EXPATRIATE

Tax Regime In India for Expatriates with

an overview of a change in Economy

Topics to be covered……

India Briefing… Overview of recent trends in the

Indian economy

The Tax Regime in India Overview of tax issues specific to

inbound expatriates and outbound assignees

Solutions to Reduce Tax Costs

India today is fast changing – setting the pace for growth and stability…

Hindu rate of growthHindu rate of growth BureaucraticBureaucratic Protected and slowProtected and slow Small consumer marketsSmall consumer markets Underdeveloped Underdeveloped

infrastructureinfrastructure

One of the fastest growing economiesOne of the fastest growing economies Reasonably proactiveReasonably proactive Opening up and dynamic economyOpening up and dynamic economy Booming and promising consumer marketsBooming and promising consumer markets Some of the world’s largest infrastructure Some of the world’s largest infrastructure

creationcreation

Yesterday…

…and today

0

2

4

6

8

10

12

1984

-85

1985

-86

1986

-87

1987

-88

1988

-89

1989

-90

1990

-91

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04*

GDP Growth

Growing GDP 11

17.9 18.522.2

26.331.8 33.5 35 33.2

36.8

44.6 43.8

52.7

63.5

19.421.9 23.3

28.7

36.7 39.1 41.5 42.4

49.7 50.5 51.4

61.4

77

0

10

20

30

40

50

60

70

80

90

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04*

Exports Imports

Falling Inflation 22

0

2

4

6

8

10

12

14

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

WPI CPI

Increasing International Trade

33

USD bn

At 19993-94 prices at factor cost

Source: KPMG analysis, Tata Statistical Outline 2005, Indiastat

Indicators of a growing and stable economy

5.82.2

6.415.1

20.817

22.325.9

29.535.1

39.5

51

71.8

107.5

129.7

0

20

40

60

80

100

120

140

ForeginExchangeReserves

0

2000

4000

6000

8000

10000

12000

FDI Approvals

FDI Inflows

…

Strong Forex Reserves 44

Increased Foreign Direct Investment

55

Understanding the drivers for growth.. Economic Growth Averages, Real GDP

Source: IMF World Economic Outlook Database

1998 to 2004

World Growth: 2.7%

The drivers of India's Economic Growth

Increased liberalization of sectorsIncreased liberalization of sectorsOpenness to foreign direct investment and Openness to foreign direct investment and

movement to an open competition policymovement to an open competition policyContinued agenda of reformContinued agenda of reformDevelopment of transport and logistics Development of transport and logistics

infrastructureinfrastructureGrowth of the services sectorGrowth of the services sectorRegulatory reform and creation of an enabling Regulatory reform and creation of an enabling

frameworkframeworkTax structure reformTax structure reformGrowth of the Indian consuming and rich classGrowth of the Indian consuming and rich class Increased willingness to spend and consumerismIncreased willingness to spend and consumerism

Implication on human resources

Strong Demand for skilled labor-Industries like Information Technology (IT) & IT enabled Services (ITES) likely to beat estimates

India viewed as an off shoring/outsourcing destination of the world

Entry of Multinational Corporations (MNCs) intensifying competition and changing Human Resource Management (HRM) practices

Increasing literacy rates / individuals opting for higher/specialized education

Change in demographics-An upward movement of income classes

Changes in overall wants and needs, motivators for work, and consumer behavior

Job motivation-Challenge, excitement and not job security as drivers

Increase in the number of youth employed in frontline jobs

Average age at which a person starts drawing a paycheck reduced

The Cost Advantage……………The Cost Advantage……………

India offers a significant cost advantage: a major reason for India today to be looked as a major outsourcing hub.

India’s minimum wage is approximately 20 percent lower than China, and up to 50 percent less than in Thailand – these variances differ according to the regions which are being compared.

Salaries and wages as % of total labour costs

Average labor costs amongst directly employed regular workers (All-India)

Compensation structuring options

Traditional model : Fixed Basic Salary, Allowances And Perquisites

Companies are moving towards the CTC model with part of the package being flexible.

- Employees can be given the option of choosing from a basket of options such as HRA, Transport, Company Car, Leave Travel Allowance (LTA), Medical Reimbursements, etc.

CTC however, does not involve bonus and incentives, that is performance based

With the introduction of FBT, there is further scope for tax efficient compensation structuring

Tax Regime vis-à-vis expatriates and assignees

Domestic tax law of host country

Double Taxation Avoidance Agreement [s]

Domestic tax law in India

Other regulatory issues-exchange control

and entry registration

Residential status

Residential status

Resident & Ordinarily resident

(ROR)

Resident

Resident but Not Ordinarily resident

(NOR)

Nonresident(NR)

Residency in India is determined by physical number of days stay in India ( > 182 Days)

Broadly expatriates coming to India would become taxable on worldwide income from the 3rd or 4th financial year after arrival in

India

None of None of the the

conditions conditions satisfiedsatisfied

Any one Any one of the two of the two conditions conditions satisfiedsatisfied

Non - ResidentResident

Basic ConditionsBasic Conditions

(a) 182 days or more in a financial year

(b) 60 days or more in a financial year plus 365 days or more in four financial years preceding the relevant financial year

Note: day of arrival and departure to be counted as full day presenceNote: day of arrival and departure to be counted as full day presence

(a) Additional Conditions

(b) Nonresident in India in nine out of ten financial years preceding the relevant financial year

(c) Present in India for 729 days or less during the seven financial years preceding the relevant financial year

One or One or both the both the

conditions conditions satisfiedsatisfied

None of None of the the

conditions conditions satisfiedsatisfied

NORROR

Law from 1 April 2003

Incidence of tax

Resident & Ordinarily Resident (ROR)

Nonresident (NR) and Not Ordinarily Resident (NOR)

Income sourced from India

Income received/ deemed to be received in India

Worldwide Income

Income liable to tax in IndiaResidential Status

Broadly, NOR/NR not taxable in India on foreign sourced income

EXPATRIATES………?????

An expatriate (in abbreviated form, expat) is a person temporarily or permanently residing in a country and culture other than that of the person's upbringing or legal residence.

Compensation and benefits offered to inbound expatriates

Base salary Bonus (performance based and completion bonus) Expatriate premiums

- Hardship payments- COLA-Cost of Living Allowance

Benefits- Home leave- Housing (employer provided or cash rental

allowance)- Rest and recreation- Tax assistance and equalisation- Company car/driver- Relocation assistance- Medical insurance- ESOP- Education assistance

Non-taxable/concessional taxation items for expatriates in India (some examples)

Workdays outside India for NOR/NRs

Housing benefit /allowance

Reimbursement of relocation expenses

Tax on non-monetary benefits

(but not claimed as corporate deduction)

Overseas contributions to social security /medical insurance schemes

(to the extent not immediately vested)

ESOP under qualified plan

(…….But subject to FBT) Club expenses Motor car expenses Telephone expenses

Foreign Nationals working On foreign ships For foreign government For approved foreign aid projects(subject to conditions)

Dual employment contracts

Meaning- An expatriate who

has dual/multinational duties signs a separate contract with the employer for services to be performed in each location

Advantage- Only in case of

NR/NOR (physical stay outside India a must)

- Remuneration for overseas workdays not taxable in India:such services

should preferably have no connection with the Indian assignment

DocumentationEmployment contracts with the same or two or more entities clearly stating roles and responsibilitiesSplit remuneration commensurate with services rendered for each entityTime records/working papers to demonstrate work done for respective entitiesPhysical stay details justifying services rendered outside India

Employee incentive schemes [ESOPS] Qualified Plan:

ESOP subject to tax only on ultimate sale of shares (provided the plan meets with jurisdictional regulatory requirements)

Non-Qualified Plan:

ESOP benefit taxable on vesting

Alternative argument – taxable on exercise

Capital gains on subsequent sale of shares

Employee Stock Option Scheme(ESOP)

Employee Stock Purchase Plan

(ESPP)

Share Appreciation Rights (SAR) /

Phantom Equity Plan (PEP)

Relief under domestic tax laws

Short-stay exemption

Foreign citizen Present for less than 90 days in India Salary is not cross-charged to Indian entity.

Tax Credits (only if there is no treaty)

‘ROR’ is liable to tax on world wide incomeProportionate foreign tax credits allowed against the Indian taxes on the doubly taxed income

Relief under double tax treatiesIndia has more than 65 Treaties with various countries

Exemption of employment income for tax residents of a treaty country

Work days outside India Even if salary RECEIVED in India Supported by decision of Authority of Advance Ruling

Short stay in IndiaPresence in India < 183 daysExpense not cross charged/borne by Indian Entity/PERemuneration to be paid by a foreign employer

Foreign tax credit on doubly taxed income

Short-stay exemption under DTAA(caution points)

Exemption will not apply if deduction is sought to be claimed from income on Indian Permanent Establishment

Specific provisions of each DTAA to be examined

Residency outside India as per the Treaty (including Tie Breaker on facts!!) may have to be substantiatedBenefits provided Benefits provided

in India by local in India by local entityentity

TaxableTaxable

Foreign Tax Credit under DTAA

Foreign Tax Credit

Available based on country of tax residence

Only if the same income is taxed in both home and host country

At the time of filing the individual tax return (no rules regarding credit at the time of withholding/advance tax) By submitting the proof of taxes paid in the country of source.

Withholding tax /compliance requirements under Indian tax laws

Tax to be withheld only at the time of payment of salary

Employer outside India is also required to withhold tax from the remuneration chargeable to tax in India

If the employee has two employers – employee may disclose all the income to one of them

Other statutory compliance requirements (annual/quarterly withholding tax returns)

Fringe Benefit Taxation (FBT) in India effective 1/4/2005

Computation of FBT @33.66 percent* on:

Discount on tickets for private journey Applicable only to transportation/airline companies

Employer contribution to approved superannuation fund

Specified percentage of deemed fringe benefits

FBT not tax deductible*(30%tax+10% surcharge+2% education cess)

Deemed fringe benefits(even where expenses not related to employees)

50 Percent of the following:

Festival

Gifts

Use of club facilities

Use of health club, sports, and similar facilities

Scholarships

Effective tax rate 16.83 percent of the expense

20 percent of the following:

Conveyance, tour and travel including foreign travel

Hotel, boarding and lodging Repair, running, maintenance, and

depreciation of motorcars Repair, running, maintenance, and

depreciation of aircrafts Entertainment expenses Hospitality expenses Employees’ welfare Sales promotion including publicity

(advertisements excluded) Guest house maintenance Conference Telephone

Effective tax rate 6.73 percent of the expense.

Industry specific rates prescribed

FBT on foreign companies

Nexus with India

•Employee based in India OR•Employee taxable in India OR•Expenses attributed to PE in India

No FBT on foreign companies if

•no employees based in India; OR •all employees exempt as per DTAA

FBT also applicable to companies exempt from Tax such as, Liaison office, Airlines/ Shipping Co.

FBT base: Industry specific ratesFBT base: Industry specific rates

Nature of industry Nature of expenditure Reduced presumptive base

Hotel Hospitality 5%

Carriage of passengers or goods by motor car.

Repair, running & maintenance of motor cars (including fuel and depreciation)

5%

Manufacture or production of Pharmaceuticals

software

Maintenance of Production Machinery

5%

Construction Raw Materials 5%

Carriage of passengers or goods by aircraft.

Repair, running & maintenance of aircraft (including fuel and depreciation)

Nil

Exchange regulationsPayment of salary for foreign nationals / Indian

citizens deputed to India -Upto 75 percent of salary can be paid outside India-Balance 25 percent has to be paid in India

Remittance

-During the assignment, expatriates can remit entire net salary after taxes provided:

Such remittance is for maintenance of close relatives abroad and The employment is for a specific duration (irrespective of the length) or for a specific job or assignment, the duration of which does not exceed three years

-If the expatriate’s assignment exceeds three years, he/she can still remit upto US$100,000 p.a for maintenance of close relatives abroad-On completion of assignment, expatriate can remit other assets upto US$1,000,000 per calendar year

Visa and registration with the Foreigners’ Regional Registration Officer (FRRO)Employment visa v. Business visa

Foreign nationals are required to get FRRO registration if visa/intention to stay exceeds 180 days

-Apply for extension of visa –within 15 days before expiry of visa

-Get registered with FRRO-within 14 days of arrival where visa is valid for more than 180 days

-Get registered with FRRO- within 14 days of crossing 180 days or expiry of visa whichever is earlier where intention to stay is for more than 180 days

Cumbersome process for rectification of defaults and extension of visa (especially business visa)

Corporate tax issues associated with deputation of expatriatesPermanent Establishment (PE) /

Business connection exposure

Transfer pricing issues

Withholding tax on cross-charge

Obligation to pay service tax

Tax issues specific to outbound assigneesTaxability in India depends on…

•Timing of transfer -Would ascertain the residential status in the year of departure/arrival

•Nature of the assignment-Whether employee proceeds abroad on employment/ tour/transfer

•Nature of payment-Whether allowances or reimbursement

•Place of payment-Income received in India is taxable in India (subject to treaty relief)

Obligations of employer and employeesWithholding tax on Salaries and

benefits

Withholding tax return filings

Individual tax return filings

IN HOMEIN HOME …and……and… HOSTHOST COUNTRIES

Note: Foreign employer also required to withhold India tax if Note: Foreign employer also required to withhold India tax if remuneration taxable in Indiaremuneration taxable in India

Solutions to reduce tax costs

Claim tax benefits under laws of home/host countries

• Tax on non monetary perquisites • Tax exemptions on per diems where possible• Qualified stock options• FBT planning

Treaty Benefits

• Salary taxable only where services rendered (even if received in India) .

• Short-stay exemption . • Appropriate tax credits claims and flow back of

such claims to the employer.• Introduce tax equalization/hypo tax policies.

Consider moving to NET PAY approach

Employees to be tax neutral

Employees freed from hassle of ensuring tax compliance

Tax optimization and compliance controlled and ensured by the employer

Up side of tax differentials flow back to the employer and reduce employee costs

THE END

ANKIT SETHI MOHAMED IMRAN TAJ

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