1. © 2010 KPMG, an Indian 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. 1 Taxation of Salary, Expatriate Taxation and Related Issues Vikas Vasal Sat, 19 June 2010

2. © 2010 KPMG, an Indian 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. 2 Contents Income under the head ‘salaries’ Employee’s residential status Perquisites Social security – ‘International Workers’ New visa regulations 1 2 3 4 5 6 Expatriate salary – Key considerations

3. © 2010 KPMG, an Indian 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. 3 Income under the head ‘salaries’

4. © 2010 KPMG, an Indian 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 Income under the head ‘salaries’  Section 15 - Salary due* from an employer / former employer - Salary paid or allowed by an employer / former employer - Arrears of salary paid or allowed by an employer / former employer  Section 16 – Deductions - Entertainment allowance (for government employees) - Professional/ employment Tax  Section 17 – ‘salary’, ‘perquisites’ and ‘profits in lieu of salary’ defined * While section 15 provides for taxation in employee’s hands when salary is due/ paid, whichever is earlier, section 192 casts the obligation on employer to withhold tax only at the time of payment of salary

5. © 2010 KPMG, an Indian 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. 5 Income under the head ‘salaries’ Master-servant relationship Supervision and control Authority to terminate services Responsibility for acts and deeds Payment of remuneration

6. © 2010 KPMG, an Indian 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. 6 Employee’s residential status

7. © 2010 KPMG, an Indian 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. 7 Residential status Stay  182 days in the tax year Resident YesNo Stay  60 days in the tax year and Stay  365 days in the preceding 4 tax years Yes Non- Resident for 9 out of 10 previous tax years Resident & Ordinarily Resident (R&OR) No Yes Resident but Not Ordinarily Resident (R but NOR) Non-resident (NR) Tax Year is from 1 April to 31 March 60 days substituted for 182 days in certain cases No Stay in India < 729 days in preceding 7 tax years Yes NO

8. © 2010 KPMG, an Indian 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. 8 Residential status…  Different rules for:  Indian citizens leaving India for the purposes of employment  Indian citizens/ person of Indian origin visiting India Period of 60 days substituted by 182 days [Explanation (a) and (b) to section 6(1)]  Benefit restricted to the financial year in which the individual left India for the purpose of employment.  Held by - Manoj Kumar Reddy Nare v. ITO (34 SOT 180)  Distinguished - Anurag Chaudhary (AAR No. 839 of 2009)  Counting the number of days in India  Both day of arrival and date of departure to be counted P - 7 OF 1995, In re (223 ITR 462)  Date of arrival to be excluded for calculating the period of stay in India Manoj Kumar Reddy Nare v. ITO (34 SOT 180)

9. © 2010 KPMG, an Indian 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. 9 Residential status – ‘Tie Breaker Rule’  Tie breaker rule is applied when an individual has dual residency. It prescribes a set of tests to determine the individual’s residency  Article 4(2) of the OECD model states that “ where by reason of the provisions of paragraph 1 an individual is a resident of both contracting states, then his status shall be determined as follows:  He shall be deemed to be a resident only of the state in which he has a permanent home available to him. If he has a permanent home available to him in both the states, he shall be deemed to be a resident only of the state with which his personal and economic relations are closer;  If the state in which he has his centre of vital interests cannot be determined, or if he does not has a permanent home available to him in either state, he shall be deemed to be a resident only of the state in which he has an habitual abode;  If he has a habitual abode in both states or in neither of them, he shall be deemed to be a resident only of the state of which he is a national;  If he is a national of both states or neither of them, the competent authorities of the contracting states shall settle the question by mutual agreement

10. © 2010 KPMG, an Indian 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. 10 Residential status - Scope of Income Liable to Tax  Income received/ deemed to received in India; or  Income accruing/ deemed to accrue in India Non-resident Not Ordinarily Resident Taxability of Income  Income received/ deemed to be received in India; or  Income accruing/ deemed to accrue in India; or  Income from business controlled in or profession setup in India Resident Ordinarily Resident  Worldwide income

11. © 2010 KPMG, an Indian 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. 11 Perquisites

12. © 2010 KPMG, an Indian 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. 12 Perquisites  Perquisites valued as per prescribed method:  Rent free accommodation  Movable assets owned by the employer  Motor car  Share based incentives  Interest free/ concessional loan  Transfer of asset  Perquisites valued at cost:  Gardner, sweeper, watchman  Gas, electricity, water  Travel, tour, etc  Club  Credit card expenses, etc

13. © 2010 KPMG, an Indian 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. 13 Perquisites  Perquisites specifically exempt:  Medical Reimbursement up to INR 15,000  Expenditure on medical treatment in certain cases  Provision of a vehicle for travel from office to home and vice versa  Health insurance premium paid by the employer.  Telephone expenses  Meals provided at working hours or through paid vouchers where the value does not exceed fifty rupees  Gift voucher less than rupees five thousand

14. © 2010 KPMG, an Indian 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. 14 Perquisites – Few Recent Issues  Share based incentives  Apportionment of income in case of globally mobile employees  Valuation of motor car  Reimbursement of fuel expenses for travel from office and office to home - CIT vs. Reliance Industries Ltd. (297 ITR 228) HC Gujarat  Employer owns or hires the car and the driver’s salary is reimbursed by the employer  Valuation of free food and meals  Meals provided during office hours in excess of the prescribed limits  Limit on the number of meals  Provision of health/sports club facilities  Reimbursement of expenditure incurred by the employee

15. © 2010 KPMG, an Indian 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. 15 Expatriate salary - Key considerations

16. © 2010 KPMG, an Indian 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. 16 Tax reimbursement – tax equalisation vs. tax protection  Tax equalisation  Most common approach  Employer is responsible for paying expatriate’s actual home and host country taxes  Hypothetical tax is calculated on the basis of ‘stay- at- home’ compensation  Hypothetical tax is not a real tax but reduction of wages  A tax equalisation settlement (“TEQ’) is prepared at the close of the year which compares the final hypothetical tax deducted to the hypothetical tax that should be deducted among other things.  Tax protection  The employee is responsible for paying the actual home and host country taxes  At the end of the assignment/ annually ‘stay- at- home’ tax is determined and compared to the actual worldwide taxes that the expatriate employee paid.  The employer reimburses the excess tax to the expatriate employee if the worldwide taxes exceed the hypothetical tax  The employee is not required to reimburse the employer if the worldwide taxes are less than the hypothetical tax

17. © 2010 KPMG, an Indian 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. 17 Hypothetical tax  Taxable salary to be computed after reducing hypothetical tax  Jaydev H. Raja (ITA No. 2021/Mum/1998)  Roy Marshall v. ACIT (ITA No.2038/ Mum/ 2006)  Christopher Noble vs. Arabian American Oil Co., Inc. (US District Court)  IRS Letter Ruling 8204074  Hypo tax only reduces tax perquisite  Lukas Fole (ITA No. 1228/PN/2008)

18. © 2010 KPMG, an Indian 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. 18 Tax paid by employer  Indian taxes of expatriate employees generally borne by employer – taxable in the hands of employees  Whether monetary or non-monetary perquisite?  Non-monetary perquisite  RBF Rig Corpn. LIC.(RBFRC), (297 ITR 228), ITAT Delhi  Monetary perquisite  Mitsubishi Corporation v. DCIT, (2007 TIOL 404), ITAT Delhi  Western Geco International Ltd, ITA No. 3120 to 3195 /Del/2006  BJ Services Company Middle East Ltd. v. ACIT, 297 ITR 141

19. © 2010 KPMG, an Indian 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. 19 Social security contributions, per diems, etc  Social security contributions  Employer’s contribution – If no vested right, may not be taxable  Employee’s contribution – May be deducted, if diversion of income by overriding title.  Gallotti Raoul (61 ITD 453), ITAT Mumbai  Eric Moroux (TIOL-145), ITAT Delhi  Per-diem payments to employees  Amount represented by reimbursement of actual expenses does not form part of salary.  CIT Vs Information Architects (ITA No. 2207and 2210), Mumbai HC  Reimbursement on the basis of declarations without submission of actual receipts  Larsen & Toubro (18 DTR 162, 163), SC  Taxable salary of employees having multi country responsibility  Eric Moroux (TIOL-145), ITAT Delhi  ACIT v. Shri Ellis ‘D’ Rozario, ITA No. 2918 / Del / 05

20. © 2010 KPMG, an Indian 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. 20 Expatriate salary – ‘short stay exemption’ Under the Act [section 10(6)(vi)]  employee is a foreign citizen  employed by foreign enterprise  foreign entity not engaged in trade / business in India  stay in India ≤ 90 days in a financial year  remuneration not liable to be deducted from employer's income chargeable to tax Under tax treaties  Remuneration derived by not be taxable in the state where services are rendered if:  The employee is a resident of a state other than the state where the services are rendered  stay in other state ≤ 183 days in relevant taxable year / any twelve month period  remuneration is paid by or on behalf of a non resident employer  remuneration is not borne/deducted/deductible by a permanent establishment or a fixed base or a trade or business which the employer has in the other State

21. © 2010 KPMG, an Indian 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. 21 Social security - “International Workers”

22. © 2010 KPMG, an Indian 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. 22 Notification issued by the ministry of Labour and Employment (October 2008)  ‘International Workers’ introduced as a new class of participants in the existing Employees' Provident Fund Scheme, 1952 (‘EPFS’) Employees’ Pension Scheme, 1995 (‘EPS’)  International Workers required to join the schemes with effect from November 1, 2008  International Workers employed to do any work, in or in relation to any establishment to which the Act applies have to mandatorily participate in the scheme unless falling under the category of “excluded employee”. New regime with effect from 1 October 2008

23. © 2010 KPMG, an Indian 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. 23 Notification issued by the ministry of Labour and Employment (October 2008) Excluded employee Covered establishment International worker  All the establishments to which the provisions of the Act apply.  Non Indian employees, not holding an Indian passport, working for an establishment in India to which the Act applies;  Indian employees having worked or going to work in a foreign country with which India has entered into a social security agreement.  International Workers contributing to the social security of their country of origin, with whom India has entered into a social security agreement (SSA) and enjoying the status of detached worker.

24. © 2010 KPMG, an Indian 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. 24 Avoidance of no coverage or double coverage of social security contributions To protect the interest of workers in the host country Bilateral agreement between two countries Equality of treatment with host country nationals What is a social security agreement (‘SSA’)?

25. © 2010 KPMG, an Indian 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. 25 Benefits under SSA DetachmentExportability of pension Benefits Totalisation of insurance periods Encourages movement of cross border employees

26. © 2010 KPMG, an Indian 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. 26 SSAs signed so far INDIA Belgium* Hungary Switzerland Netherlands Luxembourg Czech Republic Germany** France Denmark * Entry into force on 1 Sep 2009 ** Entry into force on 1 Oct 2009

27. © 2010 KPMG, an Indian 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. 27 Indian social security regime – Key Issues Definition of ‘Monthly Pay’ Taxability of social security contribution Certificate of coverage/detachment certificate Social security on salary paid outside India Social security on expatriates employed as contractors Refund of social security

28. © 2010 KPMG, an Indian 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. 28 New visa regulations

29. © 2010 KPMG, an Indian 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. 29 New visa regulations  Business visa  Primary consideration is purpose of stay and not period of stay  Business visa would not be granted to foreign nationals who intend to execute a project or contract in India.  Employment visa  The new guidelines provide for the grant of an employment visa only to foreign nationals who are highly skilled or employed at senior levels.  Limits have been placed on the number of employment visas that can be issued to foreign nationals. The Indian mission abroad can grant such visas only to the extent of 1% of the total workforce engaged on a project subject to a minimum of 5 and maximum of 20. However, in case of power and steel sector projects a relief has been provided and limit has been set at 40.  In case more employment visas are required in comparison with the specified limits then specific permission is to be obtained from the Ministry of Labour and Employment.

30. © 2010 KPMG, an Indian 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. 30 New visa regulations  Tourist Visa  Gap of at least two months for foreign nationals who intend to make a return visit to India.  Special permission is required from the Indian mission if the visit to India is within two months of the last departure.  Tourist visa on arrival facility has been introduced for citizens of five countries namely Finland, Japan, Luxembourg, New Zealand and Singapore at four international airports in the country i.e. Delhi, Mumbai, Chennai and Kolkata.

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