© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member...

1© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Taxation of Salary, Taxation of Salary, Expatriate Taxation and Expatriate Taxation and Related IssuesRelated Issues

Vikas VasalSat, 19 June 2010


Contents

Income under the head ‘salaries’

Employee’s residential status

Perquisites

Social security – ‘International Workers’

New visa regulations

1

2

3

4

5

6

Expatriate salary – Key considerations





Section 15

- Salary due* from an employer / former employer

- Salary paid or allowed by an employer / former employer

- Arrears of salary paid or allowed by an employer / former employer

Section 16 – Deductions

- Entertainment allowance (for government employees)

- Professional/ employment Tax

Section 17 – ‘salary’, ‘perquisites’ and ‘profits in lieu of salary’ defined

* While section 15 provides for taxation in employee’s hands when salary is due/ paid, whichever is earlier, section 192 casts the obligation on employer to withhold tax only at the time of payment of salary



Master-servant relationship

Supervision and control

Authority to terminate services

Responsibility for acts and deeds

Payment of remuneration


Employee’s residential status


Residential status

Stay 182 days in the tax year

Resident

Yes No

Stay 60 days in the tax yearand

Stay 365 days in the preceding 4 tax years

Yes

Non- Resident for 9 out of 10 previous tax years

Resident & Ordinarily Resident (R&OR)

No

Yes

Resident but Not Ordinarily Resident (R but NOR)

Non-resident (NR)

•Tax Year is from 1 April to 31 March

•60 days substituted for 182 days in certain cases

NoStay in India < 729 days in preceding 7 tax years

Yes

NO


Residential status…

Different rules for: Indian citizens leaving India for the purposes of employment Indian citizens/ person of Indian origin visiting India

Period of 60 days substituted by 182 days [Explanation (a) and (b) to section 6(1)]

Benefit restricted to the financial year in which the individual left India for the purpose of

employment. Held by - Manoj Kumar Reddy Nare v. ITO (34 SOT 180) Distinguished - Anurag Chaudhary (AAR No. 839 of 2009)

Counting the number of days in India Both day of arrival and date of departure to be counted

P - 7 OF 1995, In re (223 ITR 462)

Date of arrival to be excluded for calculating the period of stay in India

Manoj Kumar Reddy Nare v. ITO (34 SOT 180)


Residential status – ‘Tie Breaker Rule’

Tie breaker rule is applied when an individual has dual residency. It prescribes a set of tests to determine the individual’s residency

Article 4(2) of the OECD model states that “ where by reason of the provisions of paragraph 1 an individual is a resident of both contracting states, then his status shall be determined as follows:

He shall be deemed to be a resident only of the state in which he has a permanent home available to him. If he has a permanent home available to him in both the states, he shall be deemed to be a resident only of the state with which his personal and economic relations are closer;

If the state in which he has his centre of vital interests cannot be determined, or if he does not has a permanent home available to him in either state, he shall be deemed to be a resident only of the state in which he has an habitual abode;

If he has a habitual abode in both states or in neither of them, he shall be deemed to be a resident only of the state of which he is a national;

If he is a national of both states or neither of them, the competent authorities of the contracting states shall settle the question by mutual agreement


Residential status - Scope of Income Liable to Tax

Income received/ deemed to received in India; or

Income accruing/ deemed to accrue in India

Non-resident

Not Ordinarily Resident

Taxability of Income

Income received/ deemed to be received in India; or

Income accruing/ deemed to accrue in India; or

Income from business controlled in or profession setup in India

Resident

Ordinarily Resident

Worldwide income


Perquisites


Perquisites

Perquisites valued as per prescribed method:

Rent free accommodation

Movable assets owned by the employer

Motor car

Share based incentives

Interest free/ concessional loan

Transfer of asset

Perquisites valued at cost:

Gardner, sweeper, watchman

Gas, electricity, water

Travel, tour, etc

Club

Credit card expenses, etc


Perquisites

Perquisites specifically exempt:

Medical Reimbursement up to INR 15,000

Expenditure on medical treatment in certain cases

Provision of a vehicle for travel from office to home and vice versa

Health insurance premium paid by the employer.

Telephone expenses

Meals provided at working hours or through paid vouchers where the value does not exceed fifty rupees

Gift voucher less than rupees five thousand


Perquisites – Few Recent Issues

Share based incentives

Apportionment of income in case of globally mobile employees

Valuation of motor car

Reimbursement of fuel expenses for travel from office and office to home - CIT vs. Reliance Industries Ltd. (297 ITR 228) HC Gujarat

Employer owns or hires the car and the driver’s salary is reimbursed by the employer

Valuation of free food and meals

Meals provided during office hours in excess of the prescribed limits

Limit on the number of meals

Provision of health/sports club facilities

Reimbursement of expenditure incurred by the employee


Expatriate salary - Key considerations


Tax reimbursement – tax equalisation vs. tax protection

Tax equalisation Most common approach Employer is responsible for paying expatriate’s actual home and host country taxes Hypothetical tax is calculated on the basis of ‘stay- at- home’ compensation Hypothetical tax is not a real tax but reduction of wages A tax equalisation settlement (“TEQ’) is prepared at the close of the year which compares the

final hypothetical tax deducted to the hypothetical tax that should be deducted among other things.

Tax protection The employee is responsible for paying the actual home and host country taxes At the end of the assignment/ annually ‘stay- at- home’ tax is determined and compared to the

actual worldwide taxes that the expatriate employee paid. The employer reimburses the excess tax to the expatriate employee if the worldwide taxes

exceed the hypothetical tax The employee is not required to reimburse the employer if the worldwide taxes are less than

the hypothetical tax


Hypothetical tax

Taxable salary to be computed after reducing hypothetical tax

Jaydev H. Raja (ITA No. 2021/Mum/1998)

Roy Marshall v. ACIT (ITA No.2038/ Mum/ 2006)

Christopher Noble vs. Arabian American Oil Co., Inc. (US District Court)

IRS Letter Ruling 8204074

Hypo tax only reduces tax perquisite

Lukas Fole (ITA No. 1228/PN/2008)


Tax paid by employer

Indian taxes of expatriate employees generally borne by employer – taxable in the hands of employees

Whether monetary or non-monetary perquisite?

Non-monetary perquisite

RBF Rig Corpn. LIC.(RBFRC), (297 ITR 228), ITAT Delhi

Monetary perquisite

Mitsubishi Corporation v. DCIT, (2007 TIOL 404), ITAT Delhi

Western Geco International Ltd, ITA No. 3120 to 3195 /Del/2006

BJ Services Company Middle East Ltd. v. ACIT, 297 ITR 141


Social security contributions, per diems, etc

Social security contributions

Employer’s contribution – If no vested right, may not be taxable

Employee’s contribution – May be deducted, if diversion of income by overriding title. Gallotti Raoul (61 ITD 453), ITAT Mumbai

Eric Moroux (TIOL-145), ITAT Delhi

Per-diem payments to employees

Amount represented by reimbursement of actual expenses does not form part of salary. CIT Vs Information Architects (ITA No. 2207and 2210), Mumbai HC

Reimbursement on the basis of declarations without submission of actual receipts Larsen & Toubro (18 DTR 162, 163), SC

Taxable salary of employees having multi country responsibility Eric Moroux (TIOL-145), ITAT Delhi

ACIT v. Shri Ellis ‘D’ Rozario, ITA No. 2918 / Del / 05


Expatriate salary – ‘short stay exemption’

Under the Act [section 10(6)(vi)]

employee is a foreign citizen employed by foreign enterprise foreign entity not engaged in trade / business in India stay in India ≤ 90 days in a financial year remuneration not liable to be deducted from employer's income chargeable to tax

Under tax treaties

Remuneration derived by not be taxable in the state where services are rendered if: The employee is a resident of a state other than the state where the services are rendered stay in other state ≤ 183 days in relevant taxable year / any twelve month period remuneration is paid by or on behalf of a non resident employer remuneration is not borne/deducted/deductible by a permanent establishment or a fixed base

or a trade or business which the employer has in the other State


Social security - “International Workers”


Notification issued by the ministry of Labour and Employment (October 2008)

‘International Workers’ introduced as a new class of participants in the existing Employees' Provident Fund Scheme, 1952 (‘EPFS’) Employees’ Pension Scheme, 1995 (‘EPS’)

International Workers required to join the schemes with effect from November 1, 2008

International Workers employed to do any work, in or in relation to any establishment to which the Act applies have to mandatorily participate in the scheme unless falling under the category of “excluded employee”.

New regime with effect from 1 October 2008


Notification issued by the ministry of Labour and Employment (October 2008)

Excluded employee

Covered establishment

International worker

All the establishments to which the provisions of the Act apply.

Non Indian employees, not holding an Indian passport, working for an establishment in India to which the Act applies;

Indian employees having worked or going to work in a foreign country with which India has entered into a social security agreement.

International Workers contributing to the social security of their country of origin, with whom India has entered into a social security agreement (SSA) and enjoying the status of detached worker.


Avoidance of no coverage or double coverage of social security contributions

To protect the interest of workers in the host country

Bilateral agreement between two countries

Equality of treatment with host country nationals

What is a social security agreement (‘SSA’)?


Benefits under SSA

Detachment Exportability of pension

Benefits

Totalisation of insurance periods

Encourages movement of cross border employees


SSAs signed so far

INDIA

Belgium*

Hungary

Switzerland

Netherlands

Luxembourg

Czech Republic

Germany**

France

Denmark

* Entry into force on 1 Sep 2009

** Entry into force on 1 Oct 2009


Indian social security regime – Key Issues

Definition of ‘Monthly Pay’

Taxability of social security contribution

Certificate of coverage/detachment certificate

Social security on salary paid outside India

Social security on expatriates employed as contractors

Refund of social security





Business visa

Primary consideration is purpose of stay and not period of stay

Business visa would not be granted to foreign nationals who intend to execute a project or contract in India.

Employment visa

The new guidelines provide for the grant of an employment visa only to foreign nationals who are highly skilled or employed at senior levels.

Limits have been placed on the number of employment visas that can be issued to foreign nationals. The Indian mission abroad can grant such visas only to the extent of 1% of the total workforce engaged on a project subject to a minimum of 5 and maximum of 20. However, in case of power and steel sector projects a relief has been provided and limit has been set at 40.

In case more employment visas are required in comparison with the specified limits then specific permission is to be obtained from the Ministry of Labour and Employment.



Tourist Visa

Gap of at least two months for foreign nationals who intend to make a return visit to India.

Special permission is required from the Indian mission if the visit to India is within two months of the last departure.

Tourist visa on arrival facility has been introduced for citizens of five countries namely Finland, Japan, Luxembourg, New Zealand and Singapore at four international airports in the country i.e. Delhi, Mumbai, Chennai and Kolkata.

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continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the

particular situation.

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Thank you

Vikas Vasal

KPMG

Phone : 0124- 307 4780

Cell: +91 98103 15656

[email protected]

www.in.kpmg.com

mailto:[email protected]

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