The taxation of outbound employees remains a complex issue for companies with employees on secondment to group entities or deployed on overseas projects.
The transient nature of these assignments, coupled with the necessity for employees to maintain their financial obligations back home and retain employment benefits such as insurance, provident fund contributions, and gratuity, necessitates that Indian employers retain the payroll locally.
However, while disbursing salaries locally, many employers follows a practice of withholding regular taxes from the payroll of these outbound employees. This practice persists irrespective of the fact that the employees are executing employment overseas and are non-resident in India.
Consequently, leading them either to claim a hefty tax refund or face the burden of double taxation in the home and host locations. The recent ruling by the Delhi Income Tax Appellate Tribunal (ITAT) in the case of Devi Dayal vs. DCIT reflects these complexities.
Facts in Brief:
- The taxpayer, an employee of an Indian company, was deputed to work on a project in Vienna, Austria.
- As a non-resident in India working overseas, the taxpayer's salary and allowances were paid in Vienna by the Indian company. Additionally, these allowances were accessible through a credit card valid only in Austria.
- The taxpayer filed a tax return in India without disclosing the overseas allowances received.
- The Assessing Officer made addition on account of salary and allowances as the employee did not furnish tax residency certificate (TRC).
Key Arguments:
- The taxability of the salary is determined by a combined reading of Sections 5, 9, and 15 of the Income Tax Act, 1961.
- Section 5 outlines the scope of total income, indicating that a non-resident taxpayer is taxable in India on income that is either received or deemed to be received in India, or arises or is deemed to accrue or arise in India.
- Section 9(1)(ii) specifies that salary shall be deemed to accrue in India if the services are rendered in India and any rest period or leave period is part of the employment contract and is preceded and succeeded by services rendered in India.
- Section 15, the charging section for income under the head ‘Salaries,’ states that salary is taxable on a due/accrual basis, except when paid in advance or in arrears.
The Ruling:
Following a combined analysis of these provisions, ITAT ruled that the salary is taxed on a due or accrual basis and is deemed to accrue in India only when employment is rendered in India. For employment undertaken overseas by a non-resident taxpayer, the salary is not considered accrued or deemed to accrue in India, and is accordingly not taxable in India.
Structuring Outbound Secondments - Key Aspects to Consider
The Delhi ITAT ruling reaffirms the view adopted in many prior judicial presidents. For organisations with significant outbound secondments, especially those on a rotational basis, delving into these rulings in conjunction with an understanding of compliance obligations in the host country, the duration of secondments, domestic tax regulations, treaty provisions, and the tax residency of employees can aid in the efficient management of compliance obligations both in India and the host locations. Essential aspects to evaluate could include:
- Payroll Location: Deciding on the payroll location for expatriate employees hinges on various factors, including the structure and tenure of the assignment, the relationship between the host and home entities, and the employee's family obligations and potential tax residency. It's essential for organisations to evaluate these factors to decide whether to set up payroll in the host country, continue retaining employees on the Indian payroll, or opt for a split payroll arrangement. Local regulations in the host country also play a crucial role in this decision-making. For instance, Bangladesh mandates that a portion of salaries be paid locally to expatriates. Similarly, in India, certain embassies, such as those of Germany and Hong Kong, require that expatriates be remunerated locally as a precondition for issuing employment visa.
- Payroll Structure: The taxability of special pays, assignment allowances, per-diems, housing support, and other benefits provided to seconded employees during their assignment term must be evaluated in both the home and host location.
- Tax Withholding in India: If the payroll of the expatriate employee is retained in India purely for administrative convenience and the cost thereof is charged or transferred to the overseas group entity, then depending on employee’s tax residency a position around tax withholding in India from employee’s payroll may be adopted after careful evaluation.
- Social Security: Depending on the payroll arrangement and the country of secondment, if the employees are being seconded to countries with which India has a social security agreement, they can seek exemption from participating in host country’s social security schemes and continue to maintain regular Provident Fund contributions in India.
- Documentary Trail: Maintaining a comprehensive documentary trail is indispensable for validating any tax stance. It is imperative to meticulously archive secondment-related documentation, including assignment letters, contracts and host tax receipts, certificates, tax returns and Tax Residency Certificates (TRCs).In the referenced ruling, while the assessing officer erred by adding non-resident employee's overseas salary and allowances due to the absence of a TRC but this definitely underscores the significance of maintaining a full suite of essential documents. This is especially crucial for substantiating eligibility for tax treaty relief when an employee qualifying as tax resident in India, is subject to taxation on the secondment income.
For successful secondments, it's crucial for companies to have a well-thought-out mobility policy that addresses the above compliance aspects and incorporates other mobility facets such as immigration, logistical support for expatriates, and programs for language and cultural integration. In certain cases, especially for assignments and projects in countries where the home entity does not have a subsidiary, partnering with a reliable ‘Employer of Records’ who can onboard outbound employees on their payroll in the host country may be a viable solution for successful assignments.
For any queries related to the taxation of outbound employees, structuring of assignments, or establishing mobility policies, feel free to contact our experts here- https://calendly.com/expatorbit/30min
