With corporates looking to find opportunities beyond the local shores and leverage on cost and other benefits of working in various economies of the world, there is a significant movement of employees from one country to another. The movement of employees has given rise to personal tax implications in multiple countries resulting in double taxation.
In order to provide tax relief to avoid double taxation, various countries have entered into Double Taxation Avoidance Agreements (Tax Treaty). One of the ways to avoid double taxation is by way of an exemption from tax in the source country where the income is accrued or received. In the context of India, a tax resident of a tax treaty country (say US) can claim tax exemption on his salary income in India for his short stay in India irrespective of whether the income arises or is received in India. This implies that the tax payer has to be tax resident of US and Non Resident (NR) in India.
Hither to the recent changes in Indian tax law, NR taxpayers were not required to obtain and/ or furnish proof of being tax resident of a tax treaty country. Recently, India has amended its tax laws, vide Finance Act, 2012, to mandate NR taxpayers to obtain Tax Residency Certificate (TRC) if they are claiming benefits under the Tax Treaty.
The Indian Tax Authorities (ITA) have notified Rules on 17 September 2012 prescribing the particulars that are required in the TRC which inter-alia include: name, status (individual or otherwise), nationality, tax identification number, residential status for the purpose of tax, period for which the certificate is applicable and address of the NR taxpayer, which is issued by the Country of Residence (COR). The requirement to furnish the TRC is effective from the Financial Year (FY) 2012 13 (i.e., 1 April 2012 to March 31, 2013).
A tax payer gets the status of NR in India if his/her physical stay in India is less than:
> 182 days in a FY; or
> 60 days in a FY and 365 days during preceding four FYs. The 60 days may be extended to 182 days in cases where an Indian citizen in going abroad for employment or an Indian citizen/ person of Indian origin visiting India.
Let us consider the situation of two Indian citizens - Giri, who goes to UK on a secondment on 31 August 2012 but receives his salary in India and Pankaj (US Green card holder) who comes to India for business meetings on 15 November 2012 and receives his salary in US. While Giri continues to be in UK, Pankaj continues to be in India till March 31, 2012. The residential status of both, Giri and Pankaj is NR for the FY 2012-13 as they are less than 182 days.
Both Giri and Pankaj are eligible to claim benefit under the Tax Treaty with UK/US for the FY 2012-13 as under:
Giri can claim exemption from Indian tax on his salary income which otherwise is taxed in India as he is receiving his salary in India;
Pankaj can claim exemption from Indian tax on his salary income which otherwise is taxed in India since salary income received in US is taxed in India in case employment is exercised in India (subject to satisfaction of other conditions).
Now, if Giri and Pankaj are availing benefits under Tax Treaty they are required to obtain TRC from their COR (UK/US). To obtain TRC, there may be several practical challenges faced by the NR taxpayers which may include:
Determination of residential status in COR: In case of individuals, each country determines residential status based on different criteria (number of days, citizenship, etc). Accordingly, a NR taxpayer would be required to satisfy the residency rules of their particular country and obtain a TRC. While Pankaj may be regarded as US resident as he is a Green card holder, Giri needs to determine the residential status in UK based on his physical stay in UK.
Resident in both the countries: There may be a possibility of a person becoming a resident in both the countries. In such a situation a taxpayer may have to run through detailed tests provided in the Tax Treaty to break the tie of residency in favour of the other country.
Date of applicability: The Rules prescribing the particulars of TRC have been notified in the month of September but are effective from FY 2012-13, leading to ambiguity of applicability of TRC for the period from April to September 2012.
Time frame for obtaining TRC: The tax laws do not prescribe the timeframe for obtaining the TRC i.e., whether it has to be obtained at the time of return filing or at the time of payment when the withholding happens. However, the Indian payer/employer may insist for furnishing a TRC at the stage of withholding to protect its interest and penal consequences. Accordingly, Giri may be required to obtain and furnish TRC to the payer/ employer at the withholding stage, while Pankaj may be required to obtain the same at a later date to furnish to the ITA in case of any assessment/audit.
Format of TRC: The COR may have a particular format for issuing a TRC which may not have all the particulars prescribed by the ITA which may create practical challenge in satisfying the provisions of the Indian law.
Period of TRC: The TRC is issued for a particular period/ tax year of the COR which may not be the Indian FY. Accordingly, in order to cover the Indian FY, the NR taxpayer may be required to obtain more than one TRC from COR.
On a concluding note the introduction of TRC has created an additional burden on the NR tax payers on one side, but it is beneficial on the other side which reduces the litigation associated with claiming the treaty benefit at the stage of audit. While, obtaining TRC is one of the conditions to avail treaty benefit, it is not conclusive evidence. Accordingly, it is time to proactively analyse your tax residency in India and evaluate the tax consequences/benefits under the tax treaty to identify situations where TRC would be required.
In order to provide tax relief to avoid double taxation, various countries have entered into Double Taxation Avoidance Agreements (Tax Treaty). One of the ways to avoid double taxation is by way of an exemption from tax in the source country where the income is accrued or received. In the context of India, a tax resident of a tax treaty country (say US) can claim tax exemption on his salary income in India for his short stay in India irrespective of whether the income arises or is received in India. This implies that the tax payer has to be tax resident of US and Non Resident (NR) in India.
Hither to the recent changes in Indian tax law, NR taxpayers were not required to obtain and/ or furnish proof of being tax resident of a tax treaty country. Recently, India has amended its tax laws, vide Finance Act, 2012, to mandate NR taxpayers to obtain Tax Residency Certificate (TRC) if they are claiming benefits under the Tax Treaty.
The Indian Tax Authorities (ITA) have notified Rules on 17 September 2012 prescribing the particulars that are required in the TRC which inter-alia include: name, status (individual or otherwise), nationality, tax identification number, residential status for the purpose of tax, period for which the certificate is applicable and address of the NR taxpayer, which is issued by the Country of Residence (COR). The requirement to furnish the TRC is effective from the Financial Year (FY) 2012 13 (i.e., 1 April 2012 to March 31, 2013).
A tax payer gets the status of NR in India if his/her physical stay in India is less than:
> 182 days in a FY; or
> 60 days in a FY and 365 days during preceding four FYs. The 60 days may be extended to 182 days in cases where an Indian citizen in going abroad for employment or an Indian citizen/ person of Indian origin visiting India.
Let us consider the situation of two Indian citizens - Giri, who goes to UK on a secondment on 31 August 2012 but receives his salary in India and Pankaj (US Green card holder) who comes to India for business meetings on 15 November 2012 and receives his salary in US. While Giri continues to be in UK, Pankaj continues to be in India till March 31, 2012. The residential status of both, Giri and Pankaj is NR for the FY 2012-13 as they are less than 182 days.
Both Giri and Pankaj are eligible to claim benefit under the Tax Treaty with UK/US for the FY 2012-13 as under:
Giri can claim exemption from Indian tax on his salary income which otherwise is taxed in India as he is receiving his salary in India;
Pankaj can claim exemption from Indian tax on his salary income which otherwise is taxed in India since salary income received in US is taxed in India in case employment is exercised in India (subject to satisfaction of other conditions).
Determination of residential status in COR: In case of individuals, each country determines residential status based on different criteria (number of days, citizenship, etc). Accordingly, a NR taxpayer would be required to satisfy the residency rules of their particular country and obtain a TRC. While Pankaj may be regarded as US resident as he is a Green card holder, Giri needs to determine the residential status in UK based on his physical stay in UK.
Resident in both the countries: There may be a possibility of a person becoming a resident in both the countries. In such a situation a taxpayer may have to run through detailed tests provided in the Tax Treaty to break the tie of residency in favour of the other country.
Date of applicability: The Rules prescribing the particulars of TRC have been notified in the month of September but are effective from FY 2012-13, leading to ambiguity of applicability of TRC for the period from April to September 2012.
Time frame for obtaining TRC: The tax laws do not prescribe the timeframe for obtaining the TRC i.e., whether it has to be obtained at the time of return filing or at the time of payment when the withholding happens. However, the Indian payer/employer may insist for furnishing a TRC at the stage of withholding to protect its interest and penal consequences. Accordingly, Giri may be required to obtain and furnish TRC to the payer/ employer at the withholding stage, while Pankaj may be required to obtain the same at a later date to furnish to the ITA in case of any assessment/audit.
Format of TRC: The COR may have a particular format for issuing a TRC which may not have all the particulars prescribed by the ITA which may create practical challenge in satisfying the provisions of the Indian law.
Period of TRC: The TRC is issued for a particular period/ tax year of the COR which may not be the Indian FY. Accordingly, in order to cover the Indian FY, the NR taxpayer may be required to obtain more than one TRC from COR.
On a concluding note the introduction of TRC has created an additional burden on the NR tax payers on one side, but it is beneficial on the other side which reduces the litigation associated with claiming the treaty benefit at the stage of audit. While, obtaining TRC is one of the conditions to avail treaty benefit, it is not conclusive evidence. Accordingly, it is time to proactively analyse your tax residency in India and evaluate the tax consequences/benefits under the tax treaty to identify situations where TRC would be required.
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