In case of long-term assignments, employees are generally transferred to overseas entities. However, the employer and the employee face a challenge in case of short-term work-related visits and business travel vis-a-vis taxability overseas.
While countries follow their own tax regime for taxing income, many countries retain the right to tax an individual on income for employment exercised in that country. Therefore, business visits need to be carefully planned and monitored, based on the domestic tax laws of the foreign country as well as the relevant tax treaty.
Tax treaties provide relief from taxation in respect of short-term assignments by way of a short stay exemption, wherein an individual may claim exemption in a foreign country if certain conditions are met.
India has entered into tax treaties with many countries, most of which contain a specific provision for short stay exemption, under which individuals can claim exemption from taxation of salary overseas.
Let's consider an example of an employee working with an Indian company who visits Canada for employment. The remuneration derived by the employee, being a resident of India, in respect of the Canadian employment, shall be taxable only in India if he is present in Canada for a period not exceeding 183 days in the relevant fiscal year. Secondly, his remuneration should be paid by, or on behalf of, an employer who is not a resident of Canada; and thirdly, such remuneration should not borne by a permanent establishment or a fixed place, which the Indian employer has in Canada.
If all the aforesaid conditions are met, then the individual will not be subject to tax in Canada on his remuneration received from the Indian employer and will be taxed only in India. Thus, short stay exemption is an important concession, whereby the same income avoids double taxation in two countries. However, it is important to note that the conditions under the relevant tax treaty should be examined carefully as there are variations in the same.
For example, in case of India-Sweden tax treaty or India-Austria tax treaty, the first condition of 183 days is to be read in the context of any 12 month period commencing or ending in the fiscal year concerned which, in effect, is different from the condition provided in India-Canada tax treaty discussed above.
In the event the conditions discussed above for claiming short stay exemption are not satisfied, the income would be taxable both in India as well as overseas. In such a case, the employee can explore the possibility of claiming credit for taxes paid overseas in India, subject to the provisions of the relevant tax treaty.
The writer is executive director, Tax, KPMG