Expatriate Taxation

Ashish Gupta

6thth October 2009

Contents

General Overview of Expatriate tax regime in

India:

Residency Rules
Tax Equalization
Specific Tax Benefits under domestic tax law and
treaty

Case Studies covering practical tax aspects

on:

Residency
Treaty
Outbound Assignments

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Residential status

Residential status

Resident

Resident and Resident but Not

Non Resident
Ordinarily Resident Ordinarily Resident
(NR)
(ROR) (NOR)

Residency is determined by physical number of days stay in India

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 Residential status …..Cont’d

Basic conditions:

• 182 days or more in a financial year

• 60 days* or more in a financial year plus 365 days or more in four
financial years preceding the relevant financial year

Any one of None of the

the two conditions
conditions satisfied
satisfied

ROR / NOR NR

* 60 days gets substituted for 182 days only in the year of departure for an Indian citizen proceeding abroad for the purposes
of employment. In the year of arrival to India for resuming employment, the threshold limit is 60 days.

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Residential status …..Cont’d

Additional conditions:
• “Resident” in India in atleast two out of ten financial years preceding
the relevant financial year; and
• Present in India for 730 days or more during the 7 financial year
preceding the relevant financial year

Both the One or

conditions none of the
satisfied conditions
satisfied

ROR NOR

Generally, an expatriate coming to India for the first time will qualify as ROR in the 3rd or 4th year.

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Illustration - Position from 1 April 2003
Date of first arrival into India 5 April 2008
Date of departure from India 31 December 2011
Tax Year Days Cumm. Res. Remarks
stay status

2008-09 361 361 NOR Not a resident in 2 out of 10 preceding

years; and
< 730 days in the 7 preceding years
2009-10 365 726 NOR - do -
2010-11 365 1091 NOR Resident in 2 out of 10 preceding
years; but
< 730 days in the 7 preceding years
2011-12 275 1366 ROR Resident in 2 out of 10 preceding
years; and
> 729 days in the 7 previous years

NR/ NOR – Taxed in India only on Indian sourced income

ROR – Taxed in India on worldwide income
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Taxation of Pre/Post Assignment Income

Residents:
Generally taxable irrespective of charge back
Relocation reimbursement exempt
Lump sum relocation allowance taxable

Non-residents:
Joining bonus paid outside India but related to Indian assignment
Taxable irrespective of charge-back
Short-stay impacted if charge back if otherwise eligible
Lumpsum relocation allowance - taxable
Reimbursement exempt
Severance payments made outside India
Arguably not taxable as no connection with past services

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ESOPs - Tax regime w.e.f 1 April 2009

Benefit taxable in the hands of employee on date of allotment / transfer of securities

Taxable Benefit = Fair Market Value (FMV) on date of exercise less exercise price paid
by employee

Capital gains tax on sale

Value considered for Perquisite becomes cost base for CGT

Shares allotted by foreign company to employees of Indian subsidiary

Employee to pay perquisite tax

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Overview of Tax Equalization/ Protection

Tax
Equalization
Host and Cost
Home Actual
Income Taxes Hypothetical
Home
Home
Country
Country
Income Tax
Income Tax

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TEQ Example – Taxation in Host Country
TEQ Calculations

Facts:
Individual assigned from Country A (home country) to India
Salary received in Country A, allowance/benefit received in India
Individual tax equalised - Home country hypothetical tax is deducted
Host country tax rate assumed at 30% and Country A at 40%

How would the indivdual be taxed in India

Taxable Salary income
Base salary received in Country A 1,000
Less: Hypothetical tax 40% 400
600
Assignment allowance received in India 400
Accomodation provided in India 100
Tax paid by employer 471

Net taxable income 1,571

Host country tax

Host country tax liability 30% 471

Tax equalisation reconciliation

Hypothtical tax deducted 400

Host country tax payable 471

Cost to employer 71
Cost to employee 400
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Specific Tax Benefits under domestic tax law
(some examples)
Adequate planning of assignments
Ordinary residence can be deferred
Transfer payroll for outbound
assignees to the home location
Workdays outside India for NOR/NRs
Dual employment contracts
Overseas contributions to social
security /medical insurance schemes
(to the extent not immediately vested)
Tax on non-monetary benefits
(but not claimed as corporate deduction)
Per diem exemption wherever
possible
Short-stay exemption as per domestic
tax law
Leveraging
Car, club, telephone etc
Housing benefit /allowance
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Specific Benefits - Treaties

Exemption of employment income

Work days outside India
Even if salary RECEIVED in India
Supported by decision of Authority of Advance Rulings (AAR)

Short stay in India

Presence in India < 183 days
Expense not cross-charged/borne by Indian entity/PE
Remuneration to be paid by foreign employer

Foreign Tax Credit (FTC) on doubly taxed income

Exemption of personal income in some treaties

e.g. India Singapore treaty, if treaty resident of Singapore even if asset is situated in
India, capital gains from sale of certain assets exempt in India

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Key Challenges and Income Tax Traps

Deputation related issues

Misunderstanding residency rules for outbound assignees

Mismatch of ESOP taxation

No clarity on claiming treaty benefits at the time of withholding

Credit for foreign taxes not effectively paid during the tax year (accrued basis)

Credit for foreign taxes subject to a subsequent refund

FBT requirement cumbersome for foreign companies who have employees based in
India

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Case Studies
Case Studies

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Case Study 1
Treaty Breaker Rule
Background and Issues
Mr. P
US India

US Citizen Indian Resident – Tax and FEMA

Employed with US Co. Renders services in India

Receives salary in US Friend stays in India

Wife stays in US Daughter stays in India

House in US House in India

Issue: Which country (India or USA) is he an ultimate tax resident of?

US citizens continue to be residents of US
Indian tax and FEMA resident because of physical presence in India
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Case Study 1
Tie Breaker Rule
Approach
Examination of Article of 4 (2) of the Indo-USA treaty
Permanent Home Test
Available in both countries
Centre of Vital (personal and economic) Interest
Daughter and Friend in India. Wife in US
Rendering services in India
US employer and paid in US
Habitual Abode
Staying in US in the past few years
Would stay in India during the period of Indian assignment
Nationality Test
US Citizen
Mutual Agreement Procedure
Likely to be a US tax resident.
For US tax return purpose – a US citizen always a US resident.

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Case Study 2 - Canadian Court Decision Treaty
Breaker Rule
Background

Mrs. Y

CANADA

Married and took Canadian

Citizenship

Husband progressive presence

in Canada

House in Canada

Planning to retire in Canada

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 Case Study 2 - Canadian Court Decision Treaty
Breaker Rule
Background and Issue
Mrs. Y

KOREA

Born and brought up in Korea House in Korea

After marriage returned to

Korea with family While in Korea had
three short visits
to Canada in 18 years
More time spent in Korea

Children staying and studying

Engaged in Social, Cultural &
in Korea …dependent
Religious activities in Korea
on her income in Korea

Employment in Korea

Issue:- Which country (Korea or Canada) is she an ultimate tax resident of?
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Case Study 2 - Canadian Court Decision
Treaty Breaker Rule
Approach
Examination of Article of 4 (2) of the Canada-Korea treaty
Permanent Home Test
Available in both countries
Centre of Vital Interest
Husband staying in Canada
Daughter and Son staying in Korea
Cultural, social and religious activities in Korea
Employed in Korea
Habitual Abode
Visited Canada in the past 18 years for three times
Staying in Korea for the past 18 years in Korea

Nationality Test
Canadian Citizen.
Mutual Agreement Procedure
Held not a Canadian Tax resident.
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Case Study 3
Outbound Assignees
Background and Issues

Employee of I Co.
Assigned to Branch of I Co. in USA
Salary and per diem paid by I Co.
Departure in June

Employment/Transfer Tour

Issues: What is the tax residential status in India of the outbound

assignees?
What is the taxability of the per diem allowance paid to
assignee by I Co.?
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Case Study 3
Outbound Assignees
Approach
Departure in June

Employment/Transfer Tour

No substitution-even
182 days substituted for 60 days presence of 60 days
will trigger residency

Non-Resident Resident

FTC in India
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Case Study 3
Outbound Assignees
Approach – Cont’d.

Employment / Transfer Tour

Resident Non-resident Resident

Section 10(14)(i) not Section 10(14)(i)

applicable Not taxable applicable

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Case Study 3
Outbound Assignees
Approach – Cont’d.
Against expenditure on tour and travel

Exempt under section 10(14)(i) read with Rule 2BB(1)

Surplus taxable in employee’s hands

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Presenter’s contact details

Ashish Gupta
agupta1@kpmg.com

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