Expatriate Taxation – An Overview

Living in India can offer expats a taste of life in an exotic and diverse place. It is a bright and vibrant country with an eclectic mix of different cultures and people. India is a huge country whose population currently represents a sixth of the world’s total population. However, despite the large numbers of people that are living in India, it is a relatively small country that covers only 2% of the world’s total land. This makes India a very crowded and busy place.

The advent of economic reforms in the form of globalization and liberalization in our country has resulted in rapid growth of the economy in general and cross border transactions in particular. The world has become a “Global Village”. The process of globalization has set to gain further impetus with the good performance of the economy in the recent past.

With the technology has bridged the gap and connectivity is no longer an issue; the need for skilled manpower to guide, supervise, control and manage the business abroad still remains a challenge for MNCs.

WHO IS AN EXPAT?

Expatriate or expat is a person residing in a country temporarily or permanently which is different from his/her home country i.e. the country in which he/she is a resident. Usually this term is used in case of technicians and professionals sent by their companies to their associated enterprises or foreign subsidiaries.

EXPATRIATE AGREEMENT

An agreement has to be formulated between the host and the home country of the expatriate which is driven by tax, social security, immigration concerns or requirements. The written contract must encompass crucial issues such as the length of the assignment, governing law and jurisdiction, compensation and benefits, termination provisions and many more.

PROVISIONS UNDER INCOME TAX ACT, 1961

• SECTION 6: Taxation in India is based on the residential status of a person and not on citizenship. This section creates the 3 categories regarding the residential status of the person i.e. Resident, Non-Resident, Resident but Not Ordinarily Resident, Resident and ordinary resident.
• DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) is empowered by the Central Government under Section 90 of the Act in order to prevent double taxation between countries. Where the provisions of a DTAA are more beneficial to any assessee, the assessee would be governed by such provisions of the treaty. Where there is no specific provision in the agreement, it is the Income-tax Act that will govern the taxation of income.
• PERMANENT ESTABLISHMENT (PE): Where the employment or payroll of the expatriate employee continues in the home country, depending on the period of presence, nature of work performed by the expatriate employee and contractual arrangements with host country entity, the overseas employer may trigger a PE exposure in the host country. This gives rise to tax and other compliance obligations, which may be unwarranted.
• Salary income is subject to income tax in India if services are rendered in the country, irrespective of whether salary is received in India or not.
• SECTION 9: The remuneration received by foreign expatriate working in India is assessable under the head salaries, is deemed to be earned in India if it is payable to him for services rendered in India.
• Any individual who is liable to pay taxes in India is required to apply for Tax Registration number i.e. PERMANENT ACCOUNT NUMBER (PAN) with the Income Tax Authorities in Form 49AA with the required documents.
• SECTION 230: Under this section, expatriates who may be working for foreign company in India or may be on deputation to India are required to seek (TCC) from Income Tax Authorities before leaving India.
• GROSSING UP (195A & 206AA): It so happens that there is such kind of agreement that the tax burden is on the company to which he/she sent and expatriate employee gets the net salary. This gives rise to the concept of grossing-up. An expatriate’s salary is to be considered as net salary + tax liability on it, as it has been borne by the company. If an expat is getting salary in India as well as his home country, then his global salary is taxable in India for the purpose of grossing-up.
• Expats coming to India are to subject to APPLICATION OF A VISA which can be obtained from their local Indian Embassy.viz. Employment or Business Visa depending upon the nature of the assignment.
• FOREIGNER’S REGIONAL REGISTRATION OFFICE (FRRO): When an expat’s visa is valid for more than 180 days (and/or those who intend to stay in India for more than 180 days), he will be required to register with the FRRO within 14 days of arriving to receive a residential permit.
• RESIDENTIAL PERMIT: This permit is issued at the time of registration and its validity is the period of stay specified in the visa.

SOCIAL SECURITY AGREEMENTS (SSA’S)

• Any social security benefit payable in the host country may become an added cost to the employer, especially in situations where there are restrictions for withdrawal.
• It is in this context that social security agreements (“SSAs”) executed between countries comes into perspective and they need to be carefully evaluated to help reduce the financial implications. Indian employees, who are posted to other countries by their Indian employers, without terminating the contract of employment, continue to make social security contribution in India as per Indian law. A certificate of coverage (COC) or a detachment certificate is a document that must be obtained so as to avail the benefits under the applicable SSA.

DECLARATION OF FOREIGN ASSETS

• It is well established that expats have to file an income tax return in India and pay tax on their global income in India. The income tax form, ITR-2 requires the ‘Residents’ to report their foreign assets in their tax return.

TAX EQUALISATION & HYPOTHETICAL TAXATION  

• With tax equalisation in place on account of the tax rates, positive or negative, is on the employee’s tax liability is maintained at the tax level of the employee’s home country and any differential account of the employer. Hypothetical Taxation is a result of implementation of Tax equalisation policy. The word “Hypothetical” is used as the salary income of the expatriate is taxed at the rate as if the foreign assignment never occurred.

CONCLUSION

• With increasing trade relations between India and the world, cross-border movement of employees from and out of India has increased quite considerably. Hence, it has become essential for employers to have the most efficient human resource and to grant them their legal rights and entitlements.

To know more, get in touch with us at info@taxpertpro.com