Taxation of Expatriates

Speaker: Pinakin Desai, C.A. Past President, BCAS

Venue : I.M.C. Hall, Churchgate, Mumbai.

Date : 4th March 2009

(a) Broadly, the subject will cover the tax liability of expatriates, who are either :

 

(i) Resident of other country, or

 

(ii) Persons of Indian origin coming to India for a short period for taking employment in India.

 

(b) The domestic law provides an option to get himself taxed in his home country on income carried in India, if the DTAA provides such option or otherwise to pay tax on income earned in India and to claim tax credit from tax determined in the home country on global income.

 

(c) Expatriates of the above category may be coming to India as employee of foreign company on deputation for rendering services on project undertaken by such foreign employer, or may take an employment with Indian company. In both cases, the tax liability under Indian Tax Law is attracted on salaries earned in India.

3. Dictionary meaning of Expatriate :

A person, who moves from his home country to another country to earn some emolument is known as expatriate.

4. The domestic law provisions applicable to salaries earned in India are :

S. 9(i)(ii) provides that salary earned in India by a non-resident individual will always be considered as chargeable in India.

5. The meaning of salary earned in India :

Explanation to S. 9(i)(ii) creates some controversy — salary paid for services rendered in India is chargeable to tax in India. There is distinction between salary chargeable in India and services rendered in India. One meaning is that whenever the person is physically present in India and renders services during such period, it is salary earned in India. A case may arise where a non-resident, during his service period is frequently travelling outside India, then whether the payment to him for the period when he is outside India is also covered by term services rendered in India. The term earned in India is a wider term which may include the earning outside India, if such earning has nexus with services rendered in India. There are two conflicting Tribunal judgments on this issue.

Under domestic law, salary earned in India is taxable. In case of employees working on rigs there is a cycle of working for say 21 days continuously followed by leave period of 21 days and so on. In such cases, the payment to him for vacation period, if followed by working period, then, salary for rest period will also be treated as salary earned in India liable to tax in India. The rest period preceding or succeeding the work period will also be considered as period of service. The right to enjoy the leave is an emolument flowing from services rendered continuously.

S. 10(6)(vi) provides tax exemption to salary if three conditions stated in that Section are fulfilled. This exemption is different from exemption available to a foreign technician; for S. 10(6)(vi) the persons need not be a technician.

6. Treaty provisions applicable to salary
earned in India and related issues :

Salary provisions are governed by treaty Article, which is titled as Dependent personal services or Income earned from employment. There must be employer-employee relationship for invoking this Article. The treaty provisions to be applied are from the treaty with the country of which the employee is a resident and not of the country of employer who may be resident of some other country.

This is important because where a non-resident taking employment abroad has to travel in another country in connection with his service in India the question may arise, in the absence of this Article as to fixation of liability to deduct tax in Multiple situations, based on source or on physical stay or place where contract is signed. This will create uncertainly about place and amount. The provisions in the treaty will resolve this chaotic situation. The tests to be applied for determining employer-employee relationship are too well known. They do not apply to a working partner of a firm or a professional person dealing on freelancer basis or Director of company as Board member.

Article 16(1) of India-US Treaty — (Dependent personal services) deals with salary, wages, derived by Non-Resident employee, who is resident of the USA. Such salary will be chargeable in the USA irrespective of place where services are rendered. The exception to this rule is where employment is exercised in India. In that case, credit of tax suffered in India can be availed by such USA resident in his country.

As observed earlier, an expatriate will mean and include an Indian citizen coming to India for employment or a foreign citizen taking employment with an Indian company or may be taking employment with a foreign company on deputation on a project undertaken by the foreign company or P.E. of the foreign company. The presence of such person in India to necessary on long-term basis.

7. Considerations not relevant for applying Article 16(1) are :

(i) The place where fruits of an employment are enjoyed is not a relevant factor. If work is exercised in India it is sufficient to attract tax liability under domestic law.
     
(ii) Place of signing contract, say, in UAE is not relevant where work is exercised in India.

(iii) Headquarters of the employer not relevant.

(iv) Place where emoluments are remitted is not relevant.
     
(v) Residence of employer or nationality of employee is not relevant. Exercise of employment should generally be of long-term nature and not just casual visit.

Article 16(2) of India-US Treaty:

Article 16(2) deals with circumstances where income may not be taxable in India: This Article provides that income from exercise of employment in India will be taxable in the USA if the following three conditions are fulfilled. The conditions or tests are negatively worded. When these negative tests are converted into positive tests, they become alternative condition. If anyone of these three conditions is fulfilled, then India gets right to tax such emolument in India.

(a)    The stay of U.S. Resident in India is more than 183 days.

(b)    Remuneration of such US employee is paid by or on behalf of a person, who is resident in India. The number of days stay in India as in (a) above is not relevant.

(c)    The employment should be functionally attached to P.E. of foreign company. In that case his salary will be taxable in India.

In all the above three tests, it will be necessary to show that employment was exercised in India, when such employee was present in India.

8. Analysis of above  conditions:

As regards first test of stay exceeding 183 days, if the stay is prolonged for more number of days due to sickness or hospitalisation, then such excess stay need not be considered, if otherwise the stay was less than 183 days.

There is some basic difference while interpreting provisions of law and provisions of Articles in treaty. The former is to be strictly construed even at the cost of equity, whereas the treaty being a commercial agreement between two countries, a liberal and equitable approach is permissible.

The second condition is residence of employer in India who is bearing the salary of the non-resident. Such person is normally an employee of foreign company which has deputed him in India for rendering services in India and after his term in India, he is returning to his foreign employer. Till his emoluments for services are rendered in India, the tax is chargeable in India. There may be a case where salary is initially paid by U.S. company and debited to Indian company, even then the position remains unchanged if there is a service contract with Indian company or if Indian company controls his performance of service. So also if the fruits of such service including intellectual property rights are vesting in Indian company, then this test can be said to have been satisfied. The third test is whether remuneration of foreign employee is borne by permanent establishment in India of foreign employer.

There is also reference of fixed base which has same meaning. The term ‘fixed base’ applies to foreign professional firm/ company, whereas P.E. is of business concern.

The logic in taxing emoluments of employee in India is that since the salary paid is claimed as deduction from income of P.E., the tax is chargeable in India. The position remains unchanged even if income of P.E. of foreign employer is taxed on presumptive scheme u/ s.44BB.

The working of income from salary in case of expatriate is to be done in the same manner as in case of resident salary earner.

9.    Following issues can arise in computation of salary:

(a)    Triangular situation:  Illustration:

Example: A U. S. company under a contract with a Norwegian resident deputes him on a project to explore business opportunities for US Co. in India during service period 1-12-2007 to 31-7-2008. The U.S. Company is not having a P.E. in India. Similarly, in both the financial years, viz. 2007-2008 and 2008-2009, the stay of the Norwegian employee is less than 182 days. The question for determining tax liability is which treaty is applicable. As seen earlier, the India-Norway treaty will apply and not India-U.S. treaty.

A recourse is to be taken to three alternative tests. Though the services are rendered in India, they are for less than 183 days in each financial year, so first test Of number of days stay fails. For 2nd test, though services are rendered in India, the employer company is not resident of India. It is U.S. company which is a Non-resident Co. and not having P.E. in India, nor US company is carrying on business in India. It is only exploring opportunities in India. So 2nd test also fails, As regards the 3rd test, the provisions in India-Norway treaty makes a difference.

Normally test of 183 days is to be applied for each financial year separately. In this case, the exemption u/s.l0(6)(vi) (where stay in each year has to be less than 90 days) is also not available to the foreign employee. In respect of India-Norway treaty, the stay for 183 days is to be worked out by taking stay for two consecutive fiscal years together. In view of this treaty provision, the Norwegian employee’s emoluments earned in India will be liable to tax under domestic law u/s.9(1)(ii).

(b)    Issue on split  residency/dual  residency test:

Example: A UK national comes to India in 1st April, 2007 and leaves for the UK in October’ 2007. He has permanent home in the UK. His residential status for India and the UK tax laws for Financial Year 2007-2008  will be as follows:

He is resident in India due to 182 days’ stay. He will also be resident of the UK per tax law of the UK. His earning in India up to September 2007 is liable to tax in India and if from October 2007 to March 2008 he has taken employment in the UK it will be liable to tax in the UK. The difficulty arises due to dual residential status as resident of both India & the UK. Though Indian tax law does not recognise split-residency concept, the UK. tax law considers this concept.

In another case, where a resident of UK has stayed and worked in India for say 21hyears and goes back to the UK he will be considered as Resident of the UK from the day of his returning to the UK.

In the first case for UK tax for first six months up to September, 2007 he is non-resident he being in India; for second six months he is Resident of UK. As per S. 6 he is resident of India considering his stay in earlier years and stay more than 60 days during April to September 2007. Similarly, per UK Law, he becomes resident of the UK the moment he arrives in the UK even though up to September, 2007 he was Non-Resident of UK he being in India.

In such situation, tie-breaker test as provided in OECD update of 2008, will have to be applied. This will apply to income earned in the UK between October 2007 to March 2008 determining which provision of treaty will apply. If it is found that he is treaty resident of the UK by applying tie breaker test, for last 6 months he will be taxed as if he is UK Resident and not as Resident of India.

(c)    Issue on Overseas Social Security Contribution:

The learned speaker cited two judgments on deductibility of contribution for social security viz. Gallotti Raoul 61 ITD453 (Mum.) and Eric Moroux (2008) TIDL 145 (Del.) while explaining the facts and ratio, he stated that it is a case of French National coming to India under employment of French Co. working in India. From emoluments earned in India, the Employer Co. used to make two mandatory deductions.

(i)    Contribution for benefit of all French nationals, and

(ii)    contribution to social security to cover the benefit and costs including impairment in earning potential, medical, old age, professional sickness, etc. These contributions were not providing addition to personal savings like P.P. contribution. There is no income potential provided under the scheme. The French I.T. Act permitted these contributions as deduction from salary income.

Considering these features, those contributions were treated as diversion by overriding title and deductible from gross salary earned in India, and not as application of income.

(d) Issue on ESOP Levy-Key  events and Triggers:

The applicable parameters are:

(i)    When ESOPs are granted, it is called ‘grant day’. Thereafter subject to the employee’s complying with certain conditions, there will be a vesting. Such shareholder will be eligible thereafter to exercise his right to get allotment.

At the stage of grant by employer there is no tax effect for the employer nor for employee. On the date of vesting, the value gets frozen, but at that time there is no taxability for FBT from employer. S. 115WB(i). After exercise of option, shares will be allotted and on that day the FBT will be payable on the value which was frozen. If the employer recovers the FBT from employee there is a cross charge of amount of FBT recovered from expatriate em-ployee. If, however, the expatriate employee remained outside India from date of grant till the date of exercise of option, then no FBT will be payable. In another situation where the employee was based in India for two years after ESOP was granted, but was outside India on date of exercise of option, after say 3 years the allotment is made, then FBT liabil-ity on frozen value will be worked out proportionately i.e., 2/5th or 40%. No FBT will be payable on balance 60%, when employee was outside India. The same rule will apply to foreign companies offering ESOP to employees based in India.
 
Where proportionate FBT is recovered from employee, this will not affect FBT liability of employer. As regards employee, if benefit of ESOP is taxed in foreign country in the hands of employee, then he can claim rebate or tax credit of FBT borne by him in India, because FBT is nothing but income-tax.

10.    Conversion rate for Salary earned in Foreign Currency Illustration:

Take a case where the salary due on the last day of each month, if actually paid on 10th day of succeeding month. Assuming that on 31st July was Rs.40 per $, whereas on 10th August the rate was say Rs.45 per $. In such case Rule 115provides that the income is to be worked out at the rate when salary is due i.e., 31st July in the present case and not at the rate prevailing on date of receipt. But can employee say that he will pay tax on Rs.40 and not Rs.45 which he has actually received. Similar situation arises re : capital gain received by foreign investor. Though arguable, it is possible to contend that Rule 115 will be binding on Tax Department.

But in opposite case whether the employee can say that his tax liability will be on actual lower realisation and real income principle should be applied.

11. Credit  for overseas  taxation  for TDS u/s.192:

Taking a hypothetical case, where an Indian Company has P.E. abroad, say, in Germany where its employees are working. Those employees are paying tax on their emoluments as per tax laws of Germany. If such employee was in India for part of the Financial Year and received salary in India and thereafter was posted abroad in P.E. of the Co., then the employer can work out the tax on total salary and give credit for the tax deducted in foreign country. The balance tax will be collectible u/s.l92.

However, the CBDT Circular giving guidance note on working of tax liability of employees is silent about giving tax credit for tax deducted in other country. A better view is that per Sec.90, if a treaty exists with a country which has deducted tax, then treaty provisions will supersede substantive provisions of S. 192. A caveat to this is that if foreign Government terms the deduction as provisional and refundable in appropriate cases, then the Indian employer should deduct tax out of abundant precaution.

The meeting terminated with a vote of thanks to the learned speaker Shri Pinakin Desai.