blba global mobility seminar

Global Mobility:

Issues and Challenges

21 March 2013

1. Individual Tax

Aspects

Agenda for discussion

2. Social Security

Aspects

3. Corporate Tax

Aspects

Issues for consideration

Secondment

Arrangements

Corporate Tax, Transfer Pricing, Permanent

Establishment (PE) issues

Social security arrangements

Employee Taxation

Indirect Tax Implications

Withholding Tax obligation on reimbursement /

salary cost

Individual tax

aspects

© 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member

firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4

Contents

Scope of Taxation

Taxability of Employment Income

Compliance Requirements

Relief from Double Taxation

Caution Points

Work permit / Visa requirements

Social Security Provisions

Q&A



Scope of Taxation

Residential Status under domestic tax law:

• Resident and Ordinarily Resident; Worldwide income

• Non Resident / Not Ordinarily Resident; Income sourced / received in India

Physical stay in India in relevant tax year (01 April to 31 March) / ten previous tax

years

Highest tax rate – 30 percent over income > INR 1 Million; progressive tax slabs

Additional Surcharge @ 10 percent over income > INR 10 Million; only for tax year

2013-14



Taxability of Employment Income

Services rendered in India; taxable

Salary, allowances and benefits taxable; subject to certain exceptions

Residential status / place of receipt of salary; not relevant

In case of tax equalization – Salary net of hypo tax; grossing up of taxes

Tax withholding and compliance by employer (PAYE)



Compliance Requirements

Employee related compliances:

• Permanent Account Number - mandatory tax registration number

• Advance taxes on income other than Salary

• Filing of return of income - due date of July 31st following the end of tax year

Employer related compliances:

• Tax Deduction Account Number

• Withholding tax compliances:

Monthly tax withholding - by 7th of the following month

Quarterly withholding tax statements (Form 24Q)

Annual withholding tax certificates (Form 16 and Form 12BA)



Relief from Double Taxation

Provisions of domestic tax law or tax treaty – whichever is more beneficial to

taxpayer

India has signed tax treaties with more than 100 countries (comprehensive /

limited), including Belgium and Luxembourg

Relief under tax treaty:

• Short Stay Exemption – stay in India < 183 days in a tax year / any 12 month

period; other specified conditions

• Foreign tax credit of taxes paid in host country on doubly taxed income;

subject to proportionate Indian taxes



Caution Points

Service PE risk under the relevant tax treaty:

• Furnishing of services through employees or other personnel

• Services other than Technical / Included Services

Stewardship activities – No PE risk

If PE in India; short stay exemption not available

PE risk mitigation; Appropriate documentation



Visa Requirements

Employment Visa:

• Registration with FRRO upon arrival into India within 14 days

• Highly skilled / qualified professionals coming for employment , execution of

contract, to provide technical services, etc.

• Not granted for routine, ordinary, or clerical jobs; availability in India

• Salary > USD 25,000 per annum

Business Visa:

• No registration if stay < 180 days in a single visit

• Bonafide business purpose (establish business ventures, explore business

opportunities, attending board meetings, etc.)



Social Security Provisions

International Worker (foreign passport holder) working for Indian establishment

Employee’s contribution @ 12 percent; matching contribution @ 12 percent by

Employer

Effective Social Security Agreement (SSA) / Bilateral Comprehensive Economic

Agreement; not required to contribute

&

Questions

Answers

Social Security

Aspects



Contents

Social Security in India – Applicability

Major developments on International

Worker

Employers’ responsibilities for Iws

Social Security Agreement (‘SSA’) and

its provisions

Grey Areas

Q&A



Social Security in India – Applicability

Applicable to companies having twenty or more employees

Option for voluntary coverage

Employee would also include those who engaged through the contractors

Employee is required to contribute to provident fund (‘PF’) @ 12 percent per

annum

Matching contribution @ 12 percent per annum to be made by employer



Major developments on International Worker

In October 2008, Employees’ Provident Fund law introduced the concept of

International Workers (‘IWs’)

IWs included:

• Foreign employees working for an establishment in India to which the Act

applies

• Indian employees deputed to a country with which India has entered into an

Social Security Agreement (SSA)

IWs and their employers required to make Provident Fund contributions effective

1 November 2008

Contribution to be made on full monthly salary (i.e. without any salary cap)



Major developments on International Worker …continued

Exemption from contributions available to IWs :

• If they are contributing to home country social security ; and

• Obtained Certificate of Coverage (‘COC’) under the relevant SSA ; or deputed

from a country with which India has entered into a bilateral comprehensive

economic agreement (‘agreement’) before 1 October 2008

• No exemption because of salary limit of INR 6500




In September 2010, Government of India issued a notification and further

amended the EPFS and EPS vis-à-vis IWs. The key amendments were as follows :

• Employer will be required to contribute towards pension fund at full salary

• Employees from non-SSA countries will not get pension refunds

In May 2012, Employees’ Provident Fund Organisation issued a circular to its

officers clarifying certain key aspects on IWs

• The definition of IWs has been reinterpreted. Under the new interpretation

Indian outbound employees who obtain a COC will not be treated as IWs

during their employment in SSA countries




In October 2012, Government of India has issued a notification changing the EPFS

and EPS vis-à-vis the IWs.

• IWs who are covered under an SSA between India and any other country can

withdraw their accumulated PF balances under EPFS on ceasing to be an

employee in an establishment covered under the EPF Act.

• The PF accumulations will be paid to IWs in their bank account directly or

through the employer

• Indian outbound employees who were employed in a country with which

India has signed SSA may become IWs



Law as on date

The IW has to be enrolled from the first day of his employment in India, unless

exempted

Filing monthly returns for IWs

Indian employee working in SSA countries with COC will not be IWs

PF contribution on full salary (Employee:12 percent and Employer: 3.67 percent)

Pension contribution will be @ 8.33 percent of the full monthly pay funded

entirely by employer

EDLI contribution (0.5 percent) will be capped to salary of INR 6500

PF Rules to apply irrespective of where the salary is paid

In case of split payroll – contribution is required to be made on the total salary



Law as on date …continued

The dormant account clause for Indian employees will not apply to IWs

Refund for employees covered under SSA possible

IWs from non SSA country get PF refund on retirement after attaining 58 years

PF accumulations will be paid to IWs in their bank account directly or through

the employer.



Social Security Agreements

A Social Security Agreement is a bilateral instrument to protect the interests of

the workers in the host country

SSA provides for avoidance of double coverage and equality of treatment with

the host country workers

SSA generally covers the following benefits:

• Exemption from double social security contribution

• Exportability of benefits

• Totalisation of contributory periods for determining eligibility



SSAs Signed and in force

Sl. No. Country Name Signed on Effective from

1 Belgium 3 November 2006 1 September 2009

2 Germany 1 October 2008 1 October 2009

3 Switzerland 3 September 2009 29 January 2011

4 Denmark 17 February 2010 1 May 2011

5 Luxembourg 30 September 2009 1 June 2011

6 France 30 September 2008 1 July 2011

7 Republic of Korea 19 October 2010 1 November 2011

8 Netherlands 22 October 2009 1 December 2011



SSAs Signed but not in force

Sl. No. Country Name Signed on

1 Hungary 2 February 2010

2 Czech Republic 9 June 2010

3 Norway 20 October 2010

4 Finland 12 June 2012

5 Canada 6 Nov 2012

6 Japan 16 Nov 2012

7 Sweden 26 Nov 2012

8 Austria 4 Feb 2013

9 Portugal 4 March 2013



Benefits covered under SSAs

Country Detachment Totalisation Portability

Belgium 5 years √ √

Germany 4 years ⤫ ⤫

Switzerland 6 years ⤫ √

Denmark 5 years for outbound from India

3 years for inbound from Denmark √ √

Luxembourg 5 years √ √

France 5 years √ √

Republic of

Korea 5 years √ √

Netherlands 5 years ⤫ √



Employee benefits compared – SSA and Non SSA countries

SSA Countries Non SSA Countries

Benefits

Refund of Provident Fund : At the time

of cessation of employment

Refund of Provident Fund - After

completing the age of 58 years and

cessation of employment

Refund of Pension- Minimum service

of 6 months and cessation of

employment

Pension benefit- After 10 years of

contributory service

Totalisation Benefit : The period of

contribution in India will be added for

determining the eligibility for social

security benefits.

Pension contribution will be forfeited

if the service in India is less than 10

years

Compliance

Not required to contribute towards

Provident Fund

The employee is required to join

compulsorily from the first day and

contribute towards Provident Fund



Grey areas

In case of Multi-country responsibilities, should an employee contribute for the

work he is performing for India only and not for other countries?

In the EPF Act, the PF is payable on basic wages, dearness allowance and

retaining allowance. So would the following allowances be included in the salary

of IWs for calculation of PF?

• Hardship allowance

• Foreign service allowance

• Special allowance



Grey areas …continued

Mechanism of pension payment abroad

Retrospective COCs – Whether COC will be issued for specific retrospective

period of employment in the host country

In case of Exempt PF Trusts, how will refund / readjustment be done for pension

contributions

Disconnect between social security and tax law: Permanent Establishment issue

Employees hired outside India by branches of Indian establishments

Criteria for determining India IWs

&

Questions

Answers

Corporate Tax

Aspects



Contents

Introduction

Concept of Permanent Establishment

Case Study I

Case Study II

Secondment Arrangements – Critical

Factors

Q&A



Introduction

International movement of employees is a common practice among

multinational companies

The Indian tax and regulatory landscape involves certain unique factors that

should be kept in mind while evolving a secondment / deputation policy

Prolonged stay of employees of foreign companies may create exposure to a

taxable presence in India

In the next few slides…

• Overview of the important tax and regulatory considerations relevant for

policy on cross-nation movement of employees.

• Certain aspects related to presence of employees in India for performance of

contractual obligations for overseas companies, as well as deputation to

Indian group companies



Concept of Permanent Establishment (‘PE’)

Prolonged presence of employees of F Co in India, may constitute PE in India

F Co

Place of

business

Outside India

India

Customer

premises

Carrying on

business in

India

Profits of F Co taxable in India if it carries on

business in India through a PE

Only those profits of F Co which are

‘attributable’ to India can be taxed in India

Attributed profits are taxable on ‘net basis’

Methods of attributing profits

CONCEPT



Concept of Permanent Establishment (‘PE’) …continued

Permanent

Establishment Service PE

Fixed Place PE

Agency PE

“Fixed” place of business

At disposal of Foreign Company

Carrying on business activity of Foreign

company

Presence of employees in excess of 6

months typically triggers Fixed Place PE

exposure

Business of Foreign Company carried on

through an “Agent” in India

Scope of activities defined in DTAA

Agents are of two types:

Dependent agent

Independent agent

Two-Fold conditions to be met to trigger

PE taxability in India

Furnishing of “services” within India

Through employees or other personnel

Services other than Royalty / Fee for

technical services (‘FTS’)

Activities continue for a specified period

(90 / 183 days)

No service PE clause in some Treaties –

Belgium, Netherlands, France



Case Study I – Performance of Contract in India

F Co

Indian Customer

premises

Sends

employees

to India

Situation I

Contractual

obligation of F Co

performed in India

Taxability of F Co

Tax withholding

@10% / 20% on

gross basis

Service PE exposure

Tax withholding

@42.024% on net basis

Possibility of constitution of Fixed place

PE (even where the fee qualifies as FTS)

cannot be ruled out

Yes No

Yes

Restrictive

definition in

certain treaties

‘make available’

Service fee

qualifies as

‘Fee for

Technical

Services’

Payment of

Service

Fees

Necessary Compliances to be

undertaken by F Co and I Co



Case Study II – Deputation to Indian Group Company

F Co release the employees

from their job

responsibilities;

Employees to work under the

control and supervision of I

Co;

I Co to reimburse salary cost

of secondees to F Co without

any mark up;

Position of not withholding

taxes on such cross charges

may be taken

Employees

F Co

I Co

Payroll of employee to be transferred from F Co to I Co;

F Co to act purely as salary disbursement agent for

administrative convenience;

Social security / retirement benefits continue to be with F Co.

Oversees bank

account of

employee

India

Outside India

Critical agreements:

Agreement between F Co and

secondees

Cost Reimbursement Agreement

between F Co and I Co

Employment agreement between

I Co and secondees

Assignment to

Indian group

Company

Situation II

Secondment of

employees Reimbursement of salary

cost of employees



Case Study II – Indirect Tax Implications

Employees

F Co

I Co

Oversees bank

account of employee

India

Outside India

Reimbursement of salary

cost of employees

Secondment of

employees

Should not qualify as a case of ‘supply’ of manpower

since payroll / employment of Employee is

transferred from F Co to I Co

Instead could be construed as provision of

‘recruitment services’ to I Co. However, no Service

tax should arise in the absence of specific

consideration

In relation to salary / social security disbursement by

F Co:

• F Co to act pure agent of I Co for administrative

convenience – Not liable to Service tax in such a

scenario

• Advisable that F Co charge nominal amount from I

Co under cost reimbursement agreement – In such

a case, Service tax payable on such notional value



Case Study II – Regulatory / Transfer Pricing Implications

Regulatory Aspects

• Entire salary of employee can also be paid by I Co

directly in his foreign bank account, if employee

deputed to I Co from its holding company

• In other cases, specific approval from the Indian

Central Bank (‘RBI’) may need to be taken to do so

Transfer Pricing Implications

• Cross Charge would need to be reported in TP

documentation of I Co

• Appropriate documentation needs to be

maintained by the I Co to prove cross charge at

‘Arm’s Length Price’

Employees

F Co

I Co

Oversees bank

account of employee

Outside India

Secondment of

employees

Reimbursement of salary

cost of employees

India



Secondment Arrangements – Critical Factors

No single indicator is conclusive – Courts have looked at different aspects of

Secondment Arrangement to adjudicate on tax implications

Secondment Agreement and surrounding facts critical to demonstrate that I Co is

the ‘economic’ / ‘real’ employer. F Co should not be responsible for work of

employees

Secondment Agreement shall demonstrate the employer-employee relationship,

capturing the roles / responsibilities of secondees vis-à-vis I Co, terms of

remuneration, as well as defining the reporting norms. Lien on job with F Co

should not be kept



Secondment Arrangements – Critical Factors …continued

Critical to establish that Secondees are working under complete supervision/

control/ management of I Co and F Co is not providing any services to I Co

through them

Documentary evidences like international assignment policy, time records,

Secondment Agreement, minutes of the meeting need to be looked at

Presence of Employees need to be counted in terms of ‘solar days’ and not ‘man

days’

Need to obtain certainty by obtaining certificate under section 197 of the Act

from the tax authorities or seeking Advance Ruling

&

Questions

Answers

Ashish Gupta

Director – Tax – IES

T : +91 (124) 3074342

M: +91 98 1085 5938

E: [email protected]

Rambir Dalal

Director –Tax – IES

T : +91 (124) 3345062

M: +91 99 1034 8012


Nidhi Maheshwari

Director – Tax – Corporate Tax

T : +91 (124) 3074322

M: +91 98 1058 3215


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