Taxation of Expatriates and International Workers: an insight
1. EXPATRIATE MEANING-
First of all we need to know
who is an expatriate. Though there is no specific meaning of an expatriate as
per Income Tax Act, 1961. However, in general terms, an expatriate is a Person
living in a country other than his or her country of Citizenship, often
temporarily or for work reasons. MNC’s increased integration into growing
economies has led to a substantial rise in the cross-border movements of
people. The people involved in such cross-border movement are known as
expatriate i.e. a person temporarily residing and employed in another country
while still remaining citizen of his home country and such cross-border
movement is known as secondment. The term expatriate is derived from the Latin
word, ex-patria, which means out of the country. Expatriate is
defined as, a person who lives outside their native country or a person
residing in a foreign country.
2. WHAT IS SECONDMENT ?
Secondment means the temporary assignment
of an employee from an entity (lending employer) in a foreign country to an
entity (receiving employer) carrying on business in host country, supported by
the existence of an employer-employee relationship between the individual and
the receiving employer. Such movement of people can be in different capacities
i.e. employee, professional etc.
3. RESIDENTIAL STATUS-
Residential status of a person is determined on the basis
of physical presence in India and as per Section 6 of Income Tax Act, 1961.
For the taxation of expatriates, residential status has to
be determined as per Income Tax Act, 1961 ANDDouble Taxation Avoidance
Agreement (DTAA, defined below).
India has a residence-based
taxation system. There are three categories of tax residency under Indian law:
·
a- Resident and ordinarily resident (ROR)
·
b-Resident but not ordinarily resident (RNOR)
·
c-Non-resident (NR)
Expats who qualify as ROR are
taxed on their worldwide income.
Expats who are RNOR or NR are
only taxed on income that comes from an Indian source.
A
person would qualify as a resident of India if he satisfies one of the
following 2 conditions-
·
Stay in India for 182 days or more in the Previous
year;
· Stay in India for the immediately preceding 4 years is 365
days or more and 60 days or more in the previous year.
If you do not meet these
standards, you will be considered a non-resident for tax purposes. If you
qualify as a resident, you will be either an ROR or an RNOR.
You will be considered an
RNOR and taxed as a non-resident if either of the following is true:
·
i) You have been a non-resident for at least nine of ten
previous tax years.
·
ii) You have been in India for less than 730 days in the
previous seven years.
Otherwise, you will be
considered an ROR and taxed on your worldwide income.
4. Double Taxation Avoidance Agreement
Double Taxation Avoidance Agreement (DTAA) is a tax treaty
that is signed between two or more countries for helping taxpayers in avoiding
double tax payments on the same income as set out under Section 90 of Income
Tax Act, 1961. As it is very clear and obvious from the name of this treaty
(Double Taxation Avoidance Agreement) that the purpose of this treaty is to
avoid double taxation on the same income.
Double Taxation Avoidance Agreement becomes applicable when
an individual is a resident of one nation but earns income in another nation.
It is very important to determine the
Residential Status of the expatriate under the Double Tax Avoidance Agreement
(Treaty) with that country. At times, an expat employee may be a resident of
both the countries under the taxation laws of respective countries. Under such
circumstances, ‘Tie Breaker Rule’ as mentioned in the Treaty has to be
applied to determine his residential status. There are various factors which
are considered for this Tie Breaker rule such as- Permanent Home, Centre of
vital interest, Habitual abode, Nationality, and competent authorities.
The most common methodology for avoidance of double
taxation used in Indian tax treaties are:
·
Exemption method — under this method, the country of Residence
does not tax the income, which according to DTAA may be taxed in the country of
Source of income. Alternatively, the Country of source limits its right to tax
income from sources in its country.
·
Credit method — under this method, country of Residence includes
income from country of Source in the taxable total income of the tax payer and
calculates its tax on the basis of such taxpayer’s total income (including
income from country of Source). It then allows a deduction from its own taxes
for taxes paid in Country of Source with respect to income earned there.
5. Social Security Agreement-
Before coming to the taxability of an expatriate, we should
know about the Social Security Agreement. The idea behind signing a Social
Security Agreement between two countries is with the prime objective of
protecting the interests of cross-border workers. This is done with the
objective of ensuring that workers from both countries are treated equally in
terms of Social Security.
Certain home countries cast an obligation on the employer
to contribute to the social security schemes in respect of the employees hired
in non-home countries. The inclusion of social security contribution in taxable
salary quantum of expatriate has been debated time and again in the past but
the courts have held that such inclusion cannot be done as it amounts to
contingent payments to which the employee has no right till the contingency
occurs.
6. Taxability of Expatriates in India -
As per the provisions of Section 14 of
Income Tax Act, 1956, there are 5 heads of Income under which the income of a
person can be classified. These are:
(A) Salary
(B) Income from House Property
(C) Income from Business and
Profession.
(D) Capital Gains
(E) Income from Other sources
Analysis of income under each head for
expatriates has been done with respect to the domestic tax laws and provisions
given in the Double Tax Avoidance Agreements of India with other countries.
(A)
SALARY
Salary income of expatriates would be
taxable in India under the provisions of the Income Tax Act, in case the same
is either received or deemed to be received in India or in case it accrues or
is deemed to be accrued in India.
The extent of Indian Tax Liability
depends on the residential status of an individual based on his physical stay
in India and the extent to which their income is taxable in India. The Taxability
of salary paid to an expatriate employee for services rendered in India depends
upon the residential status of the expatriate, which is to be determined under
the domestic law of the host country as well as the home country. In case of a
conflict i.e. where the expatriate becomes resident of host country as well as
home country, recourse is made available to Tie Breaker rules given in the DTAA
entered between host country and home country to decide the Final residential
status of an expatriate. However, where there exists no DTAA, the benefit of
tie breaker rules would not be available.
Similarly, in certain cases, expatriates
are required to pay a notional tax equivalent to a home country tax which would
have been paid had he/she remained in the home country with that level of
salary, commonly known as hypothetical tax. Deduction of hypothetical tax of an
expatriate is a debated issue and different views have been taken by the courts
in the past depending upon the facts and circumstances of each case. Further,
to ensure that the expatriate is not at loss in secondment, the employer
undertakes to bear the tax to be paid in the host country so that the net take
away home salary in the hands of the expatriate does not suffer.
Salary earned by an expatriate for
rendering services in India is taxable in India except where the expatriate
claims exemption on account of short term visit, either under the domestic law
or under the DTAA, upon fulfilment of specific conditions mentioned therein.
(B) INCOME FROM HOUSE PROPERTY
(Sections 22 to 25) deal with Income from House Property
under the domestic laws. The scope of income covered depending on the
residential status of an assessee is as under:
ROR RNOR NR
Resident and Resident but not Non
Ordinarily resident Ordinarily resident Resident
_____________________________________________________________________________
Situation
1..House Property situated in India, Yes Yes Yes
Income
received in India
2..House Property situated in India, Yes Yes Yes
Income
received outside India
3..House Property in foreign country, Yes Yes Yes
Income
received in India
4..House Property in foreign country, Yes No No
Income
received in foreign country
Thus, if the house property is situated in a foreign country
–
1) A Resident assessee is taxable under section 22 in respect
of the annual value of a property situated in a foreign country.
2) A RNOR or NR is, however, chargeable under section 22 in
respect of income of a house property situated abroad; if income is received in
India during the previous year.
Non-residents should be careful about taxation of deemed let
out property. If they own more than one residential house, and if either is not
given on rent, one of them will still be taxable as deemed let out property.
This condition applies to immovable properties owned globally. Say, if a
self-occupied house was owned abroad, and the other house was in
India,theassessee would have to pay tax on deemed rent in India if it is not
let out.
(C) INCOME FROM BUSINESS
OR PROFESSION
According to the domestic law, the taxation of business
profits of non-residents in India is kicked off with a business connection in
India. The inference of business connection in India as per the Income Tax Act
is quite wide and would lead to deeming the Income ‘to accrue or arise’ for the
foreign enterprise in India.
1) Global Income is taxable for Residents.
2) For RBOR and NR, taxability of Income from business or
profession depends on whether such business or profession is carried out via a
Permanent Establishment” (PE) situated in India.
(D) CAPITAL GAINS
Capital gains are taxable as per domestic law as follows–
ROR RNOR NR
Resident and Resident but not Non
Ordinarily resident Ordinarily resident Resident
_____________________________________________________________________________
Situation
1..Capital Asset situated in India, Yes Yes Yes
Income
received in India
2..Capital Asset situated in India, Yes Yes Yes
Income received
outside India
3..Capital Asset in foreign
country, Yes Yes Yes
Income
received in India
4..Capital Asset in foreign
country, Yes No No
Income received in foreign country
(E) INCOME FROM OTHER SOURCES
1)
Income from other sources includes interests, dividends (excluding exempt
dividend u/s 10), fees for technical services, etc not covered under the other
heads of income.
2)
As per the domestic tax law, they are taxable as provided under Section 56 of
the Act.
3)
Income of Non-residents will be taxable if it arises in India.
Conclusion:
The taxation framework for expatriates
in India, endeavors to achieve equity, transparency, and compliance. By
aligning with the principles of residence-based taxation, India aims to tax
income earned within its boundaries while providing avenues for double taxation
relief through DTAA.
The availability of exemptions,
deductions, and compliance requirements further facilitates expatriates in
meeting their tax obligations effectively. A comprehensive understanding of the
taxation system enables expatriates to navigate the Indian tax landscape
smoothly, fostering economic growth and harmonious integration.
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