Saturday, August 29, 2009

Tax laws to be amended for totalisation deals

Tax laws to be amended for totalisation deals

The government will make necessary changes in tax laws to align them with provisions in social security pacts, as India gets ready to implement its first such agreement with Belgium from September 1. This would allow companies and employees to enjoy full benefit arising from such agreements. A finance ministry official told ET that the government will look at the requirement posed by totalisation agreements, a treaty between two countries that is aimed at preventing double expenditure on social security and make necessary changes. Presently, India’s tax provisions are not in line with provisions in totalisation agreements and thus restrict benefits that accrue from such a pact. A totalisation agreement benefits both, employer and employee in countries involved as it allows governments there to recognise each others’ social security systems. This saves companies’ from incurring double expenditure on account of such contributions. For example, as per the provisions under the Indo-Belgium totalisation agreement, if an Indian employer contributes provident fund for that employee in India, then he does not need to contribute to the Belgian social security system. But, to be able to contribute to the PF, the Indian employer will have to continue paying him his base salary in India, which would be subject to tax here, even if such salary is not related to employment in India. This is because the tax laws in the country tax the income on the basis of residency or source and also on the basis of place of receipt. So while an employee can claim a refund later quoting tax treaty provisions, the employer may still be obliged to deduct tax at source on that salary. Moreover, Belgian tax authorities are unlikely to give credit for the tax deducted by the Indian employer, hence leading to double taxation. Any income received in India is taxed here as per current law, irrespective of the residence or source of that income. So, even if a non-resident receives income in India, and pays tax in the country of residence on the income received in India, he will still pay tax to the Indian tax authorities. Changes in tax laws become more necessary as India goes on to sign more such agreements. While agreement with Germany is expected to enter into force from October this year, India is in advanced negotiations with France and Netherland for such a treaty. It also has opened a dialogue with US, where as per estimates Indians contribute close to $1 billion every year to its social security network. EPFO is the recognised Indian agency under the India-Belgium totalisation agreement and contributions made to provident funds that are accredited by it would be treated as social security contribution. Moreover, if a Belgian national working at a Belgian company in India continues to receive salary in Belgium from his Belgian employer back home, the tax authorities in India are likely to target such employees on the issue of Permanent Establishment (PE). The concept of PE is one of the most important issues in international double taxation law. Virtually all modern tax treaties use PE as the main instrument to establish taxing jurisdiction over a foreigner’s unincorporated business activities. A foreign enterprise’s profits are taxable in the country where the activity takes place if the enterprise is deemed to constitute a PE.

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