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SIRC of ICAI SIRC of ICAI Tirupur Branch Tirupur Branch Taxation of Expatriates Taxation of Expatriates 9 9 th th February, 2008 February, 2008 Naresh Ajwani Naresh Ajwani Partner Partner Rashmin Sanghvi & Associates Rashmin Sanghvi & Associates Chartered Accountants Chartered Accountants

SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Page 1: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

SIRC of ICAISIRC of ICAITirupur BranchTirupur Branch

Taxation of ExpatriatesTaxation of Expatriates99thth February, 2008 February, 2008

Naresh AjwaniNaresh AjwaniPartnerPartnerRashmin Sanghvi & Rashmin Sanghvi &

AssociatesAssociatesChartered AccountantsChartered Accountants

Page 2: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Taxation of ExpatriatesTaxation of Expatriates

► Issues which can be considered for Issues which can be considered for taxation of Expatriates:taxation of Expatriates:

- Residential Status.- Residential Status.

-- Taxation of salary, perquisites, Taxation of salary, perquisites, amenities, amenities, tax equalisations given tax equalisations given abroad, etc.abroad, etc.

- FEMA issues.- FEMA issues.

- DTA.- DTA.

- FBT.- FBT.

Page 3: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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- Stock Options.- Stock Options.- TDS by employers.- TDS by employers.- Foreign Tax credits.- Foreign Tax credits.- PE issues for foreign employers.- PE issues for foreign employers.- Tax planning areas.- Tax planning areas.

►Other issues: (Not discussed.)Other issues: (Not discussed.)- Visa.- Visa.- Registration with Police.- Registration with Police.

Taxation of ExpatriatesTaxation of Expatriates

Page 4: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Expatriate Expatriate

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

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

►Under Indian context, it includes NRIs.Under Indian context, it includes NRIs.

Page 5: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Residential Status – Income-taxResidential Status – Income-tax

► If a person comes to India & stays for less If a person comes to India & stays for less than 60 days, he will be a non-resident.than 60 days, he will be a non-resident.

► If a person comes to India & stays for more If a person comes to India & stays for more than 60 days but less than 181 days,than 60 days but less than 181 days,

++

Within 4 preceding previous years, the Within 4 preceding previous years, the number of days stay in India is less than 365 number of days stay in India is less than 365 days,days,

he will be a non-resident.he will be a non-resident.

Page 6: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►For For NRINRI, the test of 365 days in 4 preceding , the test of 365 days in 4 preceding previous years does not apply if he is on a previous years does not apply if he is on a visit to India. [Expln. (b) to S.6(1)]. i.e. He visit to India. [Expln. (b) to S.6(1)]. i.e. He can be in India upto 181 days if he comes can be in India upto 181 days if he comes on a on a visitvisit, and still be a non-resident., and still be a non-resident.

However if the NRI has not come for a However if the NRI has not come for a visitvisit, , will he get the benefit of stay upto 181 will he get the benefit of stay upto 181 days and yet be considered as a NR?days and yet be considered as a NR?

Residential Status – Income-taxResidential Status – Income-tax

Page 7: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Residential Status – NRI – Residential Status – NRI – Income-taxIncome-tax

►NRI is defined u/s. 115C(e):NRI is defined u/s. 115C(e):

It means a person who is:It means a person who is:

(i) a non-resident; and (i) a non-resident; and

(ii) an Indian citizen; or(ii) an Indian citizen; or

a person of India Origin (PIO).a person of India Origin (PIO).

PIO means a person who himself, or PIO means a person who himself, or either of his parents, or either of his either of his parents, or either of his grandparents, were born in undivided grandparents, were born in undivided India. India.

There is no reference to There is no reference to spousespouse..

Page 8: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Residential Status – Income-taxResidential Status – Income-tax

►Not Ordinarily Resident (NOR):Not Ordinarily Resident (NOR):

If a person is a non-resident for nine years, If a person is a non-resident for nine years, he will be considered as NOR for one year.he will be considered as NOR for one year.

If a person is a non-resident for 10 years or If a person is a non-resident for 10 years or more, he will be considered as NOR for 2 more, he will be considered as NOR for 2 years.years.

If he is in India for less than 730 days in 7 If he is in India for less than 730 days in 7 preceding years, he will be a NOR. (This preceding years, he will be a NOR. (This can give NOR status benefit for 3 or 4 can give NOR status benefit for 3 or 4 years.)years.)

►As an NOR, foreign incomes are tax free.As an NOR, foreign incomes are tax free.

Page 9: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►Section 2(v)(B) -Section 2(v)(B) -

A person is a resident in India if he stays A person is a resident in India if he stays in India:in India:

- for employment in India.- for employment in India.

- for carrying on business.- for carrying on business.

-- for any purpose which indicates his for any purpose which indicates his intention to stay for an uncertain intention to stay for an uncertain

period.period.►An expatriate would be an Indian resident An expatriate would be an Indian resident

from the day he comes to India.from the day he comes to India.

Residential Status – FEMAResidential Status – FEMA

Page 10: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►A person is Not permanently resident A person is Not permanently resident (NPR) in India if he comes for an (NPR) in India if he comes for an employment of specific duration employment of specific duration (irrespective of the period), or a specific (irrespective of the period), or a specific job for assignment not exceeding 3 job for assignment not exceeding 3 years.years.

Residential Status – FEMAResidential Status – FEMA

Page 11: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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FEMA issuesFEMA issues

►Employer can remit its contribution Employer can remit its contribution towards Provident fund/ towards Provident fund/ superannuation/ superannuation/ pension fund pension fund abroad in case of abroad in case of “Expatriate staff” who are NPR. [FEMA “Expatriate staff” who are NPR. [FEMA Notification 3, Reg. 5]Notification 3, Reg. 5]

► ‘‘Expatriate staff' means a person whose Expatriate staff' means a person whose provident / superannuation/ pension fund provident / superannuation/ pension fund is maintained outside India by his is maintained outside India by his principal employer outside India.principal employer outside India.

Page 12: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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FEMA IssuesFEMA Issues

►His foreign assets and foreign incomes can His foreign assets and foreign incomes can be kept abroad.be kept abroad.

►Normally full salary has to be brought into Normally full salary has to be brought into India.India.

►25% of foreign salary has to be paid by the 25% of foreign salary has to be paid by the foreign employer in rupees in India. 75% can foreign employer in rupees in India. 75% can be kept abroad.be kept abroad.

[This facility is available if he is on [This facility is available if he is on deputationdeputation to the Indian office or subsidiary to the Indian office or subsidiary - -

FEMA Notification 10, Reg. 7(8).]FEMA Notification 10, Reg. 7(8).]

Page 13: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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FEMA IssuesFEMA Issues

►Remittance abroad:Remittance abroad:

A foreign citizen (other than a citizen of A foreign citizen (other than a citizen of Nepal or Bhutan or a PIO) who has retired Nepal or Bhutan or a PIO) who has retired from an employment in India, can remit US$ from an employment in India, can remit US$ 1 mn. per financial year out of retirement 1 mn. per financial year out of retirement proceeds.proceeds.

Documentary evidence and a certificate from Documentary evidence and a certificate from a CA is required for the remittance.a CA is required for the remittance.

[FEMA Notification 13, Reg. 4(2)(i)][FEMA Notification 13, Reg. 4(2)(i)]►NRIs can remit US$ 1 mn. per year out of NRIs can remit US$ 1 mn. per year out of

Indian assets.Indian assets.

Page 14: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Residential Status – Income-tax Residential Status – Income-tax Vs. FEMAVs. FEMA

►A person can have different residential A person can have different residential status under Income-tax Act & FEMA.status under Income-tax Act & FEMA.

E.g. A person comes to India on 1E.g. A person comes to India on 1stst Dec.07. Under FEMA, he will be an Indian Dec.07. Under FEMA, he will be an Indian resident immediately. Under I.T. Act, he resident immediately. Under I.T. Act, he will be a non-resident till 31will be a non-resident till 31stst March, 08. March, 08.

[An NRI will lose exemption on NRE [An NRI will lose exemption on NRE interest - section 10(15)(ii).]interest - section 10(15)(ii).]

Page 15: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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► Indian Ships – if operating beyond India’s Indian Ships – if operating beyond India’s territorial waters - will not be considered territorial waters - will not be considered as “in India”. (Territorial waters mean a as “in India”. (Territorial waters mean a distance upto 12 nautical miles from distance upto 12 nautical miles from appropriate baseline).appropriate baseline).

Under FEMA – a ship flying an Indian flag is Under FEMA – a ship flying an Indian flag is considered as a floating island. Therefore considered as a floating island. Therefore a person is “in India”. (Paul H. Rodriguez a person is “in India”. (Paul H. Rodriguez V. Director of Enforcement – 45 Taxmann V. Director of Enforcement – 45 Taxmann 94).94).

Residential Status – Income-tax Residential Status – Income-tax Vs. FEMAVs. FEMA

Page 16: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►Day of arrival & departure in India.Day of arrival & departure in India.

Advance Ruling (233 ITR 462) – Advance Ruling (233 ITR 462) – Both Both daysdays should be counted as “in India”. should be counted as “in India”.

Jaipur Tribunal (No. 1230 dt. 22.8.86) Jaipur Tribunal (No. 1230 dt. 22.8.86) (ITO V/s. Dr. R. K. Sharma) – (ITO V/s. Dr. R. K. Sharma) – Only day of Only day of departure departure has to be considered as “in has to be considered as “in India”.India”.

Residential Status – Income-taxResidential Status – Income-tax

Page 17: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Dual ResidenceDual Residence

►DTA does not prescribe residential status. DTA does not prescribe residential status. ►Only the Domestic Tax law determines Only the Domestic Tax law determines

residential status. residential status. ►A person can be a resident of two A person can be a resident of two

countries (specially in the year of countries (specially in the year of departure / arrival).departure / arrival).

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

Page 18: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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► If there is a DTA, the tie-breaking rules If there is a DTA, the tie-breaking rules have to be applied as per hierarchy of have to be applied as per hierarchy of tests below:tests below:

- Permanent Home;- Permanent Home;

-- Centre of vital interests (Personal & Centre of vital interests (Personal & economic relations);economic relations);

- Habitual Abode;- Habitual Abode;

- Nationality;- Nationality;

- Mutual Agreement Procedure.- Mutual Agreement Procedure.

Dual ResidenceDual Residence

Page 19: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►Due to different fiscal year endings, a Due to different fiscal year endings, a person may be a non-resident of both - person may be a non-resident of both - the home country & the host country. the home country & the host country.

►As a non-resident of both countries, he As a non-resident of both countries, he will not be entitled to DTA relief.will not be entitled to DTA relief.

►Domestic relief also may not apply.Domestic relief also may not apply.

Dual Non-ResidenceDual Non-Residence

Page 20: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►Example:Example:A Singapore expatriate comes to India on A Singapore expatriate comes to India on 11stst January, 2007. He will be a NR of January, 2007. He will be a NR of Singapore for 2007.Singapore for 2007.In India, he will be a non-resident upto In India, he will be a non-resident upto 31.3.07.31.3.07.Salary earned in Singapore for January-Salary earned in Singapore for January-March, 2007 – will become taxable in March, 2007 – will become taxable in both countries. He will not get credit any both countries. He will not get credit any where – leading to double tax.where – leading to double tax.

Dual Non-ResidenceDual Non-Residence

Page 21: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Taxation of ExpatriatesTaxation of Expatriates

►Resident & Resident & Global income Global income

ordinary residentordinary resident is taxable. is taxable.►Resident but NOR Indian income isResident but NOR Indian income is

taxable. Foreign taxable. Foreign incomeincome

is not taxable – is not taxable – unlessunless

received in India.received in India.►Non-residentNon-resident Same as above. Same as above.

Page 22: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►Employee employed Employee employed S.5 – Income S.5 – Income accruesaccrues in India. in India. in India.in India.

Employee employed Employee employed S.9(1)(ii) –Income is S.9(1)(ii) –Income is abroad, but rendersabroad, but renders deemed to accrue indeemed to accrue inservices in India. services in India. India India

► Indian salary plus foreign salary is taxable in Indian salary plus foreign salary is taxable in India.India.

Taxation of ExpatriatesTaxation of Expatriates

Page 23: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►Foreign perquisites are also taxable in India.Foreign perquisites are also taxable in India.►Meaning of employment – Max Mueller Meaning of employment – Max Mueller

Bhavan – 268 ITR 31 (Advance Ruling)Bhavan – 268 ITR 31 (Advance Ruling)►Duration of employment is not relevant.Duration of employment is not relevant.►Tax on Non-monetary perquisite paid by the Tax on Non-monetary perquisite paid by the

employer is exempt from grossing up – employer is exempt from grossing up – section 10(10CC).section 10(10CC).

RBF Rig Corp. Delhi Tribunal Special Bench RBF Rig Corp. Delhi Tribunal Special Bench (2007) – Tax borne by the employer is (2007) – Tax borne by the employer is exempt from grossing up.exempt from grossing up.

Taxation of ExpatriatesTaxation of Expatriates

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► Income received before joining Income received before joining employment (pre-sign-on incentive); or employment (pre-sign-on incentive); or after leaving employment is considered as after leaving employment is considered as “profits in lieu of salary” [S.17(3)(iii) w.e.f. “profits in lieu of salary” [S.17(3)(iii) w.e.f. A.Y. 2001-02].A.Y. 2001-02].

►Salary for rest period before & after Salary for rest period before & after services rendered in India is taxable. services rendered in India is taxable. [S.9(1)(ii), Expln.].[S.9(1)(ii), Expln.].

► If payment is related to services rendered If payment is related to services rendered in India, it is taxable.in India, it is taxable.

Taxation of ExpatriatesTaxation of Expatriates

Page 25: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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DTADTA

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

►Primarily salary is taxable in the Country Primarily salary is taxable in the Country of Residence (say UK) unless, the of Residence (say UK) unless, the employment is exercised in the other employment is exercised in the other country (say India). [Article 15(1)].country (say India). [Article 15(1)].

► If the employment is exercised in India, If the employment is exercised in India, then salary is also taxable in India.then salary is also taxable in India.

Page 26: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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DTADTA

►Place where the employee renders services Place where the employee renders services is considered as the place of employment.is considered as the place of employment.

►Time of payment of remuneration is Time of payment of remuneration is immaterial. If it is related to employment in immaterial. If it is related to employment in India, remuneration is taxable in India.India, remuneration is taxable in India.

If the other country taxes income on If the other country taxes income on receipt basis, then there can be unrelieved receipt basis, then there can be unrelieved double tax. (e.g. salary under S. 9(1)(ii), double tax. (e.g. salary under S. 9(1)(ii), 17(3)(iii)).17(3)(iii)).

Page 27: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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DTADTA

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

- Director’s fees.- Director’s fees.

- Artist’s & sportsperson’s remuneration. - Artist’s & sportsperson’s remuneration.

- Pension.- Pension.

- Salary& pension of Government - Salary& pension of Government employees. employees.

- Payments to students, professors & - Payments to students, professors & foreign teachers in some cases.foreign teachers in some cases.

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►Exemption for short visits:Exemption for short visits:

Income-tax – S.10(6)(vi) – salary is exempt Income-tax – S.10(6)(vi) – salary is exempt if:if:

-- Foreign enterprise is not engaged in Foreign enterprise is not engaged in trade trade or business in India,or business in India,

- - Employee does not stay for more than Employee does not stay for more than 90 90 days in a days in a previous yearprevious year in India, and in India, and

-- Salary is not deductible from the Salary is not deductible from the employer’s income chargeable under employer’s income chargeable under Income-tax Act.Income-tax Act.

[These are cumulative conditions.][These are cumulative conditions.]

Short visitsShort visits

Page 29: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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►Exemption for short visits:Exemption for short visits:

DTA - Article 15(2) - Salary is exempt if:DTA - Article 15(2) - Salary is exempt if:

- Employee does not stay in India for more - Employee does not stay in India for more than 183 days in a than 183 days in a 12 month period12 month period

commencing or ending in a fiscal year,commencing or ending in a fiscal year,

- Remuneration is paid by a non-resident - Remuneration is paid by a non-resident employer, andemployer, and

- Remuneration is not borne by PE or FB of - Remuneration is not borne by PE or FB of employer in India. employer in India.

[These are cumulative conditions.][These are cumulative conditions.]

Short visitsShort visits

Page 30: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Short visitsShort visits

► In other words, under a DTA, India can In other words, under a DTA, India can tax the employment income, if tax the employment income, if anyany of of converse conditions are satisfied. i.e.converse conditions are satisfied. i.e.

-- if number of days of employee in if number of days of employee in India India exceed 183, or exceed 183, or

-- if remuneration is paid by an if remuneration is paid by an Indian Indian resident, or resident, or

-- if remuneration is borne by the if remuneration is borne by the employer’s PE or FB in India.employer’s PE or FB in India.

Page 31: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Short visitsShort visits

►Some DTAs use the words “deductible”. Some DTAs use the words “deductible”. (Indian DTAs with Australia, Belgium, UK.)(Indian DTAs with Australia, Belgium, UK.)

►What is the meaning of “borne by”?What is the meaning of “borne by”?

-- Debiting accounts.Debiting accounts.

-- Payment by a PE.Payment by a PE.

-- Deduction from profits for taxation.Deduction from profits for taxation.

-- Attributed to the PE.Attributed to the PE.►Living allowance paid by Indian company.Living allowance paid by Indian company.

Page 32: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Short visitsShort visits

► In case of presumptive tax, can we say In case of presumptive tax, can we say that salary is “borne by” the PE?that salary is “borne by” the PE?

Lloyd Helicopter – 249 ITR 162Lloyd Helicopter – 249 ITR 162

Dhv Consultants – 277 ITR 97Dhv Consultants – 277 ITR 97

Ensco – 91 ITD 459Ensco – 91 ITD 459►Reimbursement of costs by PE – Does it Reimbursement of costs by PE – Does it

mean PE has “borne” the salary?mean PE has “borne” the salary?►The “base erosion” principle is important. The “base erosion” principle is important.

If the PE has claimed salary as a If the PE has claimed salary as a deduction, it should be considered as deduction, it should be considered as “borne by”.“borne by”.

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► If the employee,If the employee,

is employed on a foreign ship,is employed on a foreign ship,

and his stay in India is upto 90 days in a and his stay in India is upto 90 days in a year, salary is not taxable in India [S.10(6)year, salary is not taxable in India [S.10(6)(vii)].(vii)].

►Employee on a ship or aircraft operating in Employee on a ship or aircraft operating in international traffic is taxable on his salary international traffic is taxable on his salary where the employer is situated. [Art. 15(3) where the employer is situated. [Art. 15(3) of a DTA].of a DTA].

Employment on shipsEmployment on ships

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International Hiring – Out of International Hiring – Out of labourlabour

Gibraltar Employer (employee contractor)

Employees for less than 183 days

Indian Resident

India Payment

Employees work under supervision of Indian client. All conditions of article 15(2)

are satisfied.

Contract

Page 35: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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International Hiring – Out of International Hiring – Out of labourlabour

►Meaning of employer- One who bears Meaning of employer- One who bears responsibility & risks of employees;responsibility & risks of employees;

One who directs & supervises the work of One who directs & supervises the work of employees; employees;

One who enjoys the fruits of employee’s One who enjoys the fruits of employee’s work.work.

►Substance over form should prevail.Substance over form should prevail.►Software people working on site – who is Software people working on site – who is

the employer?the employer?

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Expatriates – some issuesExpatriates – some issues

►The employee will not be liable to tax on The employee will not be liable to tax on his foreign incomes, till he is a NOR.his foreign incomes, till he is a NOR.

►What about his other active income?What about his other active income?

Examples:Examples:

-- If he trades in shares over a website?If he trades in shares over a website?

-- His retirement account (e.g. 401-K His retirement account (e.g. 401-K account in USA) where he has the power account in USA) where he has the power to manage the investments? (Advance to manage the investments? (Advance ruling ruling P-12 – 228 ITR 61)P-12 – 228 ITR 61)

Is it a source in India (partly or fully)?Is it a source in India (partly or fully)?

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Expatriates – some issuesExpatriates – some issues

►Wealth-tax:Wealth-tax:

-- Assets as defined u/s. 2(ea) outside Assets as defined u/s. 2(ea) outside India India are taxable in case of an are taxable in case of an ordinary resident.ordinary resident.

-- S. 6(i) – Assets outside India of foreign S. 6(i) – Assets outside India of foreign citizen and NOR, are exempt from citizen and NOR, are exempt from

wealth-wealth- tax.tax.

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►Foreign employers may be liable to FBT.Foreign employers may be liable to FBT.►Foreign employers will have to comply Foreign employers will have to comply

with TDS provisions.with TDS provisions.►Stock Options.Stock Options.►PE exposure for foreign employers.PE exposure for foreign employers.

Expatriates – some issuesExpatriates – some issues

Page 39: SIRC of ICAI Tirupur Branch Taxation of Expatriates 9 th February, 2008 Naresh Ajwani Partner Rashmin Sanghvi & Associates Chartered Accountants

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Residents going abroadResidents going abroad

►Residential status:Residential status:

60 days test applies.60 days test applies.

For For Indian citizensIndian citizens going for employment going for employment abroad, or as members of crew of Indian abroad, or as members of crew of Indian ships, the person can be in India for upto ships, the person can be in India for upto 181 days and still be an Indian resident. 181 days and still be an Indian resident. [Expln. (a) to S.6(1)].[Expln. (a) to S.6(1)].

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Residents going abroadResidents going abroad

►Sometimes initial period of posting Sometimes initial period of posting abroad may be as a consultant. Benefit of abroad may be as a consultant. Benefit of 181 days may not be available.181 days may not be available.

► In the first year, he may be an Indian In the first year, he may be an Indian resident. Foreign salary is taxable in resident. Foreign salary is taxable in India. He will get foreign tax credits.India. He will get foreign tax credits.

►Different fiscal years may cause Different fiscal years may cause rectifications.rectifications.

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Residents going abroadResidents going abroad

► Indian employees sent abroad:Indian employees sent abroad:-- On payroll of foreign branch or On payroll of foreign branch or foreign subsidiary,foreign subsidiary,-- On short visits.On short visits.Indian company pays salary in India and Indian company pays salary in India and abroad in foreign country. Is the Indian abroad in foreign country. Is the Indian salary and foreign salary taxable in India?salary and foreign salary taxable in India?British Gas – 287 ITR 462British Gas – 287 ITR 462S Mohan – 294 ITR 177.S Mohan – 294 ITR 177.

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Residents going abroadResidents going abroad

►TDS by Indian Co.:TDS by Indian Co.:

–– Is it creditable abroad?Is it creditable abroad?

-- Is it refundable in India?Is it refundable in India?►Living allowance for visit abroad.Living allowance for visit abroad.

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Fringe Benefit TaxFringe Benefit Tax

►FBT is payable by an employer on any FBT is payable by an employer on any fringe benefit provided to employees. fringe benefit provided to employees. Fringe benefit includes:Fringe benefit includes:

- Actual benefit to employees.- Actual benefit to employees.

- Deemed benefit to employees.- Deemed benefit to employees.►Circulars clarify the intention of the Circulars clarify the intention of the

Government. Some issues in the circulars Government. Some issues in the circulars are not covered under the I.T. Act.are not covered under the I.T. Act.

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FBT – Cross BorderFBT – Cross Border

►Foreign employers are liable to FBT if Foreign employers are liable to FBT if they have they have employees based in Indiaemployees based in India..

► Indian employers are not liable to FBT if Indian employers are not liable to FBT if they have they have employees based outside employees based outside IndiaIndia..

►What is the meaning of employees based What is the meaning of employees based in India and employees based outside in India and employees based outside India?India?

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►FBT is payable if employees are based in FBT is payable if employees are based in India.India.

►Foreign employer may not have a PE in Foreign employer may not have a PE in India, or its income may be exempt from tax India, or its income may be exempt from tax under a DTA, still FBT is payable if there are under a DTA, still FBT is payable if there are employees based in India.employees based in India.

►Expenses attributable to operations of the Expenses attributable to operations of the PE are to be considered for charging FBT.PE are to be considered for charging FBT.

►Short duration stay in India of employees – Short duration stay in India of employees – FBT is payable if salary is taxable in India.FBT is payable if salary is taxable in India.

Foreign employers – India Foreign employers – India employeesemployees

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► If If nonenone of the employees are taxable in of the employees are taxable in India, FBT is not payable. India, FBT is not payable.

►Thus, FBT is not payable if:Thus, FBT is not payable if:

- there are no employees based in India, - there are no employees based in India, or or

- none of the employees are taxable in - none of the employees are taxable in India.India.

Foreign employers – India Foreign employers – India employeesemployees

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Foreign employers – India Foreign employers – India employeesemployees

►3 tests for levying FBT:3 tests for levying FBT:

-- Employees are based in India.Employees are based in India.

-- Employees’ salary is chargeable to Employees’ salary is chargeable to tax in tax in India.India.

-- Expenses are attributable to Indian Expenses are attributable to Indian PE.PE.

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Indian employers – Foreign Indian employers – Foreign employeesemployees

►FBT is payable on expenses attributable FBT is payable on expenses attributable to to operations in Indiaoperations in India. .

What is the meaning of Operations in What is the meaning of Operations in India?India?

► If there are separate books of account for If there are separate books of account for Indian & foreign operations, FBT is Indian & foreign operations, FBT is payable on expenses reflected in Indian payable on expenses reflected in Indian books.books.

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► If there are no separate books of If there are no separate books of account, FBT is payable on proportionate account, FBT is payable on proportionate amount of Global expenditure.amount of Global expenditure.

Proportionate Amount =Proportionate Amount =

No. of Indian EmployeesNo. of Indian Employees

No. of Global employeesNo. of Global employees

Indian employers – Foreign Indian employers – Foreign employeesemployees

x Global x Global expenditureexpenditure

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FBT creditFBT credit

►Will the foreign employee get credit for Will the foreign employee get credit for FBT against his home country tax?FBT against his home country tax?

►Will the foreign employer get credit for Will the foreign employer get credit for FBT against its home country tax?FBT against its home country tax?

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Stock OptionsStock Options

►Upto A.Y. 2007-08, employees were Upto A.Y. 2007-08, employees were chargeable to tax.chargeable to tax.

From A.Y. 2008-09, employer is liable to From A.Y. 2008-09, employer is liable to FBT.FBT.

► If allotment or transfer of specified If allotment or transfer of specified security or sweat equity takes place after security or sweat equity takes place after 1.4.07, employer is liable for FBT.1.4.07, employer is liable for FBT.

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Stock Options by Foreign Stock Options by Foreign CompanyCompany

►Shares allotted to Indian subsidiary’s Shares allotted to Indian subsidiary’s employees – FBT payable by Indian company.employees – FBT payable by Indian company.

► If during the period between “grant” and If during the period between “grant” and “vesting” of option (grant period) the “vesting” of option (grant period) the employee was in India, FBT is payable by employee was in India, FBT is payable by Indian company.Indian company.

► If employee is in India for part of the grant If employee is in India for part of the grant period, value of fringe benefit will be divided period, value of fringe benefit will be divided proportionately between his presence in India proportionately between his presence in India and presence outside India.and presence outside India.

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►Employee of foreign company deputed to Employee of foreign company deputed to India – FBT is payable based on the India – FBT is payable based on the proportionate period of grant period – if proportionate period of grant period – if employee is based in India.employee is based in India.

What if salary is not taxable in India?What if salary is not taxable in India?►Valuation of shares has to be done by Valuation of shares has to be done by

SEBI registered Category-I Merchant SEBI registered Category-I Merchant Banker.Banker.

Stock Options by Foreign Stock Options by Foreign CompanyCompany

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Stock Option granted by Indian Stock Option granted by Indian Co.Co.

► If employees are based abroad, then no If employees are based abroad, then no FBT is payable. FBT is payable.

►However if the employees are in India However if the employees are in India during the grant period, FBT will be during the grant period, FBT will be payable.payable.

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Stock Appreciation RightsStock Appreciation Rights

►As per CBDT circular, FBT applies even to As per CBDT circular, FBT applies even to “Employee Appreciation Rights”.“Employee Appreciation Rights”.

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TDSTDS

►Foreign employer is required to deduct tax Foreign employer is required to deduct tax at source u/s. 192.at source u/s. 192.

►Excess TDS – refund can be made to the Excess TDS – refund can be made to the employer – circular 285[F.No. 275/77/79-IT employer – circular 285[F.No. 275/77/79-IT (B) dt. 21.10.80].(B) dt. 21.10.80].

► If tax is to be borne by employer (usually If tax is to be borne by employer (usually for short visits), refund can be given to for short visits), refund can be given to employer if authorisation has been given employer if authorisation has been given by the employee – circular 707 dt. 11.7.95.by the employee – circular 707 dt. 11.7.95.

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Foreign Tax CreditForeign Tax Credit

► Indian employees earning foreign salary Indian employees earning foreign salary & paying taxes abroad – & paying taxes abroad –

Credit for foreign taxes will be available Credit for foreign taxes will be available provided that the salary is taxable in provided that the salary is taxable in foreign country.foreign country.

►Foreign tax be credited against Indian tax Foreign tax be credited against Indian tax on salary only, and not against tax on on salary only, and not against tax on any other income.any other income.

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Permanent EstablishmentPermanent Establishment

►Presence of employees in India can amount Presence of employees in India can amount to a PE.to a PE.

Profits attributable to the PE can be taxable Profits attributable to the PE can be taxable in India.in India.

► If there is an office in India from where the If there is an office in India from where the employees work, the place could become a employees work, the place could become a PE.PE.

► If the employees’ stay in India exceeds the If the employees’ stay in India exceeds the threshold stated in the DTA, it could become threshold stated in the DTA, it could become a service PE.a service PE.

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Permanent EstablishmentPermanent Establishment

►Motorola, Ericsson and Nokia – Delhi Motorola, Ericsson and Nokia – Delhi Tribunal Special Bench (2005).Tribunal Special Bench (2005).

The manner of operations in India by the The manner of operations in India by the employee, gave an impression that there is employee, gave an impression that there is a PE.a PE.

►UAE Exchange Centre (269 ITR 9) Advance UAE Exchange Centre (269 ITR 9) Advance Ruling – The liaison office’s activities were Ruling – The liaison office’s activities were substantial activities of the company. substantial activities of the company. Therefore it was held to be a PE.Therefore it was held to be a PE.

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Questions & Comments are welcome.Questions & Comments are welcome.

Thank You.Thank You.

Naresh AjwaniNaresh Ajwani