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Expatriate Taxation

Expatriate Taxation

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Published by: Monica Singh on Apr 27, 2011
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Expatriate Taxation

Ashish Gupta

6th October 2009


General Overview of Expatriate tax regime in India:
Residency Rules Tax Equalization Specific Tax Benefits under domestic tax law and treaty

Case Studies covering practical tax aspects on:
Residency Treaty Outbound Assignments


Residential 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 3 .

the threshold limit is 60 days. 4 .Residential status «. In the year of arrival to India for resuming employment.Cont¶d Basic conditions: ‡ ‡ 182 days or more in a financial year 60 days* or more in a financial year plus 365 days or more in four financial years preceding the relevant financial year Any one of the two conditions satisfied None of the conditions satisfied ROR / NOR NR * 60 days gets substituted for 182 days only in the year of departure for an Indian citizen proceeding abroad for the purposes of employment..

.Cont¶d Additional conditions: ‡ ³Resident´ in India in atleast two out of ten financial years preceding the relevant financial year. an expatriate coming to India for the first time will qualify as ROR in the 3rd or 4th year. 5 . and ‡ Present in India for 730 days or more during the 7 financial year preceding the relevant financial year Both the conditions satisfied One or none of the conditions satisfied ROR NOR Generally.Residential status «.

Position from 1 April 2003 Date of first arrival into India Date of departure from India Tax Year 20082008-09 Days Cumm. and < 730 days in the 7 preceding years .do Resident in 2 out of 10 preceding years.Illustration . status NOR 5 April 2008 31 December 2011 Remarks Not a resident in 2 out of 10 preceding years. but < 730 days in the 7 preceding years Resident in 2 out of 10 preceding years. and > 729 days in the 7 previous years 361 20092009-10 20102010-11 365 365 726 1091 NOR NOR 2011-12 275 1366 ROR NR/ NOR ± Taxed in India only on Indian sourced income ROR ± Taxed in India on worldwide income 6 . stay 361 Res.

taxable Reimbursement exempt Severance payments made outside India Arguably not taxable as no connection with past services 7 .Taxation of Pre/Post Assignment Income Residents: Generally taxable irrespective of charge back Relocation reimbursement exempt Lump sum relocation allowance taxable NonNon-residents: Joining bonus paid outside India but related to Indian assignment Taxable irrespective of charge-back chargeShortShort-stay impacted if charge back if otherwise eligible Lumpsum relocation allowance .

Tax regime w.f 1 April 2009 Benefit 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 by employee Capital gains tax on sale Value considered for Perquisite becomes cost base for CGT Shares allotted by foreign company to employees of Indian subsidiary Employee to pay perquisite tax 8 .ESOPs .e.

Overview of Tax Equalization/ Protection Home Country Income Tax Host and Home Actual Income Taxes Tax Equalization Cost Hypothetical Home Country Income Tax 9 .

allowance/benefit received in India Individual tax equalised .Home country hypothetical tax is deducted Host country tax rate assumed at 30% and Country A at 40% H o T axa oul t e in i ual le a la r y in o m e e ta x e in n ia 1.000 400 600 400 100 471 1 1 Base salary received in Country A Less: Hypothetical tax 40% Assignment allowance received in India Accomodation provided in India Tax paid by employer e t ta x a H ost H ost T ax e le in ome o u n try ta x o u n t r y t a x lia u a lis a t io n r e ilit y on 30 % ilia t io n 400 471 71 400 10 4 1 Hypothtical tax deducted Host country tax payable Cost to employer Cost to employee .TEQ Example ± Taxation in Host Country T E Q C a l u la t io n s a ts Individual assigned from Country A (home country) to India Salary received in Country A.

Specific Tax Benefits under domestic tax law (some examples) Adequate planning of assignments Ordinary residence can be deferred Transfer payroll for outbound assignees to the home location Workdays outside India for NOR/NRs Dual employment contracts Overseas contributions to social security /medical insurance schemes (to the extent not immediately vested) ShortShort-stay exemption as per domestic tax law Leveraging Car. telephone etc Housing benefit /allowance Tax on non-monetary benefits non(but not claimed as corporate deduction) Per diem exemption wherever possible 11 . club.

g. India Singapore treaty. capital gains from sale of certain assets exempt in India 12 .Specific Benefits .Treaties Exemption of employment income Work days outside India Even if salary RECEIVED in India Supported by decision of Authority of Advance Rulings (AAR) Short stay in India Presence in India < 183 days Expense not cross-charged/borne by Indian entity/PE crossRemuneration to be paid by foreign employer Foreign Tax Credit (FTC) on doubly taxed income Exemption of personal income in some treaties e. if treaty resident of Singapore even if asset is situated in India.

Key Challenges and Income Tax Traps Deputation related issues Misunderstanding residency rules for outbound assignees Mismatch of ESOP taxation No 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 subject to a subsequent refund FBT requirement cumbersome for foreign companies who have employees based in India 13 .

Case StudiesStudies Case 14 .

Case Study 1 Treaty Breaker Rule Background and Issues Mr. Receives salary in US Wife stays in US House in US India Indian Resident ± Tax and FEMA Renders services in India Friend stays in India Daughter stays in India House in India Issue: Which country (India or USA) is he an ultimate tax resident of? US citizens continue to be residents of US Indian tax and FEMA resident because of physical presence in India 15 . P US US Citizen Employed with US Co.

For US tax return purpose ± a US citizen always a US resident.Case Study 1 Tie Breaker Rule Approach Examination of Article of 4 (2) of the Indo-USA treaty Permanent Home Test Available in both countries Centre of Vital (personal and economic) Interest Daughter and Friend in India. Wife in US Rendering services in India US employer and paid in US Habitual Abode Staying in US in the past few years Would stay in India during the period of Indian assignment Nationality Test US Citizen Mutual Agreement Procedure Likely to be a US tax resident. 16 .

Y CANADA Married and took Canadian Citizenship Husband progressive presence in Canada House in Canada Planning to retire in Canada 17 .Canadian Court Decision Treaty Breaker Rule Background Mrs.Case Study 2 .

Y KOREA Born and brought up in Korea After marriage returned to Korea with family More time spent in Korea Engaged in Social.Canadian Court Decision Treaty Breaker Rule Background and Issue Mrs.Case Study 2 . Cultural & Religious activities in Korea Employment in Korea Children staying and studying in Korea «dependent on her income in Korea House in Korea While in Korea had three short visits to Canada in 18 years Issue:.Which country (Korea or Canada) is she an ultimate tax resident of? 18 .

Canadian Court Decision Treaty Breaker Rule Approach Examination of Article of 4 (2) of the Canada-Korea treaty Permanent Home Test Available in both countries Centre of Vital Interest Husband staying in Canada Daughter and Son staying in Korea Cultural. Mutual Agreement Procedure Held not a Canadian Tax resident. 19 . Citizen. social and religious activities in Korea Employed in Korea Habitual Abode Visited Canada in the past 18 years for three times Staying in Korea for the past 18 years in Korea Nationality Test Canadian Citizen.Case Study 2 .

Case Study 3 Outbound Assignees Background and Issues Employee 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. Assigned to Branch of I Co.? 20 .

Case Study 3 Outbound Assignees Approach 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 21 .

Case Study 3 Outbound Assignees Approach ± Cont¶d. Employment / Transfer Tour Resident Non-resident Resident Section 10(14)(i) not applicable Not taxable Section 10(14)(i) applicable 22 .

Against expenditure on tour and travel Exempt under section 10(14)(i) read with Rule 2BB(1) Surplus taxable in employee¶s hands 23 .Case Study 3 Outbound Assignees Approach ± Cont¶d.

Presenter¶s contact details Ashish Gupta agupta1@kpmg.com 24 .

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