Tax implications of an overseas assignment in the year of departure
November, 18th 2008
There has been an unprecedented increase in the cross border movement of employees over the past few years in the increasingly globalised economy. Indian companies in their world conquering pursuit have expanded their operations around the world and this has provided thousands of Indian professionals the opportunity of working on overseas assignments. With hefty pay packages and the excitement of working in a foreign country, overseas assignments have never looked more glamorous for the hard working Indian professionals.
However, if an assignment is not planned keeping the tax implications in mind, there could be additional tax burden and painful compliances, which might, in hindsight, make the assignment not so lucrative. Tejas Mehta and Priyanka Rathi from Ernst & Young explain certain tax aspects that one should bear in mind at the time of taking up an overseas assignment.
The taxation of individuals under the Indian Income-tax Act 1961 ('Act') depends on the 'Residential status' of the individuals and the place of accrual/ receipt of the income.
Accordingly, the determination of Residential status is of utmost importance. The residential status of an individual in India depends on the number of days stay in India during the specified period, as explained in the subsequent paragraph.
An individual is considered to be a Resident of India if he/she is:
a) physically present in India for 182 days or more in that tax year; OR
b) physically present in India for 60 days in that tax year and 365 days or more in the preceding four tax years. However, if an Indian citizen leaves India during the previous year for the purpose of employment outside India or as a member of the crew of Indian ship, the period of '60 days' is extended to '182 days'.
The above two conditions are termed as the basic conditions of residency. If neither of these two basic conditions are satisfied, the individual is classified as a "Non Resident" in India.
One may also need to note the scope of the term "for the purpose of employment outside India". The term does not necessarily refer to a situation where a person takes up new job / employment outside in India with an employer outside India. Even a person who is deputed to overseas branch of Indian Company or who is seconded to overseas subsidiary can take the benefit of extended days to 182 in condition (b) above.
An individual qualifying as a Non Resident is taxable in India only on the income received / deemed to be received in India or income accruing / arising or deemed to accrue / arise or income sourced in India. Accordingly, in case of a Non Resident the payments received / benefits provided outside India would not be subject to tax in India unless the same is directly received/ sourced in India. If an individual qualifies as a Resident, he would be liable to tax in India on his worldwide income.
Let us take Bhavika's case. She is on her way for her first overseas assignment to the UK for a period of 2 years. She has left India on 1 September 2008. During her overseas assignment, Bhavika would receive salary and allowances in the UK. Bhavika has always been in India, prior to this assignment and has been regularly filing her Indian tax returns. Given the facts of Bhavika's case, she has been physically present in India for less than 182 days during the tax year 2008-2009 (ie 1 April 08 to 31 March 09).
As a result, she should qualify as a Non Resident in India, with the result, income received / deemed to be received in India and income sourced in India would be taxable in India.
In this case, let us assume that Bhavika has received salary and allowances from her Indian employer till August 2008 amounting to INR 300,000 and has received INR 10,00,000 from her overseas employer for the period September 2008 to March 2009. She would be liable to be taxed on her income received/ sourced in India ie INR 300,000.
Now let us take Isha's case. She has been chosen by the company for secondment to the UK for a period of 3 years. As per the terms of the employment contract, Isha is required to start her secondment in the UK from 1 November 2008. During her overseas secondment, Isha would receive salary and other allowances in the UK. Isha has always been in India, prior to this assignment and has been regularly filing her Indian tax returns.
Based on her facts, she has been in India for more than 182 days as a result she should qualify as a Resident in India during the tax year 2008-2009 and would be subject to tax in India on her worldwide income. Accordingly, salary and other allowances received by Isha for the period November 2008 to March 2009 in respect of her employment in the UK would be taxable in India on 'residence basis' as well as in the UK on a 'source basis'.
Accordingly, in simple language this seems like a case of double taxation, where the same income is being doubly taxed in India on the basis of residence in India and in the UK on source basis. In such a case the Double Tax Avoidance Agreement ('DTAA' or 'Tax Treaty) entered between India and the UK comes to her rescue. An individual can take recourse of the DTAA for elimination of double taxation in case where the provisions of DTAA are more beneficial than domestic tax laws.
In order to avail the DTAA benefit, an individual should be a Resident of one of the countries to the DTAA.
Since , countries around the world follow different rules for determining the Residential status and it is rather normal that a situation may arise where an individual is a tax resident of both the countries. In order to tackle such situations and to determine the residential status for the purposes of the tax treaty, the 'tie breaker' test is brought to use which depends on permanent home, centre of vital interest i.e. to say personal and economic ties, habitual abode and nationality of the individual.
The tie breaker test is quite essential, since the country of residence relieves the burden of double taxation by giving either the credit for taxes paid in the source country or sparing the income that has suffered tax in the source country.
In our case, Isha has been staying in India and is a tax Resident of India under its domestic tax laws, and we assume that she would qualify as a Non-Resident of UK. As a result, she would be entitled to claim benefit of foreign tax credit under the DTAA from her Indian income-tax liability in respect of the UK taxes paid on UK sourced income. Let us now assume that Isha has received total salary and allowances of INR 10,00,000 in India for the period April 2008 to October 2008 and INR 500,000 for the period November 2008 to March 2009 in the UK.
In this case, this sum of INR 500,000 would be subject to income tax both in the UK and India. Isha would need to show her total taxable income in India as 15,00,000 (Indian salary + UK salary), on which she would be able to claim proportionate foreign tax credit of the UK taxes paid on doubly taxed income (ie income taxed in India and the UK) as per the rules under the DTAA.
In view of the above, it is important for an individual to firstly monitor his/her stay in India as well as demonstrate the factors that determine his/her treaty residence so that he/she is able to maximize his/her DTAA benefits.
In summation, it is important to note that residential status and the source/ accrual of income play a very important part in determining the amount of taxes that an individual has to bear in any tax year. In this context, the tax implications on taking up an assignment would vary depending upon the Residential status and the source/ accrual of income and would need to be examined on a case to case basis.
Another thing that an individual domiciled in India should keep in mind on taking up an overseas assignment is to file a declaration with the Indian Revenue authorities in the prescribed form prior to their departure from India.