DTAA tackles double taxation of job income
Expansion activities of companies lead to relocation of their employees to different territories, even outside the country. It goes without saying that transfer in job from one location to another comes with a baggage of issues, including the taxability of income from employment. The tax matter needs particular attention if the job location is in a foreign country.
Typically, taxability of an individual is governed by factors such as physical presence and habitual abode, which ultimately get linked to the residency of the person concerned. While an individual would qualify as a resident in his ‘home country’ by virtue of the fact that he has been physically present there for a large part of his life. He/she may, however, also land up in a situation wherein he/she may qualify as a resident of the ‘host country’ on account of laws prevalent in that country or sourcing of such employment income there and physical presence. Such a scenario is likely to lead to a situation of double taxation of employment income in two different jurisdictions.
Section 90 of the Indian tax laws provides for taxing an individual based on the provisions of the domestic law or the double taxation avoidance agreement (DTAA) between two countries, whichever is more beneficial. In a situation wherein the domestic tax law fails to provide the requisite relief, the tax payee steps into the domain of DTAA to claim shelter from double taxation. The first and the foremost step would be to determine the residency of the individual to ‘one country’ which can be concluded by application of ‘tie-breaker’ rules as laid out under the relevant clauses of DTAA.
Permanent residence, the centre of vital interest, habitual abode and nationality are some of the factors that would be considered for deciding residency to ‘one country’. The tests to determine this start with permanent home. If the individual concerned has a permanent home at both places, tests moves to the next ‘the centre of vital interest’ and so and so forth till the test tie breaks to a single country.
In order to comply with permanent home test, any form of home may be taken into account, including the rented accommodation, the only essential condition being that there should be a level of permanence to it.
As regards the ‘center of vital interest’ the same would entail an analysis of an individual’s social and economic interests. Social interests include family and social relations and schooling of children.
Economic interests include place of business or occupation, place where the property is situated or administered, among others. By applying habitual abode test, an individual becomes resident of a country where he stays more frequently and nationality test is determined by the citizenship of the individual.
After determining the residency to a single country, it would be prudent to test the ‘dependent personal services’ to understand which is the ‘country of source’ i.e. where the employment gets exercised.
If the country where the ‘employment is being exercised’ and the country of residence is the same it may be possible to take shelter under DTAA. Also, the individuals would need to give evidence tax residency by obtaining a ‘tax residency certificate’ from authorities concerned.
In situations wherein an individual fails to avoid double taxation on the employment income, then he may claim a credit of federal taxes (paid in the other country) in the country of residence.
Although taxability of employment income in two different jurisdictions is well tackled under DTAA , the issue even then is not free from doubts and can lead to litigation with the revenue department if not interpreted correctly.
