Guide to Expatriate Taxation

Meaning of Expatriate Tax: 

The term ‘Expatriate Tax’ is not defined under the Income Tax Act, 1961. However, in general terms, expatriate means a person who is living outside the country of his origin or where a country of which he does not hold citizenship. He may be residing in another country temporarily or permanently which is generally dependent upon the conditions of the deputation where the word “deputation” means deputing or transferring an employee to a post outside his cadre on a temporary basis.

Under the Income Tax Act, 1961 the incidence of tax depends on the following:

• The residential status of taxpayer
• Provisions prevailing in the Assessment Year to which the incomes relate
• Whether the accrual/ receipt of such income has a nexus with India.

Kinds of Expatriates

There are two kinds of expatriate:

1)    Inbound Expatriate, where the citizen of a foreign country lives and works in India.

2)    Outbound Expatriate where a person of Indian Origin lives and works in a foreign country.

The work requirement for expatriates is dependant on whether the assignment is a:

• Business Visit
• Consultation
• Term Assignment (Short term/ Mid term/ Long term)
• Permanent relocation

Compliance for Inbound Expatriates while entering or exiting India:

All inbound expatriates (including minors above the age of 16) visiting India on a long-term visa for more than 180 days, are required to get Foreign Regional Registration Office (FRRO) registration, which must be done within 14 days of their arrival in India, if such requirement has been raised as per their visa endorsement.

Such inbound expatriates must surrender residential permits to the FRRO/ FRO or the immigration officer at the immigration checkpoint. The Income Tax Act also provides for expatriates to obtain a “No Objection Certificate” issued through Form 30B by filing Form 30A. Form 30A is an undertaking by the employer of the expatriate that any future tax liability arising in case of the expatriate must be borne by the employer.

Taxability of Inbound Expatriates in India:

The first step in calculating income associated with an inbound expatriate is to find out his residential status and the extent to which their income is taxable in India where the nexus of income is defined.

However, it is important to note that the residential status for an expatriate will be determined keeping the Income Tax Act in mind as well as the Double Taxation Avoidance Agreement (DTAA). At times, an inbound expatriate may be considered a resident of both the countries as per the relevant taxation laws and the DTAA. In this case, the residential status will be determined according to the ‘Tie Breaker Rules’.

Salary income in case of inbound expatriates

Remittance of Salary:

The expatriates can enjoy receipt of salary in bank accounts maintained in home countries by maintaining a foreign currency account with a bank outside India. However, they have to ensure that income tax as per the Income Tax Act has been duly paid. Where perquisites are received in foreign currency by an expatriate from the parent company located in the home country, compliance in Form 15CA is mandatory while establishing such reimbursement by the subsidiary company located in India. 

Taxability of Salary Income in India:

An inbound expatriate is liable to bear taxes in India for the income received on rendering his services in India, subject to exemptions provided under the Income Tax Act and the Double Taxation Avoidance Agreement (DTAA). 

Components of salary income in case of expatriates (Perquisites & Allowances):

Daily Allowance: These allowances are paid in addition to their salary in order to meet their living expenses and are subject to tax in India. However, exemption is also available in some cases especially in case of allowances related to short-term business travels.

Relocation Allowance: These allowances are related to expenses incurred on relocation including shipment, baggage etc. These expenses are exempt from tax as long as these expenses can be substantiated with proper documentation.

Contribution to Social Security (Provident Fund): If an expatriate is employed in an organisation covered by the provisions of the EPF Act, wherein contributions under the Provident Fund are mandatory, such inbound expatriates are not required to contribute to any schemes in India provided they enjoy the status of a “detached worker” for the period and terms in the social security agreement (SSA) entered with the home countries. The SSA requirements, in such cases, are determined in accordance with the provisions of the existing SSA. However, the expatriate has to file a Certificate of Coverage(COC) then he need not contribute to SSA in India with the PF authorities. This COC is issued by the home country’s social security authorities.

For inbound expatriates to whom the PF provisions are applicable, they have to make matching contributions of 12% of salary to the PF. The employer is also required to make contributions towards insurance schemes specified under the EPF Act. 

Employee stock based incentives: If an expatriate is based in India only for a part of the vesting period, then only the proportionate amount related to the period of service in India will be liable to tax in India.

Perquisites associated with home leaves: Any reimbursement of expenses incurred by the employee on the home leave travel for journey outside India for an expatriate along with his family is fully taxable in India.

Reimbursement of expenses related to shipment and storage: In case of expatriates, expenditure is incurred on storage of household goods in the home country, after the expatriate has moved to India and while carrying out assignment in India. Since, expenditure is reimbursed by Indian companies as a necessary obligation for rendering services in India, such expenses are chargeable to tax in India. However, these expenses are considered exempt when such expenses are incurred while transferring an expatriate from his home country to India, since they are considered to be a part of his professional duties.

Short Stay Exemption: All such incomes earned by an expatriate in India are not taxable under the Income Tax Act, if the following conditions are met:

• The expatriate is not a citizen of India.
• The foreign company is not engaged in any trade or business in India.
• The expatriate’s stay in India is not more than 90 days.
• The employer in India cannot claim such income paid to the expatriate as a deduction under the Income Tax Act.

Other perquisites and allowances including House Rent Allowance, vehicle, accommodation: All such allowances are taxable/ exempt as per the provisions contained under the Income Tax Act.

Concept of Tax Equalization

To ensure that expatriates do not end up paying more taxes, the concept of tax equalization has been introduced wherein a hypothetical tax is deducted from the  salary in the home country and the actual tax in respect of income from employment in the home country and India is borne by the employer. This hypothetical tax is withheld from the expatriate’s normal pay and held as “tax reserve” and then the employer pays all the tax associated with the home country and India.

Other important compliances that an expatriate must keep in mind:

• All expatriates must obtain a Permanent Account Number (PAN) to avoid deduction under higher rate for withholding tax rates.
• The income of an expatriate is chargeable at Maximum Marginal Rate (MMR) if his income during the year exceeds Rs.5 crores.
• All expatriates must inform the FRO in case of change in accommodation and obtain a certificate of change in address.