In view of economic developments, many companies are deputing their employees across locations for international assignments. Global mobility of the employees ensures creation of a globally-competitive team and best utilisation of expertise available within the group entities having a global presence. One of the major factors which worry an individual while deciding to take up an international assignment is cross-border taxation on his/her personal income. Since these assignments involve exercise of employment in different countries, the tax laws of such countries come into play in such cases.
International assignments may be categorised as long-term and short-term. While the former is typically for 3 to 5 years, the latter is generally for few months up to 2 years. The tax implications also depend upon the category of assignment taken up and the provisions given in the Double Taxation Avoidance Agreements (DTAAs) and domestic tax laws of the countries involved.
The first issue to consider is the residential status of the individual. In India, the residential status is divided into three broad categories: resident and ordinarily resident, resident but not ordinarily resident and non resident. The residential status depends upon the number of days of stay in India. In case of an individual whose stay exceeds either 182 days during the financial year or 60 days during the financial year and 365 days during the past four financial years, s/he qualifies as resident.
The resident individual qualifies as resident and ordinarily resident in case his/her stay in India during past seven years exceeds 729 days and s/he maintains a status of resident during any two out of past 10 financial years. However, if an Indian citizen leaves India for taking employment outside India, s/he qualifies as resident only if s/he stays in India for 182 days during that year.
Every international employee is required to keep a track of his/her residential status. Non-resident and resident, but not ordinarily resident, are generally taxable only on India-sourced incomes.
Similarly, an individual who qualifies as resident and ordinarily resident is taxable on his/her worldwide income.
Many a times an individual satisfies residency conditions of both the countries and ends up qualifying as tax resident of both the countries where he/she worked prior to taking up international assignment and the country where s/he takes up employment. In such a situation, the tax treaties provide specific relief to individual in the form of tie-breaker rules to be satisfied to qualify as a tax resident of a specific country.
What if an individual becomes taxable in both the countries of origin because of residency and the country of rendering services? To protect the individual in such situations, the DTAAs provide for the specific provisions as per which the individual is not subject to double taxation on the same income. The resident country provides foreign tax credit of the taxes paid in other country on the doubly taxed income.
The DTAA provides two methods of foreign tax credit the exemption method and credit method. Under the exemption method, the state of residence does not tax the income which, according to DTAA, may be taxed in the other state. Under the credit method, the state of residence calculates its tax on the basis of taxpayers total income, including the taxable income from the other state, and then allows a deduction from its own tax in respect of the tax paid in the other state. Even with countries, like Hong Kong, which does not have a DTAA with India, the domestic tax laws provide protection to the resident from paying double taxes.
Keeping in view the changing economies, social values, frequently changing tax laws and multiple exposures under both tax and regulatory systems of countries involved, the relocation and taxation issues are increasingly getting complicated. The payment of salary in India/outside India for an international assignee taking up employment in India is governed under exchange control laws (Foreign Exchange Management Act). Therefore, all such arrangements among employee, overseas employer and Indian employer will need to be analysed for strict compliance.