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Avoiding double taxation overseas
December, 12th 2006

Indian professionals, technical personnel and managers are in great demand not only in India but also overseas. Many Indian companies are deputing their employees or sending them on secondments (transfer to group companies for a few years), wherein the employee works with the overseas company and gains international experience.

Recent ruling relevant

In these kinds of secondments, taxability of salary in India and overseas is an issue which keeps bothering both the individual and the employers. In a recent ruling by the Authority for Advance Ruling (AAR) in the case of British Gas (AAR No 725 of 2006), it has been held that the salary paid by companies to non-resident employees for rendering services outside India shall not be taxable in India in pursuance of the Indo-UK double taxation avoidance agreement (DTAA).

It is pertinent to note that the AAR rulings have a persuasive value in other cases as well. Therefore, it will be interesting to note the facts and the decision of the AAR, as the same may be relied upon while determining the taxability of the Indian employees being seconded to overseas companies or for that matter Indian citizens leaving India for the purposes of employment outside India.

In this case, the Indian company had deputed/lent its employees to its group companies, including British Gas, UK. These employees temporarily worked at the overseas locations with the group companies. The employees were non-resident in India and tax resident in the UK.

They continued to be on the payroll of the Indian company and were paid salary in India by the Indian company. The Indian company recovered their salary from the UK company by raising a debit note. The employees were also given certain allowances in the UK by the UK company.

These allowances were paid for the services rendered during their overseas assignment and to meet the additional cost of living.

Both the salary received in India and the allowances received in the UK were offered to tax in the UK. The issue before the AAR was whether the salary paid in India by the Indian company was liable to tax in India and whether the Indian company was required to withhold tax on the salary paid by it.

The AAR held that as per the DTAA, since the employees are drawing their salary in respect of the employment being exercised in the UK, the salary shall be taxable only in the UK.

It further said that by virtue of the provisions of Section 192(1) and 192(2) of the Income Tax Act, 1961 (the Act), the Indian company is not required to deduct tax at source.

What does the ruling mean?

This ruling addresses the issue faced by Indian companies and their employees who are being deputed outside India in respect of the taxability of their salary in India. In case an employee deputed to work overseas, is non-resident of India and a tax resident of the other country, then, subject to the provisions of the relevant of DTAA between India and his country of deputation, salary paid to him in India may not be taxable in India.

It is pertinent to note that if an employee is deputed to a country with which India does not have a DTAA, then the above stand may not hold good and the employee may be taxable in India for the salary received in India.

Employee/Employer checklist

There are some lessons in this ruling for the employees and their employers. Employees should check with their employer / tax consultant whether the country to which they are being deputed has a DTAA with India or not. In either case, the tax implications should be carefully evaluated before commencing the assignment to avoid any issues like double taxation etc. at a later date.

Also as residential status based on physical stay in India plays an important role, the same should be carefully evaluated and planned accordingly.

Of course, while determining the taxability in a particular case, the facts of each case including the agreement entered into between the Indian company and the overseas company for deputing the employees should be considered.

In the terms of secondment it should be clearly spelt out that the employee is being deputed to work with the foreign company and that he will only work for the foreign company under its direction and supervision during the period of his secondment.

The residential status of the individual and the provisions of the relevant DTAA need to be examined before taking a particular position. Nevertheless, this is an important ruling and may be of help to the employees and the Indian companies who are deputing their employees overseas.

(Courtesy KPMG)

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