Tax Residency Certificate

Under law, identity or recognition of a person is established by relevant documents mentioned under those laws. For example passport establishes citizenship; Aadhar Card establishes residency for the purpose of government subsidies and benefits. In the same way, residency under direct tax laws is established by ‘Tax Residency Certificate’ also known as ‘TRC’.

In one of the previous article about Foreign Tax Credit (FTC), published on taxguru.in dated 30^th March, 2021, it was discussed how FTC can be availed, the requirements and the benefits. In this article more light will be shed on how TRC is recommendable in availing FTC.

Tax Residency Certificate is a certificate issued by the Income Tax Department to the Indian Residents who earn income from countries with which India has a Double Taxable Avoidance Agreement (DTAA). The certificate is submitted to the payer (that is a foreign entity with whom the transaction is entered into) so that the foreign entity may pass on the benefits under DTAA to the Indian Residents.

Though TRC is a document which is not a prerequisite for claiming the credit of foreign taxes under Income Tax Act, 1961 (Act), it is increasingly becoming an imperative document due to its demand made by the foreign entities who wants to be cautious and wants the identity of the counter party (that is the Indian Resident) to be vouched by independent government authority.

Benefits of TRC:

Relief in Double Taxation: A person resident in India may end up paying tax twice, on income earned in foreign countries. For an instance a resident earning an income from the USA shall have to pay tax in USA as well as India. In order to provide relief to such taxpayers, Government of India enters into Double Taxable Avoidance Agreement with the governments of other countries. For getting relief mentioned under DTAA’s, a taxpayer needs to get a TRC which proves its tax residency in India in front of the US tax authorities.

Transperancy in Remittance: In case a person resident in India exports goods and/or services, for remitting the amount for exports the foreign entity with whom the transaction is entered into more often than not, asks for the TRC before making remittance. Thus, TRC brings transperancy in remittance of funds of transaction between the two entities located in two different country

Once in Year Activity: TRC certificate once issued, remains valid till the end of the financial year. Hence, there is no multiple applications or lenthy recurring processes. 

Pre-requisites to obtaining TRC:

An application for obtaining TRC needs to be done in Form 10F/10FA to the Jurisdictional Assessing Officer. The information required in Form 10F/10FA is:

• Status (individual, company, firm etc.) of the taxpayer;
• Nationality or country of incorporation;
• Unique Identification Number from which the Government of taxpayer's resident country identify the taxpayer (example- Certificate of Incorporation or Aadhaar);
• Period for which the residential status, as mentioned in the certificate is applicable;
• Address of the assesse in the country or specified territory outside India, during the period for which the certificate is applicable.

In case, the Application is made by a person resident in India, the applicable form is Form 10FA. In case of a non-resident, it shall be in Form 10F.

Assessing Officer on receipt of such application along with all information mentioned above, being satisfied in this behalf issues a TRC in Form 10FB.

Practical Scenario:

Other Points:

Where any taxpayer, being a resident of India, is aggrieved due to DTAA or due to any of the tax authorities of any country or specified territory outside India for the reason that, according to him, such action / rules of agreement will result in loss, such taxpayer may make an application to the Central Board of Direct Taxes seeking to invoke the Mutual Agreement Procedure, if provided in DTAA.

In such case, CBDT shall demand requisite documents which shall include TRC as well. Accordingly, in order to make such the relief applications more genuine, TRC is required.

Conclusion:

TRC being the proof of residence is mandatory when it comes to availing benefits of DTAAs and recommendatory in case of FTC and foreign remittances. However, with the ever increasing complexities and volume of transactions in cross country sector, TRC should evolve from just a complimenting document to a role playing document.

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(This article represents the views of the authors only and does not intent to give any kind of legal opinion on any matter)

Authors:

Rishabh Jain | Associate Consultant   |   Email: rishabh.jain@masd.co.in

Soham Dongre | Associate Consultant   |   Email: soham.dongre@masd.co.in