Practical Issues in Double Taxation
Deployment of talent is the key to success for all leading organizations of the world. Borders are shrinking or becoming non-existent as talent is transferred across countries and regions. Ever changing tax laws and fierce competition for the global talent pool present many hurdles to the HR leaders of multi-national organizations.
Global mobility and related tax issues have become the single point of focus for the HR department. They need to answer various questions such as
- Do we need to create a global talent pool?
- Are foreign assignments to fill a skill gap or for career development?
- Are there positons meant only for expats?
- How will assignees be identified and compensated?
- Senior executives with above market package and international pension plan/traditional assignees with at-market package
From a tax perspective, â€“ 40% of companies do not have risk control framework to monitor payroll tax and social security compliance. 64% of companies have incurred avoidable penalties for non â€“compliance. Only 30% have a system in place to track business travellers. 78% do not track the ROI of sending an employee on assignment. The stats tell us that there is a need for global mobility management and various issues underlying it that need to be addressed. These issues exist both a company level, from company perspective as well as from an individual and taxation perspective.
- India has DTAA with over 90 countries
- US Specifics - FBAR (Now called FINCEN 114)
- Required to be filed with the US treasury if balance on any day ina foreign account crosses USD 10,000
- Must now be e-filed. Paper filing no longer allowed
- To be filed by June 30 every year. Delinquent after June 30. No extension available for FBAR filing.
- Only a reporting requirement - has existed from 1972 but heavy penalty for non-reporting
- Income from said accounts to be declared on US return
- Became a focus of IRS post the HSBC fall out
- OVDP 2009, OVDI 2011 and the current open OVD and Streamlined Processing
- FATCA introduced in 2011
- Applies to US Individuals and Foreign Financial institutions
- U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets must report those assets
- Use Form 8938 to report these assets
- Attach Form 8938 to the annual income tax return (usually Form 1040)
- Taxpayers with a total value of specified foreign financial assets below a certain do not have to file Form 8938
- If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year
- The threshold is higher for individuals who live outside the United States
- Thresholds are different for married and single taxpayers
- The reporting requirement for Form 8938 is separate from the reporting requirement for the FinCEN Form 114, ("FBAR") (formerly TD F 90-22.1). An individual may have to file both forms and separate penalties may apply for failure to file each form.
Company Level Issues
- Cross Border employment structures should enable tax, business and other compliance needs
- PE Risk - Corporate tax departments need to avoid this.
- What about stock based compensation
- Treatment of deferred compensation
- Foreign Pension plans and reporting in home and host countries
- Withholding and payroll compliance
- Information reporting requirements
- Non-resident alien as directors and appropriate documentation (W8 BEN)
- Tax equalization cost and accounting policies
Individual Level issues
- Benefits under DTAA are claimable either as foreign tax credit or as foreign income exclusion depending on the residential status of the taxpayer concerned and provisions of local law as well as relevant DTAA article for dependant personal services. Implementation of these provisions, however, poses many practical difficulties.
- In some countries the DTAA takes precedence over local law (USA) and in some others taxpayers may elect that which is beneficial to them (India).
- Foreign income exclusion - From a practical view point most Income Tax jurisdictions would want to know why tax is withheld on the salary of a non- resident and why salary is paid in India at all. The easier solution would be to obtain an advance ruling (similar to what British Petroleum did) which obviates the need for TDS. Most companies however do not wish to take this route and so continue to withhold in India. Most JOs do not understand the concept of exclusion and hence tend to deny benefit to the assesse.
- Companies need to provide a reconciliation of double taxed income - this is essential to prove to assessing officers the link between the income taxed in home and host countries and the computation of the foreign tax credit. There are issues in tracking compensation across two or three payroll systems and reconciling each item of compensation across the globe.
- Lack of uniformity in exchange rates also causes issues as between the exchange rate expected to be used (by Tax authorities) and those actually used by companies.
- Tax positions and policies adopted may change from year to year and this causes inconsistencies in tax returns prepared from one year to the next leading to questions from tax authorities and the need for voluminous documentations. (For example - allowances may be taxed one year and not another year)
- As the documentation involved is voluminous at every level, meeting tax deadlines becomes difficult for employees.
- The use of different policies for different levels of employees also tends to cause confusion among the employees and raises the spectre of discrimination though the intent of the company is not so. Length of stay and employer policies for different stay periods must also be documented and studied.
- In many cases, taxpayers may qualify to file a resident return in the host country by virtue of their presence for the requisite number of days. In such cases they may also need to comply with various reporting requirements for normal residents of the host country and this may be a cumbersome process. (Black Money Act may inadvertently apply to incoming expats)
- Most taxpayers find home country taxation itself difficult to comprehend. Adding host country tax laws, a slew of other rules for them to follow along with concepts like tax equalization and protection, makes it extremely tedious and difficult for the taxpayers.
- When the home and host country tax years run across different periods, this adds to the complication. Sometimes taxpayers find themselves in the unenviable situation of being residents in both home and host countries or non-residents in both home and host countries. While the DTAA provides for a tie break when a taxpayer is resident in both countries, there is no solution in sight for the taxpayers who end up non-residents in both home and host countries.
- Data collection poses an additional difficulty. There is always the question of whether data may be obtained from the individual taxpayer or be provided by the employer. What would be the time lines for data? Practically when the employer chooses to provide data, it takes more time due to volume as well as clearance levels and processes involved.
- There is also the question of pre and post assignment income and their taxation.