You have just joined the
ranks in a major Indian software company and are understandably proud of it.
Suddenly, you are asked to go to Germany and trouble-shoot some problems for a
client. You promptly surf the internet and ask friends questions about the
weather, the clothes you must carry, where you should eat and what you must see.
In the midst of all the excitement you truly forget to understand the tax
implications arising out of your deputation.
Let us take Sandeep’s case. He is on his way for his first overseas deputation for a period of less than 6 months (which could be extended to 1 year). During his overseas deputation, Sandeep would receive salary and a daily allowance (per diem) in India. Given the facts in Sandeep’s case, since he has earlier always been in India, it is likely that he would be would be subject to tax in India on his worldwide income. Tax residency and consequently the charge of tax, depends on the number of days stay in India during the specified period under the Indian tax laws. Accordingly, salary received by Sandeep in India for employment exercised in the overseas country on this deputation would continue to be taxable in India. Taxability of ‘per diem’ allowances has been a vexed issue. Per Diem allowance granted to Sandeep while on deputation is not taxable in his hands as long as the allowance was actually spent by him on deputation and of course satisfies the condition of ‘reasonableness’. Post introduction of Fringe Benefit Tax (FBT), per diem allowances paid to employees would logically be liable to FBT especially per diem allowances for expenses on hotels, boarding and lodging facilities. Accordingly, the per diem allowance received by Sandeep would be liable to FBT in the hands of his employer. Sandeep would also be able continue to contribute towards retirement benefits in India such as provident fund, superannuation fund, gratuity, etc during his overseas deputation. Moving to the taxability in the country of deputation, salary received by Sandeep could also be taxable in the overseas country on a ‘source basis’ given that Sandeep has earned the salary while exercising his employment in the overseas country. Accordingly, Sandeep could be doubly taxed in India (on ‘residence’ basis) and in the overseas country (on ‘source’ basis) on the same income. Can Sandeep escape such a double tax whammy? One possibility for Sandeep could be to claim a short stay exemption in the overseas country in respect of the salary paid by his Indian employer under the ‘Dependent Personal Services’ Article of the applicable double tax avoidance agreement entered into by India with the concerned overseas country or even as per the domestic tax laws of the concerned country. hort stay exemption Typically, a short stay exemption is available to an expatriate if he is present in the overseas country for less than 183 days during a tax year. Further, such an exemption is subject to fulfillment of certain other conditions and has to be weighed against any possible corporate tax implications arising on the Indian employer. Assuming that Sandeep is not entitled to the short stay exemption and is taxable in the overseas country, Sandeep could claim credit for taxes paid in the overseas country against his Indian tax liability. A question that now arises is whether credit for foreign taxes can be considered by Sandeep’s employer while withholding taxes from Sandeep’s India salary or should Sandeep claim the credit in his Indian income-tax return? Given the tax provisions, it is debatable whether the employer would consider the credit for foreign taxes at the withholding stage when monthly salary is credited to the employee’s account. Claiming credit for foreign taxes in the expatriate’s tax return by way of a refund could result in a cash flow whammy given the often delay in processing of the tax refund by the Indian Revenue authorities. Of course, Sandeep could be insulated from the adverse cash flow impact if his employer has agreed to pick-up his overseas tax liability. In such a case, the payment for foreign taxes made by the Indian employer could be treated as a loan provided to Sandeep and a notional interest perquisite may be liable to tax in the hands of Sandeep. As the employer has paid the overseas taxes in the first place, on receipt of the tax refund, Sandeep would need to repay the same to his employer. Further, Sandeep should ensure to provide adequate evidence for payment of foreign taxes along with his Indian tax return. From a documentation perspective, the deputation contract between the employer and employee is crucial and should particularly encompass situations of double taxation by defining the liability for overseas taxes and responsibility of the parties in case if there is a refund due in India. Apart from the above, once the overseas deputation commences, there are various overseas tax compliances that Sandeep must also be aware of. Key compliances The key compliances are: (i) Obtaining a registration with the overseas tax authorities (similar to PAN in India) (ii) Payment of taxes on private income arising overseas like interest in overseas bank accounts and stock option gains (similar to advance tax requirement in India) (iii) Filing of annual personal return of income. Each country has its own deadline for filing of returns and the tax year followed is typically January to December. Unlike India, certain countries have the option of formally requesting for an extension for filing the return. (iv) Certain countries require spouses accompanying the employees to file overseas returns based on the period of their stay in the overseas country. There is also a concept of joint filing of return by the employee and his spouse which could entitle the employee to certain additional tax deductions. All implications of this option need to be carefully evaluated before opting for a joint return. (v)Finally, at the end of the deputation, there could be a requirement to obtain a tax clearance certificate from the overseas tax authority. Reaping the benefits from Sandeep’s case, perhaps on your next overseas deputation, you will travel lighter, at least with a lower tax burden. (The author is a tax partner with Ernst & Young, India) Vinesh Kriplani |
Tax tips on short-term foreign deputation
Aisha (Finance Professional) (8099 Points)
27 November 2007
CAclubindia
