Various countries have entered into agreements or treaties with other countries to avoid double taxation.
Can an individual be resident of two countries for taxation? Generally, a person has to pay tax on his world income in the country of which is the resident in a particular year. So, will he have to pay tax on his world income in both the countries if he is a resident of two countries?
Meaning of ‘resident’ for the purposes of taxation varies from country to country. Physical presence in the country during the year, domicile and citizenship are some of the factors that determine the residential status of an individual under the laws of various countries. In India, residential status is primarily based on the physical presence in India during the year and in the earlier years. Under the laws of USA, an American citizen or a person holding ‘Green Card’ is treated as a resident and taxed on his world income, irrespective of his stay in USA in the tax year. UK, on the other hand, has a complex ‘Statutory Residence Test’ to decide the taxability of foreign income in UK of an individual.
Various countries have entered into agreements or treaties with other countries to avoid double taxation and through these treaties have agreed on taxation rights between two countries. India has treaties with all major countries for avoidance of double taxation. These treaties generally provide how the residential status of an individual is to be the decided if he becomes resident of both the countries under the respective tax laws of the two countries. This provision in the treaty is commonly known as ‘tie breaker’ provision. Let us look at this tie breaker provision and how it operates.
If a person is a resident of India and also of another country, then the first thing that one has to look at is where that person has a permanent home available to him. The country in which he has permanent home available to him, that country will be considered as his country of residence. It is interesting to note that permanent home does not mean that the individual must own that house. It is sufficient if any of his family member owns the house or it may be let out to him or his family member. What is important is not the legal ownership of the house or right to the house but availability to him as his home. So long as the home is available to the individual in a particular country, he will be considered as a resident of that country.
There may be a situation where the individual may have permanent home available to him in both the countries. In such a case the treaties provide that the individual will be the resident of the country with which he has closer personal and economic relations. In such circumstances, one will have to look at where the individual has his family, social relations, investments etc. These factors have to be looked at in a holistic manner to decide to which country he is more closely connected through his personal and economic relations. This is also called Centre of Vital Interests.
Sometimes this test also fails because the individual may have his economic interests as well as family ties spread over both the countries and therefore the centre of vital interests cannot be determined.
For example, the individual along with his wife may be staying in UK while his parents and children continue to stay in India, the individual may have savings, investments and other economic ties in both UK and India. In such a case it may be difficult to come to a conclusion whether India or UK is the centre of vital interest in his case. In such a situation or in a situation where the individual does not have a permanent home in either of the two countries, one has to apply the third test, i.e. determining his 'habitual abode'.
Habitual abode is different from permanent home. Habitual abode generally refers to the country in which the person stays more frequently, regularly and for longer duration as a way of life. A person may not have a permanent home in the country but may have habitual abode in that country. The country in which the person has habitual abode would be considered as his country of residence under the treaty between India and the other country.
There could be cases where the individual may have a habitual abode in both the countries or in neither of them. In such a case, he will be considered as resident of the country of which is a national.
And finally, if the last test also fails because the individual is not national of both India and the other country, then in such a case the authorities of the two countries will mutually decide the residential status of such individual for taxation purposes.
The above tests are to an extent subjective and the conclusion may vary depending on the actual facts, how they are presented and the view taken on that. Many Indians or persons of Indian origin have settled in different countries. With the economic progress of India, opportunities opening up in India, some of them do get assignments or postings in India for varying periods. Such situations are arising more frequently and in the year in which the individual takes up the assignment or completes the assignment he may become resident of India as well as the other country. In such cases 'tie-breaker' provision becomes important.
Recently an interesting case was decided by Bangalore Tribunal involving dual residency. The taxpayer, in that case, was a person of Indian origin who had migrated to USA in 1986 and was a national of USA. He was working with a well-known company in USA. That company posted him in India with its subsidiary in India. The short-term assignment was extended from time to time and ultimately ended after a period of about six years. He returned to USA and continued his employment with the company in USA. In that year due to his presence in India he was a resident of India under the provisions of the income tax Act. He was also a resident of USA under its domestic law.
As a result, the question was whether the salary that the taxpayer earned in USA was chargeable to tax in India since he was a resident of India under the provisions of the Income Tax Act. The assessing officer took a view that the taxpayer was a resident of India based on his physical presence in India in that year and was therefore liable to pay tax on his world income including the salary earned in USA. The Tribunal held that for the period till the taxpayer was in India he was a resident of India since the taxpayer had a permanent home in India while his house in USA was let out and was not available to the taxpayer as a permanent home.
However, when he completed the assignment and went back to USA, the taxpayer had a permanent home in USA as well as in India. The tribunal therefore considered country in which the taxpayer had closer economic and personal relations to decide his residential status. It considered that the taxpayer with his wife and children lived in USA, he had driving license in USA and was registered as a voter there. The Tribunal also noted that the taxpayer was contributing to social security in USA, he had investments including retirement benefit plans there, his children were taking their education in USA and the taxpayer intended to spend rest of his lifespan in USA. On this basis, although the taxpayer had permanent home both, in India and USA, the Tribunal decided that taxpayer’s personal and economic relations were closer to USA than India.
Based on the tie-breaker test, it took a view that for the period starting from taxpayer returning to USA on completion of the assignment in India, the taxpayer was a resident of USA and not India. This decision is also noteworthy since the taxpayer was considered resident of India for part of the tax year and non-resident for the other part.
With global mobility, these questions will arise more frequently. Dual residency can be avoided with proper planning and limiting number of days stay in India. With little care, controversy and possible litigation can be kept at bay.(The author is a Chartered Accountant and views are personal)You can now invest in mutual funds with moneycontrol. Download moneycontrol transact app. A dedicated app to explore, research and buy mutual funds.
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