Remember to take your TRC for foreign assignments

The requirement for a Tax Residency Certificate (TRC), though new to India, is prevalent elsewhere in countries such as the US, the UK, Japan and Mexico. Finance Bill 2012 introduced the requirement for a TRC, with effect from financial year 2012-13 (April 1, 2012).

Thanks to the global movement of employees, an individual’s income may be subject to tax in two countries (double taxation). In such circumstances, the individual can claim relief under the Double Taxation Avoidance Agreement between the countries. The law now requires a TRC for that.

What is TRC?

Tax Residency Certificate is a document that proves residency in a particular country and substantiates it under a treaty between countries.

The TRC should be obtained from the country of residence.

A certificate issued by the foreign country would be sufficient as proof of tax residency.

Contents of TRC

Let’s take the case of Varun, who is employed by an Indian company. During financial year 2012-13, Varun goes to the US for an assignment. His payroll remains in India but he is working in the US. The employer deducts appropriate taxes from Varun’s salary, which is processed in India, and the balance after tax is credited to Varun’s bank account in India.

Let us assume that Varun qualifies as a resident in India for financial year 2012-13, and as a non-resident in the US for the 2012 calendar year. As his services are rendered in the US, the salary will be taxable in the US as well, leading to double taxation. Varun could explore the possibility of claiming relief under the India-US treaty, assuming the treaty conditions are satisfied.

With the new requirement, Varun has to obtain a TRC from India (where he is a resident) to claim the treaty relief in his income return.

Obtaining a TRC

The law does not prescribe a time limit or the stage at which a TRC should be obtained. In the absence of a specific timeline, one could interpret that the requirement is fulfilled so long as a TRC is available by the time the exemption/ relief claim in the tax return is verified by authorities.

Similarly, the law is silent on what the person should do after obtaining a TRC — whether it should be filed with the tax authority or not. There seems no obligation to furnish a TRC unless specifically asked for by the tax authorities.

There could also be a worst-case scenario where the country of residence does not issue a TRC (like in India, until the amendment was introduced). Due to the difference in tax years between different countries, individuals may also face difficulties in obtaining a TRC for the relevant period, as some particulars cannot be certified before the end of the relevant tax/ financial year. The concept of TRC is still evolving in India — more clarity will emerge even as it is being implemented. As India now has specific regulations for obtaining/ issuing TRC, it is advisable to obtain one whenever any treaty relief/ exemption is claimed to ensure certainty and avert litigation.

The author is Tax Partner, EY

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