The Tax Residency Certificate (TRC) proposal in the budget could strangle global mobility and, hence, the service sector. For example, the IT service sector's success depends on its employees' global mobility.
The Finance Act, 2012, made it mandatory for non-resident taxpayers to support the relief claimed under Double Taxation Avoidance Agreements (Treaties) with a Tax Residency Certificate (TRC) from tax authorities in their country of residence. Subsequently, in September 2012, a notification was issued specifying the contents of such TRCs to be issued by overseas authorities.
Broadly, the TRC needs to have the tax identification number in the resident country, residential status for tax purposes, the period for which the certificate is applicable, address of the tax payer and so on.
The Budget 2013 has now introduced a provision indicating that the TRC is a 'necessary but not a sufficient' condition for avoiding double taxation under the treaty. The proposed amendment has created a stir.
The industry is concerned about the additional compliance requirements for their employees on overseas assignments. Many countries do not have specified provisions to issue a TRC. In fact, India did not have such provisions until the September 2012 notification.
Further, while countries such as Singapore, Malaysia, Thailand and Australia do have these provisions, it might be difficult to obtain a TRC with the contents required by Indian regulations. But, of course, some countries would deviate from the format specified by domestic regulation if a request is made from the government (here, India).
The Indian financial year is from April to March while for others, such as the US and Australia, it is from January to December. Hence, it is not clear when tax authorities expect to get the TRC. For instance, tax returns for 2012-2013 is due by July 2013. A country following the calendar year may not be able to certify the residential status for the period from January to March 2013 since their year is not complete.
There can be complications if guidelines set by India for issue of TRC under the treaty is at variance with the domestic tax law. For example, the definition of residential status under domestic tax law is not the same as the definition under the treaty in some countries.
The additional processes involved in obtaining a TRC increases the cost for firms with employees overseas. Therefore, an employee should be able to prove residential status overseas using other documents. These could include tax returns filed overseas, passport with travel dates, proof of taxes paid, etc. Not being able to meet a procedural requirement should not prevent an Indian employee paying tax overseas from getting relief from double taxation.
TAPATI GHOSE
Senior Director, Deloitte Haskins and Sells
