India is being talked about as the next economic superpower and rightly so. An important indicator of the same being Indian companies becoming multinational companies by making overseas acquisitions. From Hindalco acquiring Novelis, to the Tatas acquiring Corus and now Bharatis acquisition to Zain, Indian companies are continuing their march of establishing a global footprint.
This along with the revival of the software industry has resulted in a lot of Indian employees being deputed abroad for a short term stint. While the employees plan their trip with regard to the visa requirements, climate, culture, language, cost of living, etc of the overseas country, one important point missed could be with regard to the tax implications.
For seconding employees abroad there are host of tax aspects that need to be considered. Summarised are some of the tax issues that should be taken into account prior to the international assignment.
Typically an employee going overseas for a short stint of less than 6 months for the first time would be classified as a 'Resident and Ordinarily Resident' ('ROR') in India and will be taxable on his global income. Accordingly, the individuals income earned outside India would also be liable to tax in India, although the services were rendered outside India. Further, there is a possibility that the income earned overseas would be taxable in the overseas country as per the local tax laws of that country. This could result in double taxation of the same income.
In such a scenario one of the possible ways to avoid double taxation could be to avail an exemption under the 'Dependent Personnel Services' Article of the Double Tax Avoidance Agreement between the overseas country and India, which is also commonly known as short stay exemption. Generally, a short stay exemption is available to an employee if he is present in the overseas country for less than 183 days during a tax year and satisfies certain additional conditions.
Alternatively, the employee could claim a credit in India of the taxes withheld in the overseas country. However, there is a controversy under the Indian tax laws on whether an employer could consider the credit of the taxes withheld overseas while withholding taxes in India. Due to this, the employees may have to claim a refund of the excess taxes deducted in their return of income which could have a cash flow impact.
Timing of the international assignment matters
Planning of the timing of the international assignment would help in mitigating issues in respect of residential status. For eg if an Indian citizen leaves India for the purposes of employment outside India and has stayed in India for a period less than 182 days during the financial year, he may be classified as non-resident and would be taxed only on income received in India or deemed to accrue or arise in India. Accordingly, the income received outside India for services rendered outside India may be out of the purview of India taxes.
Apart from the above, there could be certain compliances to be undertaken in the overseas country, such as obtaining a tax registration number, filing personal tax returns, social security contributions, etc which needs to be considered. Additionally, certain countries have a concept of filing a family tax return, which also would need to be evaluated.
Another cost in the overseas country which could have a significant impact is the social security contribution. There are overseas countries which require people working over there to contribute to the statutory social security contributions.
However, India has entered into social security agreements with few countries whereby the employee can contribute in his home country and substantially reduce the social security contribution in the overseas country subject to obtaining an appropriate certificate from the Indian Provident Fund authorities. In case there is no social security agreement between India and the overseas country, there would be additional social security cost to be considered by the employer.
Working overseas may sound adventurous for many individuals, but relocating to a foreign place holds many tax challenges. So, before you pack your bags for that overseas assignment do your tax check-up.