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Tax Implications of Expatriates working in India Forum for Expatriate Management January 31, 2012 Mahesh Kumar
Topics for discussion 2 1. Framework of analysis / planning 2. Determining tax residence 3. Taxation of expatriates income 4. Estate planning 5. Tax risks for foreign employer 6. Salary splits 7. Impact of Direct Taxes Code, 2010 8. Case studies © Nishith Desai Associates
3 Strategy Law Tax The Framework
Determining tax residence
Residence under domestic law 5© Nishith Desai Associates Not Ordinarily Resident Not Ordinarily Resident NO YES 182 days in the relevant FY 60 days in the relevant FY* + 365 days in the 4 preceding years Non-resident for 9 out of 10 preceding years In India for < 729 days in 7 preceding years YES Ordinarily Resident NO YES Non- Resident YES * 182 days for citizens/PIOs
Dual residence tie-breaker 6© Nishith Desai Associates Permanent home Centre of vital interests Habitual abode Nationality Mutual agreement procedure
Taxation of expatriates income
Scope of taxation 8© Nishith Desai Associates
Accrual of income (Domestic law) 9 Salaries earned in India Services rendered in India Income during rest / leave period succeeded by services rendered and forming part of services contract Employers location not relevant Fees for technical, managerial or consultancy services Services are utilized in a business or profession in India Non-resident need not have a place of business / business connection in India Non-resident need not render services in India © Nishith Desai Associates
Accrual of income (Treaty law) 10 Dependent personal services India does not have a right to tax income if: o Employee is in India for a period lesser than 183 days o Remuneration is paid by or on behalf of an employer who is a resident of the home country o Remuneration is not borne by a PE or fixed base which the employer has in India Independent personal services Professional services include: independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants India may tax income only if: o Non-resident has a fixed based in India o Non-resident stays in India for a period exceeding day threshold (Eg: 90/183 days) © Nishith Desai Associates
Specific exemptions 11 Salary received by foreign employee if: Foreign enterprise not is not engaged in any trade or business in India Stay in India does not exceed 90 days Employer does not claim deduction Salary for services rendered in connection with employment on a foreign ship where total stay in India is lesser than 90 days Other select exemptions. Eg: leave encashment gratuity house rent allowance voluntary retirement compensation per diem allowances © Nishith Desai Associates
Tax slabs (FY 2011 - 2012) Dividend income exempt in the hands of shareholder. Company subject to DDT Capital gains Long-term: 20% (NRI: 10%) Short term: 30% Sale of shares on floor of stock exchange: Exempt Tax rates 12© Nishith Desai Associates
Double taxation relief 13 Foreign tax credit under home countrys domestic tax law Double taxation relief under applicable tax treaty Tax equalization arrangements © Nishith Desai Associates
Withholding Tax 14 Tax withholding by person making payment of salary income on the basis of employees estimated income for the FY Is a non-resident employer required to withhold tax ? Impact of Supreme Courts decision in the Vodafone case (dated Jan 20, 2012) ? © Nishith Desai Associates
Estate Planning 16 Developing tax efficient structures taking into account: Residency and tax credit issues Deemed disposal taxes Estate duty Gift taxes Wealth tax Controlled foreign corporation regulations Tax filings and other compliances Regulatory considerations © Nishith Desai Associates
Tax exposure for foreign employer
Scope of Taxation 18 Domestic law Foreign enterprise liable to tax on income arising from a business connection in India Treaty law Foreign enterprise liable to tax in India on income arising through a permanent establishment situated in India © Nishith Desai Associates
Permanent Establishment 19 Fixed place of business through which the business of the foreign enterprise is carried on Includes place of management Presence of employees in India may give rise to a service PE For example, under the US tax treaty, service PE is constituted if services are provided through employees or other personnel if: activities in India continue for a period exceeding 90 days; or services are performed for a related enterprise Attribution of profits to PE No further attribution if there is arms length compensation (Morgan Stanley case, 292 ITR 416) © Nishith Desai Associates
Cross-border salary splits
Salary split arrangements 21 Setting up of subsidiary in India Secondment / dual employment Employee leasing Consultancy services Objectives of salary splits: Mitigate PE risks Manage tax residence Taking advantage of different tax regimes Non-tax / regulatory compliances © Nishith Desai Associates
Direct Taxes Code, 2010
Revised Tax slabs RNOR concept done away with. Exemption for offshore income retained NRIs subject to a 60 day residence threshold (not 182 days) Removal of exemptions: house rent allowance, tax on non-monetary perquisites, per diem allowances Short stay exemption retained Wide service PE exposure under domestic law (with potential treaty override) Salient proposals 23© Nishith Desai Associates
Case Study 1 25© Nishith Desai Associates Expat was born in Canada and is a Canadian citizen He spend around 120 days in Canada where his family home is situated Around 245 days are spent in India from where he conducted his business While in India, he stayed with his Indian girlfriend. He also kept his car at her house and this address figures in his Indian drivers license He is considered to be a resident under the tax laws of both Canada and India Based on the tie-breaker test, what is the expats country of residence? India Canada
Case Study 2 26© Nishith Desai Associates Dutch company provides technical services to its Indian clients through various project offices It sends its employees to India who work from these project offices Employees receive remuneration from the head office (outside India) Dutch company taxed on a presumptive basis in India Is the salary income received by the employees taxable in India ? Dutch Company A B C Indian Project Offices
Case Study 3 27© Nishith Desai Associates US Affiliate US Parent Company Indian Subsidiary Indian subsidiary provides back-office services to its US parent US affiliate seconds 3 employees to the Indian subsidiary: 1 managing director + 2 supervisors US affiliate pays all salaries, bonus, etc and is reimbursed by the Indian subsidiary Employees act exclusively under the direction, control and supervision of the Indian subsidiary, but remain on the rolls of the US affiliate Are salary payments by US affiliate taxable in India ? Are reimbursements made to the US affiliate taxable in India ?
Case Study 4 28© Nishith Desai Associates US Company Indian Company US company supplies personnel to Indian company on a hire-out basis Personnel work under the supervision of the Indian company, but are still employed by the US company Fees paid by Indian company to US company captures personnels salary entitlement Does the US company have a PE in India ? Are the fees payable by the Indian company to the US company taxable in India ?
Case Study 5 29© Nishith Desai Associates Dutch Company Indian Company Indian JV Company Dutch JV partner seconds 4 expatriates to the Indian JV company Expats were fully engaged in providing services to the JV company JV company directly paid salaries to the expats and withheld appropriate tax Expats remained on the rolls of the Dutch company and received additional salary outside India Is the home salary taxable in India ? If so, should tax be withheld on such salary and by who ?
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