271 (SC)
CA Rutvik Sanghvi49
Remittance of salary
Generally salary paid in India by employerAfter payment of taxes, employee can remit salary to home
country
Direct remittance to employee’s bank account outside India possible for:Foreign or Indian Citizen, resident of India under FEMA, and
employee of a foreign company, deputed to India
Foreign citizen, resident of India under FEMA, employed with an Indian company
Reg. 8 of FEMA Notification 10(R) / 2015-RB
Banks insist on proof of payment of taxesForm 16 – not possible before year-end
Form 26AS
Form 15CA and 15CB?
Employer’s certificate / Board Resolution
50CA Rutvik Sanghvi
Other areas of concern
Change of residence Resident under FEMA from day one
‘Not permanently resident’ Foreign incomes received abroad?
Filing of tax returns in India Submitting full income to tax Claiming correct tax credits Foreign incomes Black Money Act 2015
Service PE for employer Facts vs statements GE Energy Parts Inc.
Deputation/Secondment agreements drafting
Transfer Pricing for outsourced activities where cost plus method is followed
51CA Rutvik Sanghvi
