Saturday 1 June 2013

Country hopping? Watch out for the double taxation trap

Amit was on the top of the world. He had finally landed that job in the US that he so wanted. The interview process had indeed taken long and there had been some anxious moments --- but in the end it had all worked out. They wanted him on board from the beginning of the calendar year, so after quitting his job, it was almost mid December when he left India.




All went well for the first three months. But March arrived with a problem. It was tax filing time here in India. Now, Amit had been in India for almost 9 months of the financial year --- which made his a Resident Indian in spite of the fact that he was in the US in the last three months. For a Resident Indian, global income is taxable. Which includes the greenbacks that Amit earned from Jan to March. However, Uncle Sam is nobody�s fool and he too had withheld tax on Amit�s salary. Tax laws of each country meant Amit had to fork out more than 60% of his salary as tax. And each country is justified in its stand --- since Amit was a Resident Indian, he had to pay tax on his entire income. On the other hand, the US employer had to follow the tax rules of his country and applied TDS. The only loser here is (literally and figuratively) poor Amit.




Enter DTAA

Double Taxation Av oidance Agreements (DTAAs) help specifically in such a scenario. The above situation is not too uncommon and several NRIs who seek employment abroad might find themselves in precisely this situation. In which case they should take shelter under the DTAA between India and the relevant country.




Happily, DTAAs supercede the domestic laws of the concerned countries. Which means if there is a provision that is more beneficial as per the DTAA than the underlying domestic law, the DTAA would apply. Which happens in most cases. However, the scope of the DTAA covers only certain incomes and certain kind of taxes. If there is a particular income or a tax in the domestic law which is not envisaged in the DTAA, then the DTAA would not apply. The Indian FBT is a case in point currently.




It must also be remembered that DTAAs are not meant to eliminate taxation but to prevent the same income being taxed twice. Where there is no tax imposed by any one country (read DUBAI!), then the point whether the DTAA applies or not becomes moot. We shall visit this topic in a bit more detail a while later.




Solving Amit�s dilemma

In the meanwhile, let�s try and address Amit�s problem in the light of the DTAA between India and the USA.


The first thing to determine is the Source country and the Residence country. This makes things simpler. In Amit�s case, the source country is the USA : the source of the income. The Residence country is of course India.




The next step is to locate the Article which deals with the tax treatment of a particular stream of income. An Article of the DTAA is just like a Section in the Tax Act. Its just nomenclature, nothing else.




Now, it is Article 16 that deals with Salaries. The DTAA calls it (for reasons best known to them) Dependent Personal Services. When you go through Article 16, it becomes clear that it is the USA which will reserve the principal right of taxation and Amit would get a credit for the amount of tax paid in the US in his Indian tax return, thereby eliminating the inherent double taxation.




Pensions

There are several NRIs who eventually come home to settle in India. However, due to their past employment, they may be getting some pension in India from abroad. Again, the issue that arises is where would this stream of income be taxed?




It is Article 20 of the Indo-US DTAA which spells out that pensions would be taxable in the country of Residence ---that is India in our case. However, if it is Social Security Benefits or other public pensions, these would be taxed only in America.




Double Non Taxation

Yes, we have a treaty with the UAE signed way back in 1993. However, is it applicable? As of now, even after almost twelve years of the signing it, the jury is still out.


As per Article 4(1) on Resident of the UN Model Convention, �resident of a Contracting State� means any person who under the laws of that State is liable to tax therein by reason of his domicile, residence �� This means the treaty is only applicable to persons who are liable to tax in each country.




It is the term �liable to tax that leads to the contentious issue whether an individual living in the UAE is eligible for the benefits of the DTAA between the two countries. Since UAE does not impose tax on its Residents, some rulings have held that since there is no incidence of double taxation, relief under the treaty is inadmissible. And some rulings have held the opposite view.




The following is a snapshot of the way history has unfolded upon this issue.
Case


Authority


Ruling on DTAA


M A Rafik


AAR


DTAA Applicable


Cyril Eugene Pereira


AAR


DTAA Not Applicable


Azadi Bachao Andolan


Supreme Court


DTAA Applicable


Emirates Fertiliser Co.


AAR


DTAA Applicable


Abdul Razaq Memon


AAR


DTAA Not Applicable














An AAR Ruling is not binding as law. It is only applicable to the particular applicant for the particular transaction. Even in the case of another transaction of a similar nature of the same applicant, the earlier AAR ruling is inadmissible.




To Conclude

Death and Taxes cannot be a ed. However, just like one can�t die twice, one shouldn�t pay tax twice! Hope this piece helps you in this noble cause

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