Monday, January 08, 2007
Tax aspects to consider before sending staff on deputation
Business Line - 8th Jan 2007
When an Indian company deputed its staff to the foreign parent company, should it deduct tax from salary paid to the staff? This, in simple, was the question before the Authority for Advance Ruling (AAR) recently. The company in question was British Gas India Private Ltd, Gurgaon, which is part of the UK-based BG Group.
The ruling, as per the Authority's order dated November 8, was that the Indian company need not deduct tax on salary paid to the staff deputed to the UK (`How UK collected tax on Indian salary,' in Business Line dated December 2). Condition, however, was that the salary should have been offered for tax in the UK in pursuance of the DTAA (double taxation avoidance agreement). To know what the impact of the ruling is, Business Line posed a few questions to Mr Govardhan Purohit, Executive Director, PricewaterhouseCoopers.
The BG ruling, in brief: AAR's ruling in the BG case is that salary paid in India by the Indian employer to the non-resident employees deputed outside India would not be taxable in India in terms of the provisions of Indo-UK treaty, if such salary has been offered to tax in the UK. In such a situation, the requirement to withhold taxes from the Indian salary would also not come into play.
Is this an example of the Income-Tax Act and the treaty speaking differently?
Under the Income-Tax Act, non-residents are taxable in respect of income derived from a source in India, or income that is received in India. Accordingly, salaries received in India by the employees deputed to the UK were taxable in India. However, the Income-Tax Act yields to the treaty (DTAA), wherever the latter is more beneficial.
How is the benefit available in the treaty with the UK?
Under Article 16 (1) of the Indo-UK treaty, salary income is taxable in the country where the employment is exercised. The AAR, granting the treaty protection to the employees, held that the salary income was taxable only in the UK by virtue of the their employment in that country.
Whom does the ruling benefit?
AAR rulings are private rulings, which cannot be taken as binding precedents in general. However, ratio laid down by the ruling has persuasive value. Seen thus, the BG ruling could be viewed as favouring employers who depute their employees outside India.
Who can get the treaty protection?
Treaty protection can be sought only if the taxpayer qualifies as a resident of one of the contracting states, under the relevant treaty. Conditions governing the determination of residential status could vary depending upon the treaty being referred to.
Can the BG ruling benefit staff sent to the US?
In the case of the Indo-US treaty, an individual, taxable in the US only in respect of his US-sourced income, does not qualify as a resident for treaty purposes. Thus, for an Indian employee on deputation there, his global income is not taxed in the US.
He would not, therefore, qualify as a tax resident of the US for treaty purposes; and the treaty shelter would not be available to him. Such employees, in spite of being treated as non-resident for Income-Tax Act purposes, would be liable to tax in respect of salaries received in India. This is in contrast with the provisions of the Indo-UK tax treaty, where the residence conditions are more liberal.
How will the situation be if the deputation is to countries with which India hasn't signed a tax treaty?
No different. Take, for example, Hong Kong. India does not have treaty with that country. Suppose an individual who is a non-resident in India is deputed to Hong Kong. Salary received by such individual in India would become taxable in India.
Does it become necessary to consider all this when planning deputations?
Yes, it is imperative that the above factors be considered while entering into secondment/ deputation arrangements. In cases where individuals are deputed to countries with which India does not have treaty in place or where India has a treaty but individuals may not qualify as tax resident under the relevant treaty, an argument could be made that salary is not taxable in India under the Income-Tax Act, as services have been rendered outside India. Provided, however, the employee also receives the salary outside India from the overseas employer during such arrangements.
Deputation per se, or only to the parent company?
In the BG ruling, the employees were deputed to the parent company. Where employees are deputed to other companies, the basis of taxation of salaries in the hands of employees isn't affected.
To what extent is residential status a key consideration?
One needs to consider provisions governing residential status under the Income-Tax Act while entering into secondment/deputation agreements. Taxability in India is determined on the basis of residential status of an individual, which in turn, is dependent on the number of days the individual is present in India.
For instance, an individual going on deputation outside India, prior to September 30 will enjoy the benefit of having a stay of less than 182 days in a financial year thereby entitling him to obtain a non-resident status in India for that financial year.
Tax planning for deputations, shall we say?
Yes, with the growing number of international assignments taken by Indian employees, employers need to carefully consider the tax implications and hedge such arrangements against double taxation burden.
When an Indian company deputed its staff to the foreign parent company, should it deduct tax from salary paid to the staff? This, in simple, was the question before the Authority for Advance Ruling (AAR) recently. The company in question was British Gas India Private Ltd, Gurgaon, which is part of the UK-based BG Group.
The ruling, as per the Authority's order dated November 8, was that the Indian company need not deduct tax on salary paid to the staff deputed to the UK (`How UK collected tax on Indian salary,' in Business Line dated December 2). Condition, however, was that the salary should have been offered for tax in the UK in pursuance of the DTAA (double taxation avoidance agreement). To know what the impact of the ruling is, Business Line posed a few questions to Mr Govardhan Purohit, Executive Director, PricewaterhouseCoopers.
The BG ruling, in brief: AAR's ruling in the BG case is that salary paid in India by the Indian employer to the non-resident employees deputed outside India would not be taxable in India in terms of the provisions of Indo-UK treaty, if such salary has been offered to tax in the UK. In such a situation, the requirement to withhold taxes from the Indian salary would also not come into play.
Is this an example of the Income-Tax Act and the treaty speaking differently?
Under the Income-Tax Act, non-residents are taxable in respect of income derived from a source in India, or income that is received in India. Accordingly, salaries received in India by the employees deputed to the UK were taxable in India. However, the Income-Tax Act yields to the treaty (DTAA), wherever the latter is more beneficial.
How is the benefit available in the treaty with the UK?
Under Article 16 (1) of the Indo-UK treaty, salary income is taxable in the country where the employment is exercised. The AAR, granting the treaty protection to the employees, held that the salary income was taxable only in the UK by virtue of the their employment in that country.
Whom does the ruling benefit?
AAR rulings are private rulings, which cannot be taken as binding precedents in general. However, ratio laid down by the ruling has persuasive value. Seen thus, the BG ruling could be viewed as favouring employers who depute their employees outside India.
Who can get the treaty protection?
Treaty protection can be sought only if the taxpayer qualifies as a resident of one of the contracting states, under the relevant treaty. Conditions governing the determination of residential status could vary depending upon the treaty being referred to.
Can the BG ruling benefit staff sent to the US?
In the case of the Indo-US treaty, an individual, taxable in the US only in respect of his US-sourced income, does not qualify as a resident for treaty purposes. Thus, for an Indian employee on deputation there, his global income is not taxed in the US.
He would not, therefore, qualify as a tax resident of the US for treaty purposes; and the treaty shelter would not be available to him. Such employees, in spite of being treated as non-resident for Income-Tax Act purposes, would be liable to tax in respect of salaries received in India. This is in contrast with the provisions of the Indo-UK tax treaty, where the residence conditions are more liberal.
How will the situation be if the deputation is to countries with which India hasn't signed a tax treaty?
No different. Take, for example, Hong Kong. India does not have treaty with that country. Suppose an individual who is a non-resident in India is deputed to Hong Kong. Salary received by such individual in India would become taxable in India.
Does it become necessary to consider all this when planning deputations?
Yes, it is imperative that the above factors be considered while entering into secondment/ deputation arrangements. In cases where individuals are deputed to countries with which India does not have treaty in place or where India has a treaty but individuals may not qualify as tax resident under the relevant treaty, an argument could be made that salary is not taxable in India under the Income-Tax Act, as services have been rendered outside India. Provided, however, the employee also receives the salary outside India from the overseas employer during such arrangements.
Deputation per se, or only to the parent company?
In the BG ruling, the employees were deputed to the parent company. Where employees are deputed to other companies, the basis of taxation of salaries in the hands of employees isn't affected.
To what extent is residential status a key consideration?
One needs to consider provisions governing residential status under the Income-Tax Act while entering into secondment/deputation agreements. Taxability in India is determined on the basis of residential status of an individual, which in turn, is dependent on the number of days the individual is present in India.
For instance, an individual going on deputation outside India, prior to September 30 will enjoy the benefit of having a stay of less than 182 days in a financial year thereby entitling him to obtain a non-resident status in India for that financial year.
Tax planning for deputations, shall we say?
Yes, with the growing number of international assignments taken by Indian employees, employers need to carefully consider the tax implications and hedge such arrangements against double taxation burden.
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