The world is becoming smaller for the Indian corporate as business expands globally.
The world is becoming smaller for the Indian corporate as business expands globally.
This makes human assets fungible and mobile across the world, with individuals moving to multiple jurisdictions for business either for a short duration or for a long term.
Take the case of B Kamath, the Asia head of an Indian MNC, who has to travel to Singapore, Australia, Japan and so on, to render his services.
Kamath’s salary thus becomes taxable in multiple jurisdictions, i.e. in the source country where the services are rendered, as well as the country of residency (India).
In order to avoid double taxation of income, India has entered into double taxation avoidance agreements (DTAAs) with some countries.
DTAA gives the first right to tax to the country of residence and such income is exempt from taxes in the source country, but subject to fulfilment of certain conditions.
This means, Kamath would be subject to tax in the source country as well as in India in case he is unable to fulfill the conditions for exemption in the source country. However, he would not end up paying taxes in more than one country as he can claim credit under the DTAA for the foreign taxes paid in source country to the extent taxes relate to income doubly taxed and do not exceed the Indian taxes on such income.
It would be an ideal situation, if the mechanism to claim foreign tax credit was as simple as mentioned above.
However, there are practical glitches, which cannot be ignored. Some of the challenges are as under:
Tax year in every country may be different, like in India it is April to March whereas in Australia it’s July to June.
The time of determination of the tax liability is also different. For example, India requires payment of taxes during the tax year by way of tax withholding/ advance tax, whereas, in Singapore taxes are determined and paid only after the end of tax year.
Sometimes, taxes withheld are more than the taxes required to be paid in the source country and such number gets finalised only at the time of filing the source country return. This situation could lead to excess or short claim of FTC.
In case India does not have a DTAA with any country, the Indian Income tax Act provides for claiming the foreign tax credit to such resident individual in India.
Thus, foreign tax credit is a critical mechanism for outbound assignees to avoid double taxation.
The writer is associate director, Ernst & Young. Views are personal. Basant Gadhyan, a senior tax professional with E&Y contributed to this story.
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