In
March, last year, Karthik Shankar, a doctor and British citizen, got a tax bolt
from the blue when the HM Revenue & Customs (HMRC), the UK’s tax
department, asked him to pay tax on the money he held in India. Under the UK
law, Shankar was told, every British citizen had to pay tax on the income earned
anywhere in the world.
He had to deposit the amount within three months or face a penalty. The HMRC was aware that Shankar had deposited money in a bank account in India, the amount he had received from selling a house in Chennai in 2008, the same year that he received British citizenship.
Such shockers are not uncommon when one is either working in a different country or holds accounts there. Here are five things you should know before you emigrate or shift temporarily for work.
Global income in your tax return
Governments often demand tax on the global incomes of foreign residents living in their country on a long-term basis. Says Marnix van Rij, partner at Ernst & Young Belastingadviseurs LLP: “This is set to become more commonplace as governments across the globe, strapped for revenue following the economic crisis, are increasingly exchanging information on tax matters. This is a bid to curb evasion and track money kept in low tax jurisdictions.”
They are also increasing their focus on high net worth individuals as well as heightening surveillance of accounts held in foreign countries to crack down on financing of terrorism.
Countries such as the US, the UK and Australia now require immigrants who become permanent residents or citizens to report their incomes from all global sources and pay tax accordingly. Temporary residents are not required to declare their global incomes in these countries, but they have to ensure that taxes are paid in the home country. India also requires its residents to pay tax on any income earned overseas, if they ordinarily pay tax in India.
What constitutes global income
Global income includes anything earned abroad, from rental income and dividends to interest and capital gains. If you are emigrating from India, make a list of your assets, the cost of acquisition, earnings from these assets and the tax paid on incomes and capital gains.
For instance, if you own a house in India that is rented out, it will have to be reported as global income if you become a permanent resident or citizen of another country, but you may not have to pay tax on it. According to the Indian tax laws, you will have to pay tax here on the rental income. You could claim foreign tax credit in the country where you are living.
Permanent residents in the US also have to report inheritances and gifts received in India, though there is no tax liability on such gains either in India or the US. Conversely, if you are only a temporary resident in these nations, you will have to continue paying taxes in India on the income earned here. You will also have to comply with all the reporting requirements under the Indian tax laws, such as filing the annual information report if a property transaction exceeds Rs 30 lakh. You won’t need to declare this income in the country where you are residing temporarily.
He had to deposit the amount within three months or face a penalty. The HMRC was aware that Shankar had deposited money in a bank account in India, the amount he had received from selling a house in Chennai in 2008, the same year that he received British citizenship.
Such shockers are not uncommon when one is either working in a different country or holds accounts there. Here are five things you should know before you emigrate or shift temporarily for work.
Global income in your tax return
Governments often demand tax on the global incomes of foreign residents living in their country on a long-term basis. Says Marnix van Rij, partner at Ernst & Young Belastingadviseurs LLP: “This is set to become more commonplace as governments across the globe, strapped for revenue following the economic crisis, are increasingly exchanging information on tax matters. This is a bid to curb evasion and track money kept in low tax jurisdictions.”
They are also increasing their focus on high net worth individuals as well as heightening surveillance of accounts held in foreign countries to crack down on financing of terrorism.
Countries such as the US, the UK and Australia now require immigrants who become permanent residents or citizens to report their incomes from all global sources and pay tax accordingly. Temporary residents are not required to declare their global incomes in these countries, but they have to ensure that taxes are paid in the home country. India also requires its residents to pay tax on any income earned overseas, if they ordinarily pay tax in India.
What constitutes global income
Global income includes anything earned abroad, from rental income and dividends to interest and capital gains. If you are emigrating from India, make a list of your assets, the cost of acquisition, earnings from these assets and the tax paid on incomes and capital gains.
For instance, if you own a house in India that is rented out, it will have to be reported as global income if you become a permanent resident or citizen of another country, but you may not have to pay tax on it. According to the Indian tax laws, you will have to pay tax here on the rental income. You could claim foreign tax credit in the country where you are living.
Permanent residents in the US also have to report inheritances and gifts received in India, though there is no tax liability on such gains either in India or the US. Conversely, if you are only a temporary resident in these nations, you will have to continue paying taxes in India on the income earned here. You will also have to comply with all the reporting requirements under the Indian tax laws, such as filing the annual information report if a property transaction exceeds Rs 30 lakh. You won’t need to declare this income in the country where you are residing temporarily.
Manage tax residency
The residency rules determine if an NRI has to pay tax in a foreign country or India, says van Rij. There is no common rule across the globe. Countries such as the UK and Australia, which follow the common law system, use a residency test to determine whether a person is required to pay tax in that country. India too follows this system.
So, if you have spent more than 182 days in a country, such as India, the UK or Singapore, during a financial year, or more than 729 days in the previous seven financial years, you will have to pay income tax in that country. This means that if you emigrate mid-year, you will pay income tax in India as well as file returns at the end of the year.
In case, you are a temporary resident of a country, say, the UK, you will pay tax only on the income you earn in the UK till you become a permanent resident or citizen, says Kaushik Mukherjee, executive director at PricewaterhouseCoopers. Once you are a citizen, you will be taxed on your global income. In the US, foreign residents are taxed as American citizens if they have either acquired a green card or clear the substantial presence test. This test is far more stringent than the residency rules that apply in India and the UK.
An individual is said to have satisfied it if he stays at least 31 days in a calendar year and 183 days in the current and two preceding years. To avoid confusion about the number of days spent in a country and prevent double taxation, it will be useful to maintain a travel calendar as well as details of entry and exit as stamped on the passport. Tax authorities could check your passport to determine the residency status.
Credit for taxes paid in India
India has signed double tax avoidance treaty with about 70 countries, including the US, the UK, Australia, Japan, Germany and Switzerland. This ensures that NRIs can claim foreign tax credit if taxes have been paid on incomes and gains made in India. If, however, taxes paid in India are lower than that required to be paid in the country where the NRI is residing, additional tax will have to be paid. Before you claim foreign tax credit, ensure that you have all the relevant documents as proof.
Residency rules & Direct Taxes Code
The current residency rules in India will change when the Direct Taxes Code is implemented, most probably from 1 April 2012. Sonu Iyer, partner at the India office of E&Y, says, “The residency rules are set to become more stringent. So, taxpayers will have to report and pay taxes in India on their global incomes.” The change will mean that a person will have to pay tax in India if he spends 60 days in the country during a financial year, or 365 days or more in the previous four financial years.
Checklist for an emigrant
Retain the tax residency certificate from the host country to avoid double taxation.
Maintain the income and tax documents of both countries to claim foreign tax credit.
If you plan to work abroad for a few years and return to India eventually, file income tax returns in India in the case of incomes from property, equity or other securities and bank deposits.
Maintain a travel calendar as it helps to determine residency status for taxation purposes.
Keep your passport handy as tax officials may ask for it to check your residential status.
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