Buzz Update D-Tax: Double taxation relief on income from foreign retirement accounts TOU

Buzz Update D-Tax: Double taxation relief on income from foreign retirement accounts

 TOU

D-Tax: Double taxation relief on income from foreign retirement accounts

Globe-tracing on work, in addition to its benefits, can lead to many tax problems due to different laws in different countries. Generally, when individuals go abroad for work, they open Social Security / Retirement Fund accounts in host countries (e.g., 401K and IRA in the US) and income from such donations is deferred to the year of withdrawal / closure of such accounts. Those countries.

However, in most cases, Indian employees who are second to other countries will not reside in India in the year in which the accounts are opened / contributed, but at the time of maturity / closure such employees have already returned home and are tax resident in India. Taxing income from such donations poses major challenges for such employees in India, and the difficulty in obtaining a foreign tax credit is very clear.

Taxation methods

In view of this difficulty, the Finance Act, 2021, introduced Section 89A of the Income Tax Act, 1961 from the financial year 2021-22 to alleviate such hardships. Revenue from section a The person mentioned in a Specified account Will be taxed As prescribed and in such year. The person specified for this purpose is a person residing in India who has opened a Specific Retirement Benefit Account in the Notified Country (US, UK or Canada) while he is living abroad in India and residing in that country.

To take this further, the CBDT has recently introduced the Income Tax Rules, Rule 21AAA of the Income Tax Rules, 1962, as prescribed in Section 89A. According to Rule 21AAA, these persons are given an option (from FY 2021-22) to tax their income on the specified accounts in the year in which the withdrawal / redemption is taxed in the respective countries. If any income in India is already taxed on accrual basis or is not taxable due to the individual’s tax residency or contract benefits, such income is tax deductible in the year of withdrawal / redemption.

The taxpayer must use the option for a specific year by filing Form 10-EE. Such an option should be used for all specified accounts and once implemented, the option cannot be withdrawn. However, if a particular person becomes a non-resident in India in a particular year after using the option, the option will be withdrawn.

Gray areas remain

What is the impact of such a change in tax residency? Here is an illustrated example: Mr X, who used the option in FY 2021-22, became a non-resident in FY 2024-25. As a result, the option he used will be withdrawn from FY 2024-25; And his income from FY 2021-22 to FY 2023-24 is taxable in FY 2023-24, but such income is taxable until the due date for filing a tax return on FY 2024-25 (July 31, 2025). .

If the change in tax residency during FY 2024-25 cannot be anticipated within FY 2023-24, Mr X will pay the additional tax specified in the next FY (FY 2024-25). Which makes him liable for interest under Sections 234B and 234C on such tax; And it is not clear whether Mr X will acquire immunity from such interest. Furthermore, Mr X will not be able to file a revised / delayed return for FY 2023-24 after March 31, 2025, although he may still have to pay additional tax by July 31, 2025. In addition, FY is taxable in India. 2023-24 will be taxed in the notified country at the time of withdrawal / redemption, with the exception of the possibility of double taxation elimination in both countries (albeit in different years).

In addition, Section 89A and consequently Rule 21AAA does not apply if the specified person is a resident or non-resident in both India and the notified country at the time of opening the specified account. Furthermore, different tax years followed by different countries pose challenges in determining the point of tax residency and apply as a consequence of these regulations. Positions such as tax contracts and the tie-breaker rule under split residency need to be explored (but not necessarily agreed by the tax authorities). Therefore, clarity on such issues will help to avoid potential litigation in this regard and taxpayers will, in a real sense, be able to seek the consolation provided by these regulations.

Authors Nangia Anderson is a partner and director at LLP, respectively

Published

April 16, 2022

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