Professional Documents
Culture Documents
By
Sampath Raghunathan
CONTENTS
PROVISINS OF TAX TREATIES Employers obligation
Tax Equalization
Hypo Tax
Policy Issues
Does the company have an appropriate expatriate policy for the assignment?
Type of assignment
Approaches
Localization Localization with benefits Full balance sheet Tax equalized Hypo tax Foreign Tax - picked by the employer Foreign Tax- the employees responsibility
Base
Balance sheet approach- Repartriation Long term building up a set of compensation and allowances keeping in view that the employee on leaving would not opt for any future employment. Localized package with relocation package.
shall be taxable only in that State (INDIA) unless the employment is exercised in the other Contracting State
(USA).
If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State (USA).
as deduction)
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Tests Which entity bears the responsibility or risk for the results produced by the individuals work; Which entity has the authority to instruct the individual; Which entity controls and has responsibility for the place at which the work is performed;
.Which entity bears,. in an economic sense, the cost of the remuneration paid to the individual;
Which entity provides the tools and materials required to perform the work at the individual's disposal and Which entity determines the number and qualification of the individuals performing work on an application of the above conditions, one would have to determine who is the "real employer". The tests to determine the real employment in generally applied only to prevent Treaty abuse.
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Who is the resident of the contracting State? extract from Indo US DTAA
- the term resident of a Contracting State (INDIA) means any person who, under the laws of that State, is liable to tax therein -by reason of his domicile, residence, citizenship, -provided, however, that this term does not include any person who is liable to tax in that State in respect only of income from sources in that State (SOURCE BASED TAX)
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Where an individual is a resident of both Contracting States, then he shall be deemed to be a resident of the States: (1) in which he has a permanent home available to him; (2) with which his personal and economic relations are closer (centre of vital interests) (3) in which he has an habitual abode ; (4) of which he is a national;
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leaves India in any previous year for the purposes of employment outside India, instead of 60 days 182 days be considered
(b) being a citizen of India, or a person of Indian origin being outside India, comes on a visit to India in any previous year, instead of 60 days 182 days be considered
Leaving India for the purposes of employment outside India Different situations
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3. an Indian employee leaving India for taking up a new employment with his existing employer; (e.g. on deputation). His payroll is transferred to the payroll of the overseas entity.
ENTITLED to the benefit of the explanation. 4. an Indian employee leaving India for taking up a new employment, with a new employer ENTITLED to the benefit of the explanation
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Employer obligations
Test residential status 60 days test to determine whether the employee is on tour 182 days test- to determine whether the employee is on transfer whether the employee leaves India for the purpose of employment outside India (as distinguished from for or in connection with an employment outside India under FEMA regulations) Determine the tax liability in India and in the other country to which he has been transferred
ESOPs- Pre and Post Bonus, shadow pay roll etc Keep a watch on calendar year financial year mismatch throwing Residential Status in both the countries especially in year of return Specific issues Pension, severance pay etc FRINGE BENEFIT TAX OBLIGATIONS
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as part of his total salary and that no distinction could be made between onperiod and off-period salary (the concerned Asst year was 93-94)
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Facts: Dutch employee transferred to employers UK branch; He worked for 20 years in Holland and 2 years in the UK; Dismissed from service in UK after residence established; Issue How Tax Treaties applies to severance pay. Principles laid out by the Hoge Raad If payment is not sufficiently connected with former employment, not taxable income in Holland. Could be taxable in both states if severance payment is for cumulative work performed by the employee. Taxable as pension if payment intended to support the employee upto retirement or add to insufficient pension.
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Principles laid out by the Hoge Raad (Cont) If payment cannot be categorized as above, taxation must be divided between time spent in each state.
Formula developed by Hoge Raad takes into consideration only year of severance and for preceding four years. Formula on arbitrary basis???
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Y
N Y N Y
Y
Y Y Y Y Y
Y
Y Y
Y Y
Y Y Y Y Y
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AAR ruled that the salary so paid by Ind co is not taxable in India in accordance with the DTAA, provided the same is taxed in UK.
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AND ABOVE ALL a well drafted secondment letter PROPERLY SUPPORTED By Formal Contracts between the employee and Host Country company with specific declaration of
location, Governing Law of the State of Host, integration clause, IP benefit to the Host Country, notice period/ severance clauses, employer related contributions, statutory social insurance charges, mandatory customary vacation days (example - mandatory holidays like Independence day etc, sick and statutory holidays as per Factories Act)
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Employees obligation
True and fair disclosure of taxable income in both countries Entry and exit counselling with tax experts Surrender of Green Card or Citizenship status with expert advise- exit considerations
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(i) activities of that nature continue within that State for a period or periods aggregating more than 90 days within any twelve-month period ; or (ii) the services are performed within that State for a related enterprise [within the meaning of paragraph 1 of Article 9 (Associated Enterprises)].
3. Exclusion - the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, for the enterprise
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Business transferred along with Secondment and outsourcing the business - requires a BUY OUT PAYMENT before OUTSOURCING
Some countries provide specific secondment rules EX- GERMANY
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The ruling emphasises the need for the FE to review its deputation arrangements to assess the PE risk and ensure proper documentation to defend a PE challenge by the Indian tax authorities.
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100% current year days 1/3 rd Prior year days 1/6th second prior year days
US sourced interest and dividends to be taxed in US Capital Gains on ESOPs Tax Credits to avoid Double Taxation Shadow Pay Roll State Taxation - TAXABLE IN A STATE WHERE YOU LIVE OR WORK
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QUESTIONS?????
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