In the times of globalization, transnational organizations, having operations in
multiple countries need to employ individuals across countries. The global
mobility of employees has become even more critical in the wake of the
requirement of specialized technical skill and expertise . Today a company,
located in country A is in a position to employ a person from country C for its
operations in country B. The company may or may not have a subsidiary or a
permanent establishment in country B only to perform certain functions and hence
may be stationed in that country only for a limited period of time. In view of this taxation of the salary received by such an employee assumes tremendous importance. While the country of residence of the individual would like to tax the individual on his worldwide income, the country of source, where the individual performs his duties. This could lead to a double taxation.
This article will basically deal with tds on payment made to foreign consultants outside India.
Case Studies
If Mr.A a Canadian resident providing technical services to an Indian entity . If he brings Tax residency certificate then Tax deduction may not be made as it may fall under the Independent personal services. In that case the Canadian government will collect the tax. So ultimately there is no requirement for the Indian counterpart to deduct TDS.
But if the Canadian resident doesn’t provide the Tax residency certificate then it will not be eligible for enjoying the provisions for DTAA between the two countries.
Moreover if he doesn’t provide the PAN then TDS need to deducted at highest rates in force or 20% whichever is higher.
Legal Issues
Independent Personal Services
Income derived by a resident of a contracting state in respect of professional services or other independent activities of a similar character shall be taxable only in that State. However, in the following circumstances such income may also be taxed in other contracting state:-
a) If he has a fixed base regularly available to him in the other contracting state for the purpose of performing his activities ; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other contracting state; or
b) If his stay in the other state is for a period or periods amounting to or exceeding in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other state may be taxed in that other state.
c) If the remuneration for his services in the other contracting state is either derived from a resident of that state or borne by a permanent establishment or fixed base which a person not resident in that state has in that state and which, in either case exceeds in value an amount equivalent to two thousand U.S. dollars in the fiscal year concerned.
d) The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of the physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
Dependent Personal Services
Subject to the provision of article 16, 17, 19 and 20, salaries, wages and other similar remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only in that state unless the employments exercised in the other contracting state. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other state.
Notwithstanding the provision of paragraph 1, remuneration derived by a resident of a Contracting state in respect of an employment exercised in the other contracting state shall be taxable only in the first mentioned state if:
a) The recipient is present in the other contracting state for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; and
b) Thee remuneration is paid by, or on behalf of, an employer who is not a resident of the other contracting state; and
c) The remuneration is not borne by a resident or permanent establishment or fixed base which the employer has in the other state or by a person carrying on independent personal services in other Contracting state.
Notwithstanding the preceding provisions of this article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a contracting state may be taxed in that state
may be stationed in that country only for a limited period of time. In view of this taxation of the salary received by such an employee assumes tremendous importance. While the country of residence of the individual would like to tax the individual on his worldwide income, the country of source, where the individual performs his duties. This could lead to a double taxation.
This article will basically deal with tds on payment made to foreign consultants outside India.
Case Studies
If Mr.A a Canadian resident providing technical services to an Indian entity . If he brings Tax residency certificate then Tax deduction may not be made as it may fall under the Independent personal services. In that case the Canadian government will collect the tax. So ultimately there is no requirement for the Indian counterpart to deduct TDS.
But if the Canadian resident doesn’t provide the Tax residency certificate then it will not be eligible for enjoying the provisions for DTAA between the two countries.
Moreover if he doesn’t provide the PAN then TDS need to deducted at highest rates in force or 20% whichever is higher.
Legal Issues
Independent Personal Services
Income derived by a resident of a contracting state in respect of professional services or other independent activities of a similar character shall be taxable only in that State. However, in the following circumstances such income may also be taxed in other contracting state:-
a) If he has a fixed base regularly available to him in the other contracting state for the purpose of performing his activities ; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other contracting state; or
b) If his stay in the other state is for a period or periods amounting to or exceeding in the fiscal year concerned; in that case, only so much of the income as is derived from his activities performed in that other state may be taxed in that other state.
c) If the remuneration for his services in the other contracting state is either derived from a resident of that state or borne by a permanent establishment or fixed base which a person not resident in that state has in that state and which, in either case exceeds in value an amount equivalent to two thousand U.S. dollars in the fiscal year concerned.
d) The term “professional services” includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of the physicians, surgeons, lawyers, engineers, architects, dentists and accountants.
Dependent Personal Services
Subject to the provision of article 16, 17, 19 and 20, salaries, wages and other similar remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only in that state unless the employments exercised in the other contracting state. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other state.
Notwithstanding the provision of paragraph 1, remuneration derived by a resident of a Contracting state in respect of an employment exercised in the other contracting state shall be taxable only in the first mentioned state if:
a) The recipient is present in the other contracting state for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; and
b) Thee remuneration is paid by, or on behalf of, an employer who is not a resident of the other contracting state; and
c) The remuneration is not borne by a resident or permanent establishment or fixed base which the employer has in the other state or by a person carrying on independent personal services in other Contracting state.
Notwithstanding the preceding provisions of this article, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a contracting state may be taxed in that state
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