Globalization has brought about a boom in the movement of employees to different countries to acquire specialized technical skill and expertise. Over the years, we have seen organizations coming out with various assignment models to send their employees abroad. This trend offers many benefits to employees apart from bolstering their career and creating an international presence. However, such movement comes with a lot of challenges, especially with regard to compliance with existing laws affecting mobility. It has also become of critical importance that the changes in such laws be closely monitored for ongoing compliances.
Starting from the introduction of a law on black money targeting foreign income and assets to the radical move of demonetization, the Government has declared its intent to regularize tax compliance. We have also seen the use of bilateral agreements for exchange of information between countries to track income outside India. Providing a window to black money holders, the Government has also proposed to levy a total tax, penalty and surcharge of 50% on the amount deposited post demonetization, while higher taxes and stiffer penalties of up to 85% await those who don’t disclose but are caught. The proposed amendments will, thus, provide a permanent window for taxing unexplained income. (Source: http://bit.ly/2gHExJO)
Over the last one year, there have been a few developments affecting the global mobility perspective:
Base Erosion and Profit Shifting (BEPS)
To start with, the advent of BEPS is a welcome move to check that profits are taxed where the actual business activity is performed. A number of BEPS actions will impact the globally mobile workforce and consequently their immediate employers. The action plans advocated in BEPS is aimed at bringing coherence and transparency and identifying the true substance of the transactions.
For example, Action Plan 7 aims to identify the true substance of transactions between entities and the resulting permanent establishments (PEs). Action Plan 5 is intended to counter harmful tax practices.These action plans affecting global mobility would certainly put pressure and additional burden on the business of an organization. The human resources teams have to ensure that they have a robust system in place to track the movement of the employees, assignment type and their duration. BEPS has tightened the definition of activities that could result in a PE. For example, if a person negotiates the essence of a transaction or solicits or receives but does not formalize contracts, it could now lead to a PE.
With the increased pace of globalization and cost competitiveness, the number of short-term business travellers is only increasing. High cost of deputation, variety of requirements and need of specialized assistance are pushing the demand of business travellers.
There are also several inherent risks associated with business travellers — for example, creation of PE and individual tax non-compliance. It can be challenging for any organization to identify and then regularize the compliances required for short-term business travellers, especially when the numbers are considerable. Short-term business travellers may unknowingly create foreign assets, which have a specific disclosure requirement in the tax forms. Any default on the disclosure of foreign income or asset may attract penalty and prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
The very recent conclusion by over 100 jurisdictions on multilateral instruments for BEPS implementation itself is indicative that developing countries have expressed strong interest in further BEPS discussions. It would also emerge as a powerful instrument for international tax cooperation, providing for all forms of administrative assistance in tax matters and guaranteeing extensive safeguards for the protection of taxpayers’ rights.
Foreign tax credit rules
Unlike some developed countries such as the US, India never had any prescribed guidelines to compute eligible foreign tax credit (FTC). The current tax law in India empowers Sections 90 and 91 of the Income Tax Act, 1961 (the Act) to claim relief on doubly taxed income. In order to provide a proper computation mechanism, operational clarity and procedural requirements associated with availing FTC in India, the Central Board of Direct Taxes (CBDT) amended the Income Tax Rules, 1962 (Rules) through Rule No 128 (FTC Rules) vide Notification no. 54/2016 dated 27/06/2016 for the calculation of FTC.
This comes as a welcome step by the Government and as a huge relief to taxpayers in terms of providing a procedural mechanism and preventing unwarranted litigation. However, there are some certain underlying issues that are ambiguous and need further clarity.
Views expressed are personal.
(Anand Dhelia, Director, People Advisory Services, EY India has also contributed to this article)