Practicing as a tax consultant gives so ample opportunities to meet new people, face new situations, tackle complicated tax problems and above all gives a sense of satisfaction at day’s end.
Last week, I was contacted by a distant uncle who used to be our neighbor. His son qualified as an engineer 4 years ago. He was doing well in his job and was now getting an opportunity to spread his wings, i.e. fly to greener pastures overseas. His company was sending him for 5 months to its overseas company to take new responsibilities. The only hitch was he was not sure about the tax implications of working abroad for this short duration.
Yes it does happen with many of us. Companies do transfer/ second/ send their employees for shorter duration to its overseas companies to learn new skills.
So in today’s article, we shall look at what happens when you are posted abroad on a short stint through your company and how your salary and allowances would be taxed
There can be 2 scenarios when you are posted abroad, lets examine them one by one with the help of a dummy person Ram.
Scenario 1: You are posted abroad, but you do not acquire NRI status
what is NRI status: To find out who is a ‘non-resident’, we must first see who is a ‘resident’.
You are a resident Indian as per Indian tax laws if:
i. You are in India for more than 182 days in a financial year OR
ii. You are in India for more than 60 days in a particular financial year and more than 365 days in the 4 years preceding that financial year
If you do not satisfy either of these 2 conditions, you are a non resident Indian – NRI.
Example: On 1st June 2018, Ram was sent to the US on a project through his Indian company. He returned to India on 31st December 2018. For the financial year 2018-19, Ram was in India for 151 days. He does not qualify as a Resident Indian under point (i) of the above definition. We now need to check point (ii). Ram was in India for more than 60 days and since this was his first foreign posting, he has been in India for more than 365 in the last 4 financial years. Therefore, for 2018-19,, Ram will be treated as a Resident Indian.
Salary and allowance: During his stint abroad, Ram continued to receive his salary in his Indian bank account. He also received an allowance for expenses in his bank account in the US.
Taxability: There are two instance of taxation: One in India and one in the foreign country, in this case USA.
Tax in India: For resident Indians, all your income, whether local or global will be liable to be taxed in India. Tax will be deducted as source (TDS) on his Indian income. As for the foreign allowance, if it is in the nature of ‘allowance’ and the amount is used by you for fulfilling all your work related obligations, it would be considered as tax-free under section 10(14) of the Indian Income Tax Act.
Tax in foreign country: You will have to check on the tax laws prevailing in the country of your residence. Currently, according to the tax laws in the USA, you are considered a resident of USA if you have been present in the USA for 31 days or more in a particular calendar year and more than 183 days during a 3-year period that includes the current year and two preceding years. You are also a resident if you are a green card holder. If you satisfy this residency test, you will have to pay tax in USA. (Note: Financial year in the USA is on calendar year basis)
Ram has been in the USA for 214 days during the calendar year 2017. Therefore, he qualifies as a resident of the USA. Now according to US tax laws, a resident of USA will have to pay tax in the USA on his global income. Ram is in an awkward position as he qualifies as a resident of both countries for the same year. Therefore, next, we need to take help from the Double Taxation Avoidance Agreement (DTAA) between India and the US.
According to this DTAA, if a person is a resident of both countries as per residency definitions, he shall be deemed a resident of the country where he has a permanent home. Therefore, in Ram’s case, he will be deemed a resident of India and not a resident of USA.
According to US laws, compensation paid by a foreign employer to a person who is non-resident of USA for the period that he is temporarily in USA is exempt from US income tax. However, the compensation paid must be reasonable and in the nature of living expenses.
Ram will therefore not be liable to pay any tax in the USA, on either his foreign income or his Indian salary.
Scenario 2: You are posted abroad and acquire NRI status
Let us suppose that instead of June 1st, Ram was posted abroad from April 1st 2018 to March 10th 2019. Therefore, by the residency definitions of both countries, he is an NRI for the year 2018-2019 and a resident of USA for the calendar year 2018.
If you are a non-resident Indian, you must pay tax in India only on your income earned in India. All foreign incomes will be taxed in the foreign country.
According to US tax laws, a person who is resident of USA will have to pay tax in USA on his global income. Therefore, Ram will have to pay tax in the USA on his Indian income.
However, since his Indian employer will also deduct tax at source on his Indian salary, Ram can claim a credit for the same when he files his returns in the USA. That is, he can deduct that tax paid in India from his overall tax liability in the USA.
As for foreign allowance, the US laws state that per diem allowance is tax free if within certain prescribed limits and if they are accounted for by the employee through expense reports. If per diem is in the nature of flat amount without the employee submitted any expense reports, then they would be taxable. Each metropolitan has a different prescribed limit. So if the per diem exceeds that limit you would have to pay tax on the excess. Also, the rule of thumb for the duration of the per-diem is less than one year. If the IRS believes that compensation is being masked as per-diem in order to evade taxes, it may raise questions on the company paying the per-diem.
A similar provision exists in the UK where is the amount of per diem is within reasonable limits and not for a period longer than 2 years, it is tax exempt.
Tip: We suggest that if your employer gives you an option between a split salary between two countries and entire salary in the foreign country, it would be better to opt for the latter. That way, there would be no question of taxability in two countries. That would avoid all the paperwork with respect to claiming credits of taxes paid in India. In addition, tax treaties between countries may apply and it is prudent to research such treaties or consult experts in the area before taking a call.
(Author- XPERT Consulting – Tax Consultants, E: email@example.com, www.xpertconsulting.biz)
(Republished With Amendments)