Expatriate Taxation
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Ashish Gupta 6 th October 2009 Expatriate Taxation Expatriate Taxation
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Transcript of Expatriate Taxation
Ashish Gupta
6th October 2009
Ashish Gupta
6th October 2009
Expatriate TaxationExpatriate Taxation
2
Contents Contents
General Overview of Expatriate tax regime in India:
Residency RulesResidency Rules
Tax EqualizationTax Equalization
Specific Tax Benefits under domestic tax law and Specific Tax Benefits under domestic tax law and treatytreaty
Case Studies covering practical tax aspects on:
ResidencyResidency
TreatyTreaty
Outbound AssignmentsOutbound Assignments
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Residential statusResidential status
Residential status
Resident
Resident and Ordinarily Resident
(ROR)
Resident but Not Ordinarily Resident
(NOR)
Non Resident(NR)
Residency is determined by physical number of days stay in India
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Residential status …..Cont’dResidential status …..Cont’d
None of the conditions satisfied
Any one of the two
conditions satisfied
ROR / NOR NR
Basic conditions:Basic conditions:
• 182 days or more in a financial year182 days or more in a financial year• 60 days* or more in a financial year plus 365 days or more in four 60 days* or more in a financial year plus 365 days or more in four
financial years preceding the relevant financial yearfinancial years preceding the relevant financial year
* 60 days gets substituted for 182 days only in the year of departure for an Indian citizen proceeding abroad for the purposes of employment. In the year of arrival to India for resuming employment, the threshold limit is 60 days.
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Residential status …..Cont’dResidential status …..Cont’d
Additional conditions:Additional conditions:• ““Resident” in India in atleast two out of ten financial years preceding Resident” in India in atleast two out of ten financial years preceding
the relevant financial year; andthe relevant financial year; and• Present in India for 730 days or more during the 7 financial year Present in India for 730 days or more during the 7 financial year
preceding the relevant financial yearpreceding the relevant financial year
ROR NOR
Both the conditions satisfied
One or none of the conditions
satisfied
Generally, an expatriate coming to India for the first time will qualify as ROR in the 3rd or 4th year.
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Illustration - Position from 1 April 2003Illustration - Position from 1 April 2003
Date of first arrival into India 5 April 2008
Date of departure from India 31 December 2011
Tax Year Days Cumm. stay
Res. status
Remarks
2008-092008-09 361361 361361 NORNOR Not a resident in 2 out of 10 preceding Not a resident in 2 out of 10 preceding years; and years; and
< 730 days in the 7 preceding years< 730 days in the 7 preceding years
2009-102009-10 365365 726726 NORNOR - do - - do -
2010-112010-11 365365 10911091 NORNOR Resident in 2 out of 10 preceding Resident in 2 out of 10 preceding years; butyears; but
< 730 days in the 7 preceding years< 730 days in the 7 preceding years
2011-12 275 1366 ROR Resident in 2 out of 10 preceding years; and
> 729 days in the 7 previous years
NR/ NOR – Taxed in India only on Indian sourced incomeROR – Taxed in India on worldwide income
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Taxation of Pre/Post Assignment IncomeTaxation of Pre/Post Assignment Income
Residents: Residents:
Generally taxable irrespective of charge backGenerally taxable irrespective of charge back
Relocation reimbursement exemptRelocation reimbursement exempt
Lump sum relocation allowance taxableLump sum relocation allowance taxable
Non-residents: Non-residents:
Joining bonus paid outside India but related to Indian assignment Joining bonus paid outside India but related to Indian assignment Taxable irrespective of charge-back Taxable irrespective of charge-back
Short-stay impacted if charge back if otherwise eligibleShort-stay impacted if charge back if otherwise eligible
Lumpsum relocation allowance - taxableLumpsum relocation allowance - taxable
Reimbursement exemptReimbursement exempt
Severance payments made outside India Severance payments made outside India Arguably not taxable as no connection with past servicesArguably not taxable as no connection with past services
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ESOPs - Tax regime w.e.f 1 April 2009ESOPs - Tax regime w.e.f 1 April 2009
Benefit taxable in the hands of employee on date of allotment / transfer of securitiesBenefit taxable in the hands of employee on date of allotment / transfer of securities
Taxable Benefit = Fair Market Value (FMV) on date of exercise less exercise price paid Taxable Benefit = Fair Market Value (FMV) on date of exercise less exercise price paid by employeeby employee
Capital gains tax on saleCapital gains tax on saleValue considered for Perquisite becomes cost base for CGTValue considered for Perquisite becomes cost base for CGT
Shares allotted by foreign company to employees of Indian subsidiary Shares allotted by foreign company to employees of Indian subsidiary Employee to pay perquisite taxEmployee to pay perquisite tax
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Overview of Tax Equalization/ ProtectionOverview of Tax Equalization/ Protection
Home Country
Income Tax
TaxEqualization
Cost
HypotheticalHome
CountryIncome Tax
Host and Home Actual Income Taxes
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TEQ Example – Taxation in Host CountryTEQ Example – Taxation in Host Country
TEQ Calculations
Facts:Individual assigned from Country A (home country) to India Salary received in Country A, allowance/benefit received in IndiaIndividual tax equalised - Home country hypothetical tax is deducted Host country tax rate assumed at 30% and Country A at 40%
How would the indivdual be taxed in IndiaTaxable Salary income
Base salary received in Country A 1,000 Less: Hypothetical tax 40% 400
600 Assignment allowance received in India 400 Accomodation provided in India 100 Tax paid by employer 471
Net taxable income 1,571
Host country tax
Host country tax liability 30% 471
Tax equalisation reconciliation
Hypothtical tax deducted 400 Host country tax payable 471
Cost to employer 71 Cost to employee 400
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Specific Tax Benefits under domestic tax law (some examples)Specific Tax Benefits under domestic tax law (some examples)
Adequate planning of assignmentsAdequate planning of assignments
Ordinary residence can be deferredOrdinary residence can be deferred
Transfer payroll for outbound Transfer payroll for outbound assignees to the home locationassignees to the home location
Workdays outside India for NOR/NRsWorkdays outside India for NOR/NRs
Dual employment contractsDual employment contracts
Overseas contributions to social Overseas contributions to social security /medical insurance schemes security /medical insurance schemes
(to the extent not immediately vested)(to the extent not immediately vested)
Tax on non-monetary benefits Tax on non-monetary benefits
(but not claimed as corporate deduction)(but not claimed as corporate deduction)
Per diem exemption wherever Per diem exemption wherever possible possible
Short-stay exemption as per domestic Short-stay exemption as per domestic tax lawtax law
Leveraging Leveraging
Car, club, telephone etcCar, club, telephone etc
Housing benefit /allowanceHousing benefit /allowance
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Specific Benefits - TreatiesSpecific Benefits - Treaties
Exemption of employment income Exemption of employment income
Work days outside IndiaWork days outside IndiaEven if salary RECEIVED in IndiaEven if salary RECEIVED in India
Supported by decision of Authority of Advance Rulings (AAR)Supported by decision of Authority of Advance Rulings (AAR)
Short stay in IndiaShort stay in India
Presence in India < 183 daysPresence in India < 183 days
Expense not cross-charged/borne by Indian entity/PEExpense not cross-charged/borne by Indian entity/PE
Remuneration to be paid by foreign employerRemuneration to be paid by foreign employer
Foreign Tax Credit (FTC) on doubly taxed incomeForeign Tax Credit (FTC) on doubly taxed income
Exemption of personal income in some treaties Exemption of personal income in some treaties
e.g. India Singapore treaty, if treaty resident of Singapore even if asset is situated in e.g. India Singapore treaty, if treaty resident of Singapore even if asset is situated in India, capital gains from sale of certain assets exempt in IndiaIndia, capital gains from sale of certain assets exempt in India
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Key Challenges and Income Tax TrapsKey Challenges and Income Tax Traps
Deputation related issuesDeputation related issues
Misunderstanding residency rules for outbound assigneesMisunderstanding residency rules for outbound assignees
Mismatch of ESOP taxationMismatch of ESOP taxation
No clarity on claiming treaty benefits at the time of withholdingNo clarity on claiming treaty benefits at the time of withholding
Credit for foreign taxes not effectively paid during the tax year (accrued basis)Credit for foreign taxes not effectively paid during the tax year (accrued basis)
Credit for foreign taxes subject to a subsequent refundCredit for foreign taxes subject to a subsequent refund
FBT requirement cumbersome for foreign companies who have employees based in FBT requirement cumbersome for foreign companies who have employees based in India India
14
Case StudiesCase StudiesCase Studies
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Case Study 1Treaty Breaker RuleBackground and Issues
Case Study 1Treaty Breaker RuleBackground and Issues
US Citizen
Employed with US Co.
Receives salary in US
House in India
Friend stays in India
Renders services in India
Indian Resident – Tax and FEMA
Mr. P
US India
Daughter stays in IndiaWife stays in US
House in US
Issue: Which country (India or USA) is he an ultimate tax resident of?
US citizens continue to be residents of USUS citizens continue to be residents of USIndian tax and FEMA resident because of physical presence in IndiaIndian tax and FEMA resident because of physical presence in India
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Case Study 1Tie Breaker Rule Approach
Case Study 1Tie Breaker Rule Approach
Examination of Article of 4 (2) of the Indo-USA treaty
Permanent Home TestPermanent Home Test
Available in both countriesAvailable in both countries
Centre of Vital (personal and economic) InterestCentre of Vital (personal and economic) InterestDaughter and Friend in India. Wife in US Daughter and Friend in India. Wife in US
Rendering services in IndiaRendering services in India
US employer and paid in USUS employer and paid in US
Habitual AbodeHabitual AbodeStaying in US in the past few yearsStaying in US in the past few years
Would stay in India during the period of Indian assignmentWould stay in India during the period of Indian assignment
Nationality TestNationality TestUS CitizenUS Citizen
Mutual Agreement ProcedureMutual Agreement Procedure
Likely to be a US tax resident.
For US tax return purpose – a US citizen always a US resident.
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Case Study 2 - Canadian Court Decision Treaty Breaker Rule Background
Case Study 2 - Canadian Court Decision Treaty Breaker Rule Background
Mrs. Y
Planning to retire in Canada
Married and took Canadian Citizenship
Husband progressive presence in Canada
CANADA
House in Canada
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Case Study 2 - Canadian Court Decision Treaty Breaker Rule Background and Issue
Case Study 2 - Canadian Court Decision Treaty Breaker Rule Background and Issue
Mrs. Y
KOREA
Engaged in Social, Cultural & Religious activities in Korea
House in Korea
After marriage returned to Korea with family
Employment in Korea
Born and brought up in Korea
More time spent in Korea
While in Korea had three short visits
to Canada in 18 years
Children staying and studying in Korea …dependent on her income in Korea
Issue:- Which country (Korea or Canada) is she an ultimate tax resident of?
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Case Study 2 - Canadian Court DecisionTreaty Breaker Rule Approach
Case Study 2 - Canadian Court DecisionTreaty Breaker Rule Approach
Examination of Article of 4 (2) of the Canada-Korea treaty
Permanent Home TestPermanent Home Test
Available in both countriesAvailable in both countries
Centre of Vital InterestCentre of Vital Interest
Husband staying in CanadaHusband staying in Canada
Daughter and Son staying in Korea Daughter and Son staying in Korea
Cultural, social and religious activities in KoreaCultural, social and religious activities in Korea
Employed in KoreaEmployed in Korea
Habitual AbodeHabitual Abode
Visited Canada in the past 18 years for three times Visited Canada in the past 18 years for three times
Staying in Korea for the past 18 years in KoreaStaying in Korea for the past 18 years in Korea
Nationality TestNationality Test
Canadian CitizenCanadian Citizen..
Mutual Agreement ProcedureMutual Agreement Procedure
Held not a Canadian Tax resident.
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Case Study 3Outbound AssigneesBackground and Issues
Case Study 3Outbound AssigneesBackground and Issues
Employee of I Co.
Assigned to Branch of I Co. in USA
Salary and per diem paid by I Co.
Departure in June
Employment/Transfer Tour
Issues: What is the tax residential status in India of the outbound assignees? What is the taxability of the per diem allowance paid to assignee by I Co.?
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Case Study 3Outbound AssigneesApproach
Case Study 3Outbound AssigneesApproach
Departure in June
Employment/Transfer Tour
182 days substituted for 60 days
No substitution-even presence of 60 days will trigger residency
Non-Resident Resident
FTC in India
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Case Study 3 Outbound AssigneesApproach – Cont’d.
Case Study 3 Outbound AssigneesApproach – Cont’d.
Employment / Transfer Tour
Resident Non-resident Resident
Section 10(14)(i) not applicable Not taxable
Section 10(14)(i) applicable
23
AgainstAgainst expenditure on tour and travel expenditure on tour and travel
Exempt under section 10(14)(i) read with Rule 2BB(1)Exempt under section 10(14)(i) read with Rule 2BB(1)
Surplus taxable in employee’s handsSurplus taxable in employee’s hands
Case Study 3 Outbound AssigneesApproach – Cont’d.
Case Study 3 Outbound AssigneesApproach – Cont’d.
