Navigating Tax Residency Across Multiple Countries: DTAA Benefits Explained!

Residential Status – Multiple Countries with Double Taxation Avoidance Agreements (DTAA) Benefits

I. Tax Residency under Foreign Laws

After determining their residential status in India, an individual should also assess their residential status according to the local laws of the country in which they are currently residing. Below are a few prominent jurisdictions:

1. Residency under US IRS Code

A person will be considered a United States resident for tax purposes if they meet the Substantial Presence Test for the calendar year. To meet this test, they must be physically present in the United States (U.S.) for at least:

• 31 days during the current year, and
• 183 days during the 3-year period that includes the current year and the two years before that, counting:
  • All the days present in the current year,
  • 1/3 of the days present in the first year before the current year, and
  • 1/6 of the days present in the second year before the current year.

2. Residency in Singapore

A person is considered a tax resident for a particular Year of Assessment if they are:

• A Singapore Citizen or Singapore Permanent Resident (SPR) who normally resides in Singapore except for temporary absences.
• A foreigner who has stayed/worked in Singapore:
  • For at least 183 days in the previous calendar year, or
  • Continuously for 3 consecutive years, or
  • For a continuous period straddling 2 calendar years and the total period of stay is at least 183 days (excluding company directors, public entertainers, or professionals).
• A foreigner issued a work pass valid for at least 1 year will also be treated as a tax resident. However, tax residency status will be reviewed at the time of tax clearance when employment ceases.

II. Tie-Breaker Clauses in International Tax Treaties

The primary purpose of these rules is to prevent an individual from being considered a tax resident in multiple countries, which could lead to double taxation. For example, U.S. citizens are typically considered tax residents of the U.S. due to citizenship, while India may tax them based on their stay exceeding a certain threshold.

General Tie-Breaker Rules:

1. Permanent Home: The first test is to determine where the person has a permanent home. A permanent home is a fixed and regular place of residence, whether owned or rented.
   • If they have a permanent home in both or neither country, the next step applies.
2. Centre of Vital Interests: If permanent home status is inconclusive, the focus shifts to where the individual has stronger personal and economic ties:
   • Place of Business or Management
   • Place of Residence
   • Family and Social Connections
   • Economic Interests (investments, employment, etc.)
   • Political, Cultural, and Social Activities
3. Habitual Abode: If vital interests remain unclear, the next test considers where the individual spends most of their time regularly.
4. Nationality: If habitual abode remains inconclusive, nationality is used to determine residency.
5. Mutual Agreement Procedure (MAP): If the individual holds dual nationality or no nationality, tax authorities of both countries will resolve the issue through a mutual agreement process.

III. Relevant Compliances for DTAA Benefits for NRIs

To claim benefits under the Double Taxation Avoidance Agreement (DTAA), the following compliances are necessary:

1. Tax Registration Certificate (TRC): Individuals applying for DTAA benefits must obtain a TRC from the tax authority of the country where they are tax residents.
2. Form 10F: If the TRC does not contain all required details (e.g., taxpayer status, Tax Identification Number), Form 10F must be submitted.
3. DTAA Declaration: An individual must submit a self-declaration of their tax residency, global income, taxability, and other relevant details such as:
   • Tax Identification Number (TIN) / PAN
   • Applicable Tax Rates
   • Business Connections or Permanent Establishment in India
   • Period of Stay in Foreign Country
4. Filing of Income Tax Return: Non-residents must file their Income Tax Return (ITR) in India before July 31 of the Assessment Year, reporting their income and claiming DTAA benefits to avoid double taxation.

IV. How DTAA Practically Works

Although we will cover this in detail in future articles, the primary principle is that when an individual’s income is taxable in both countries:

• The country of source (where the income originates) levies the tax first.
• The country of residence provides tax relief by either:
  • Tax Exemption: The foreign income is exempt from taxation.
  • Tax Credit: The tax paid in the source country is credited against the tax liability in the residence country.

Example:

A Singapore tax resident earning taxable interest income in India:

• India will tax the interest income (as the source country).
• If Singapore also taxes this income, it will provide a tax relief by granting credit for the tax paid in India.

We will further explore the practical aspects of DTAA in upcoming articles.

V. Conclusion on Taxability

When an individual is considered a tax resident of both India and another country, their income taxability is determined based on tie-breaker rules under the applicable DTAA:

• If the individual is classified as a resident of the other country, their foreign income is not taxable in India. However, their Indian income remains taxable in India.
• If India is determined as the primary tax residence, their global income (including foreign income) may be taxed in India with applicable tax relief for taxes paid abroad under the DTAA.

To avoid double taxation, individuals must ensure they comply with DTAA provisions by filing the necessary forms and declarations in India.

This article provides a broad overview of Double Taxation Avoidance Agreements (DTAA) benefits and tax residency status. Future articles will address specific case studies and practical applications of DTAA benefits across multiple jurisdictions.