India Tax Workshop 2014 - EYFile/... · Page 5 India Tax Workshop 2014 Employee Mobility – The Landscape l Permanent Establishment sensitivity spreading globally - China, Malaysia,

Cross Border Mobility

India Tax Workshop 2014 10-12 September 2014

Transforming

India Tax as a growth catalyst

Content

► Employee Mobility – The Landscape

► Employee Mobility Risks

► Deputation Challenges

India Tax

Workshop 2014 The Landscape

India Tax Workshop 2014 Page 4

Employee Mobility – The Landscape

► Stronger enforcement of immigration rules

► Increased focus on tax compliance and in particular withholding tax

► Enforcement of mandatory compliance with Provident Fund for foreign national

workers in India

► Exchange of Information agreements between India and various Governments

► New Companies Act, 2013 requires compliance for related party transactions

and stronger corporate governance

► Introduction of Human Capital Intangibles in transfer pricing

► Increased Permanent establishment risk in light of recent judicial decisions

Ind

ia


Employee Mobility – The Landscape G

lob

al

► Permanent Establishment sensitivity spreading globally - China, Malaysia,

Indonesia, the US, Spain, Korea

► Era of bank secrecy coming to an end, annual exchange of information in an

agreed format

► Digitization of economy - need for greater coordination between Revenue

Jurisdiction

► Greater disclosure requirements - India, US, Australia, the UK, Canada

► Change in Tax residency rules - New Zealand, the UK

► Change in tax rules for taxation of benefits- South Africa, Brazil, the UK,

Australia


Employee Mobility – Recent Changes

► France - Tax of 75% imposed on earning over Euro 1 million

► The US - Tax on the super rich raised to 39.6%

► The UK - Taxation of share based income for internationally mobile employees

► South Africa - Pay As You Earn (PAYE) reconciliation statement to be submitted

by employers claiming Employer Tax Incentive (ETI)

► Italy - Introduction of voluntary foreign asset disclosure opportunity for tax

payers

► Russia - Tightening of sanctions for breaching immigration controls by both

employers and individuals

► Austria - New ruling clarifying that the legal employer for seconded individuals

is the ‘receiving company’

Glo

bal

India Tax

Workshop 2014

Deputation

Challenges

India Inbound Deputation– Typical Scenario

► FCo, a foreign company deputes Mr A (foreign citizen) to ICo, 100%

subsidiary of FCo in India

► Period of deputation is 3 years

► Home country payroll with continued social security coverage

► ICo to provide accommodation and car

► Salary cost crossed charged by FCo to ICo


India Inbound Deputation - Key challenges K

ey c

ha

llen

ge

s w

he

n d

ep

utin

g

Exp

atr

iate

s to

wo

rk in

In

dia

Immigration

► Appropriate visa

► Timely registration

Payment of salary

► Location of payroll – home vs

host

Social Security

► Coverage in home country

► Mandatory Indian Provident Fund

unless SSA

► Refund of contributions in India

Business Reputation

Human Resource related

Taxation

► Home and host country tax compliance

► Withholding tax compliance

► Year end tax return

► Mitigation of permanent establishment

exposure

► Cross charge arrangements and

withholding tax obligation on Indian entity at

the time of remittance

► Transfer pricing

► Indirect tax

Other considerations

► Income and social tax equalization

► Cost and risk optimization

► Security

► Cultural differences


India Inbound Deputation - Immigration

► Determination of appropriate visa type for employee and family members

► Registration at the Foreigners Regional Registration Office (‘FRRO’)

► Transition from traditional registration to online procedure

► Location specific requirements

► Non-married partners accompanying Employment Visa holders are not eligible for

dependent visa

► Change of employment from one employer to another employer is not permissible.

Limited exception has been provided for

► Change of employment between a registered holding company and its subsidiary

and vice -versa

► Change of employment between subsidiaries of a registered holding company

► Dependent cannot take up employment in India without changing the visa

Immigration


India Inbound Deputation– Location of Payroll

► An expatriate working in India can receive 100% of salary in a bank account

maintained outside India subject to satisfaction of given conditions:

► If the expatriate is employed by a foreign entity outside India

► Where such expatriate comes to India on deputation to the

office/branch/subsidiary/joint venture of its employer

► The necessary taxes due in India have been deducted by the employer

► The relationship between foreign entity and Indian entity is required to be analyzed in

order to ensure that payment of salary outside India falls under the regulation giving

automatic approval for payment of salary overseas

► If the payment of salary is not covered under automatic route, approval from Reserve

Bank of India is required

Payment of Salary outside India


India Inbound Deputation - Income-Tax

► Salary for services rendered in India is taxable irrespective of the residential status of

individual or place of payment of salary

► For short term assignees, salary may be claimed to be exempt from tax in host country

where following conditions set out under dependent personal service article of

applicable DTAA are satisfied:

► Individual is a tax resident of home country

► Physical presence in host country is less than 183 days in aggregate in a year

► Salary is paid by, or on behalf of, an employer who is not a resident of host country

► Salary is not borne by a permanent establishment which the employer has in host

country

► Requirement of tax residency certificate in order to claim exemption

► “short stay exemption” may carry “Permanent Establishment” risk

Taxability of Individual and Short Stay Exemption


India Inbound Deputation- Withholding Tax on Salary

► Supreme Court of India ruling in case of M/s Eli Lily & Company Pvt. Ltd

► Indian entity to which the employees are seconded is responsible for discharging

withholding tax obligations

► Automation of withholding tax compliance processes with mandatory e-filing

► Ability to track data – tax paid, delayed

► Withholding tax non-compliance leads to interest, penalty and initiation of prosecution

Greater focus on employer withholding tax compliance on salary payments


India Inbound Deputation- Withholding Tax on Salary

► Delay in deposit of tax withheld leading to prosecution notices from the Income-tax

Authorities in addition to interest and penalty

► Period of delay for prosecution now immaterial (earlier instruction of 12 months delay

for initiation of prosecution done away with)

► Prosecution proceedings may lead to:

► Imprisonment ranging from 3 months to 7 years and with fine or

► Compounding fee @ 5% per month for the period of default limited to tax under

default

Delay in depositing of withholding tax leading to prosecution


India Inbound Deputation – Permanent Establishment Risk

► Presence of employees of foreign company in India may trigger a PE exposure

► Indian Revenue Authorities are extremely aggressive on the issue of PE

► Conflicting judicial guidance on the issue of PE arising due to deputation of expats

into Indian entity from foreign entity

► Impact of the Delhi High Court Ruling in the case of Centrica (April 2014)

► Key Considerations;

► Reporting, control and supervision

► Legal Employment versus Economic Employment

► Lien on home country employment versus localisation

► Location of payroll

► Weaken the nexus with the home country employer

Increased sensitivity around Permanent Establishment (PE) exposure


India Inbound Deputation – Withholding Tax on Cost Cross Charge

► Technically reimbursement of salary cost by Indian company to foreign company

should not attract any withholding tax

► However, Indian Revenue may treat this payment as any of the following

► Fee for Technical Services (FTS): Payment for managerial services may be

considered as FTS under some of the DTAAs. Any sum characterized as FTS would

be taxed @ 10% of the gross amount of fee managerial services

► Business income: Business income is chargeable to tax under most of the DTAAs

only if foreign entity has a PE in India

Controversy continues…..

Withholding tax on cost cross charge


India Inbound Deputation – Service tax

► Absence of local employment with Indian company may attract service tax on

secondment arrangement

► Recent Mumbai Tribunal decision held that service tax is not applicable as there is no

“supply of manpower”

► Applicability of service tax on secondment of employees is a controversial issue and

requires fact based analysis

Service tax on secondment


India Inbound Deputation– When sending expatriates to work in India

► Balancing the tax savings from claiming short stay exemption versus the risk of

Permanent Establishment exposure

► Cross border secondment arrangements need careful evaluation at planning stage

► Alignment with business model, Corporate Tax and Transfer Pricing

► Mitigation of Permanent Establishment risk considering the approach of Indian

Courts of “substance over form” approach to determine employment status of

expatriates.

► Supplement strength of substance by

► Payroll in India

► Fortified secondment documentation/ Indian employment contract

► Consider cost impact of Indirect tax, applicable regulatory provisions and social

security in India

Things to think about - in summary


India Outbound Deputation – Typical Scenario

I Co, an Indian company sends its employees to various group entities located in different

countries.

► Employee remains on home location headcount

► Continues to receive home country salary and benefits

► Receives various assignment related allowances in the host location

► Employee is expected to return to the home location at the completion of

travel/assignment

► Host country taxes are borne by the host country employer

► Employee may continue to participate in the Provident Fund and gratuity scheme

► Duration of assignment could vary


India Outbound Deputation- Key challenges K

ey c

halle

nges f

or

India

outb

ound

Immigration

► Appropriate visa and work permit

► Minimum wage requirements in host

country

Payment of salary

► Location of payroll

► Continued coverage in Indian

retirement benefits plan

Social Security

► Coverage in home and host country

► India’s growing network of social

security agreements

► Benefit under a Social Security

Agreement if any

Tax Compliance

► Avoidance of double taxation

► Home and host country compliance

► Mitigation of permanent establishment

exposure in host country

► Transfer pricing

► Service tax

Other considerations

► Localization of global mobility policies

► Labor law compliances in host country

► Income and social tax equalization

► Cost and risk optimization


India Outbound Deputation – Tax Compliance

► Determination of residential status in India and the host country – Extension of 60 days

to 182 days

► Reporting of overseas income for taxation in India

► Taxability of per diems – whether away from normal place of duty

► Availing benefits available under an applicable tax treaty

► Foreign Tax Credit for host country taxes in case of RoRs

► Dependent Personal Services (DPS) exemption for assignees who qualify as Tax residents in

the host country

► Tax treaty benefit to be applied at India withholding tax stage versus tax return filing

► Timely filing of tax returns to claim tax refunds due & Tax Residency Certificates to

support tax treaty claims

► Failure to report overseas income when withholding tax in India will attract interest,

penalty and prosecution


India Outbound Deputation – Social Security Compliance

India’s growing network of Social Security Agreements – Opportunity for cost

optimization

► Belgium

► Germany

► Switzerland

► Luxembourg

► France

► Denmark

► Korea

► Netherlands

► Hungary

► Sweden

► Finland

► Czech Republic

► Norway

► Canada

► Japan

► Austria

► Portugal

Signed and Not in Force Signed and In Force

India Outbound Deputation – PE Risk in Host Country

Employees going under “contract for

services”

Employees going under “secondment

contract”

► Primarily, Fixed Place and Service PE for ICo

could be constituted

► Fixed place PE – if employees of ICo have a

fixed place at their disposal (including premises

of FCo) from where business is carried on

► Service PE – If the services are rendered in the

overseas country for a period exceeding the

prescribed threshold; reduced threshold where

services are provided to FCo ie. related party

► If it can be demonstrated that the seconded

employees are not carrying on any activities

on behalf of ICo, there should not be a PE risk

for ICo

► Supervision, control and responsibility of the

employees should be with Fco

► Adequate documentation such as

employment contract with FCo,

secondment/ deputation agreement, global

deputation policy, etc. should be maintained

in support of the above


Countries Threshold to trigger Service PE

Singapore > 90 days in any fiscal year in aggregate

For transaction with associated enterprise (AE): >

30 days in any fiscal year in aggregate

UAE > 9 months within any 12 month period in

aggregate

Australia > 90 days within any 12-month period in aggregate

Saudi Arabia > 182 days within any 12-month period in

aggregate

China > 183 days in aggregate

Thailand > 183 days in aggregate

Countries Threshold to trigger Service PE

USA

> 90 days within any 12 month period in aggregate

Reduced to single day if transaction with AE

UK



Canada


Reduced to single day if transaction with AE

Swiss

Confederation


> than 30 days within any 12 month period in

aggregate if transaction with AE

► No Service PE clause with countries like Germany, France and Japan

► No threshold prescribed for Fixed Place PE in the tax treaties – generally considered as

6 months in aggregate in any 12 month period

► Service PE thresholds for some key destinations

India Outbound Deputation - PE thresholds


India Outbound Deputation – Foreign Tax Credit for ICo

Employees going under “contract for service” Employees going under “secondment

contract”

► If income is taxable (as per the local laws or the

relevant tax treaty), foreign taxes are likely to be

withheld on ‘gross’ basis by FCo

► Under most tax treaties, FTC is usually restricted

to taxes which are payable on such income in the

home country

► Utilizing the entire FTC on such income by ICo

could be a concern, if:

► ICo has low / nil profitability;

► Taxes have been withheld at a higher rate by

FCo, as per domestic tax law provisions

► As no income would be received by ICo,

there should not arise any FTC issue in

absence of any withholding tax implications

► If salary cost of employees is reimbursed

(without any mark-up) to ICo, as paid in

India, it should be possible to contend that no

withholding tax should be applicable in the

absence of any income element on such

reimbursements


India Outbound Deputation – Transfer pricing

Employees going under “contract for

service”

Employees going under “secondment

contract”

► Payments to ICo by FCo should be at an

arms length price as per the Indian TP

provisions

► It can be contended that TP provisions should

not be applicable;

► As no payment is made by FCo to ICo as

no services are rendered;

► Also, where salary costs are reimbursed

(without any mark-ups) to ICo, in the

absence of any taxable income in the

hands of ICo


India Outbound Deputation

► Being on the right side of immigration and minimum wage rules

► Whether to continue India payroll

► If India payroll then requirement to deduct tax

► Explore tax Treaty relief at the time of withholding

► If no India payroll

► Continuity of Indian retirement benefits and provident fund

► Whether benefit under an applicable SSA is feasible

► Filing of home and host country tax returns

► Tax Equalization and trailing stock option liability

► PE risk in host country

► Transfer Pricing implications

Things to think about - in summary


Thank you

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purposes of decision-making. EY LLP, does not undertake any legal liability for any of the contents

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Documents

India Tax Workshop 2014 - EYFile/... · Page 5 India Tax Workshop 2014 Employee Mobility – The Landscape l Permanent Establishment sensitivity spreading globally - China, Malaysia,