Don’t get taxed by a foreign stint

An overseas assignment is definitely exciting, but it pays to understand the double taxation issues that might arise

Even with a lucrative compensation package, an assignment overseas could be taxing if there are unplanned outflows, particularly on account of double taxation. Here’s a couple of commonplace situations you might find yourselves in:

When you are a non-resident

Fanak, an Indian citizen who has always been in India for the past 20 years, receives an opportunity to work on a two-year overseas assignment, starting August 1, 2014. She will leave India on August 1 and assuming she will not return to India until April 1, 2015, her stay in India will not exceed 181 days during the tax year from April 1, 2014, to March 31, 2015. Hence, she will qualify as a Non-Resident (‘NR’). While on assignment, she will continue to receive her salary in India and certain allowances and benefits (i.e. accommodation, car) outside India. Though the allowances/benefits received outside India will not be taxable, the salary received in India will be taxable, as any income received in India is taxable regardless of the residential status. Additionally, the overseas country will typically tax the salary received in India as services are rendered in that country – thus, there is double taxation of the same income. However, if there is a Double Taxation Avoidance Agreement in place between India and the host country, an exemption from tax on salary income in India can be claimed, provided Fanak qualifies as a resident of the host country and obtains a Tax Residency Certificate (TRC) substantiating this status.

If the employer has deducted tax at source on salary income in India, then Fanak can claim a refund in her India tax return, taking recourse to the provisions of the tax treaty.

When you are a resident

Let’s look at Samarth’s case now. Samarth will be leaving India for a two-year assignment on November 1 and his stay in India would exceed 181 days during the tax year 2014-15.

Further, as he has always been in India in the past, his stay in India exceeds 729 days in the preceding seven tax years and he would be a resident of India in at least two out of 10 preceding tax years. Accordingly, he will qualify as Ordinarily Resident (‘OR’) and be subject to tax on his worldwide income in India, even if all salary, allowances and benefits are received outside India.

However, if there is a tax treaty with the host country, Samarth can claim a Foreign Tax Credit (FTC) in India for taxes paid in the host country on the doubly taxed income as per the method prescribed.

In cases where there is no tax treaty with the host country, the Indian tax laws also provide for claiming a tax credit on doubly taxed income.

However, if Samarth qualifies as a Resident of both countries, residency can be determined based on the tie breaker rules enshrined in the tax treaty.

As per the tie breaker rules, residency is determined based on factors such as permanent home, centre of vital interest, habitual abode and nationality of an individual.

If Samarth is considered a resident of the host country and non-resident of India under the tax treaty, an exemption can be claimed under the tax treaty for salary received for services rendered outside India (as discussed in example 1 above). It is recommended to obtain a TRC.