Taxing times for the super-rich

The term high net worth individuals (HNIs) is often used loosely for the so-called super-rich.

But there is no official definition of HNIs under the Income tax Act. The Finance Minister P. Chidambaram in his budget speech gave us a guide-post by terming ‘those who are relatively well-placed in society’ and have income above Rs 1 crore per year as the super-rich.

HNIs usually have various streams of incomes like high salaries, rental incomes, capital gains on sale of shares and properties, interest, royalty, dividends et al. Given their considerable wealth and power, they are a major source of capital for enterprises of a country.

HNIs face significant issues in respect of their tax management. Some of these are discussed below:

Residential status

Persons are normally taxable in their country of residence on their global income. HNIs may be present in different countries in a year. Hence, they face taxation from multiple countries (with each jurisdiction wanting to cash in on them).

Incomes and tax credits

HNIs may have taxable incomes in various countries. They can claim the credit of taxes paid in different countries in their country of residence where their global income is taxable as per the prevailing rules. While credit of some taxes paid may be allowed, others for which no credit is allowed may be a cost.

Tax rates on personal incomes vary across different countries. For example, in the European Union the top personal income tax rates in 2012 varied from a low 10 per cent in Bulgaria to 56.6 per cent in Sweden. Further, Monaco does not have any income tax on personal incomes.

Due to such disparity of tax rates, HNIs attempt to shift residency from high tax jurisdictions to low/NIL tax jurisdictions. They also try to take advantage of favourable double tax avoidance treaty provisions between different countries in this process to reduce their tax burden. This may give rise to what is called tax treaty shopping, which may be considered as tax evasion device in a country.

Flow of investments

HNIs may structure their investments in a country through a web of holding companies usually set up in tax havens/low tax countries. The tax authorities in various countries may view such holding/ subsidiary structures with suspicion of being a tax avoidance device, particularly when these companies do not have any business/commercial substance and are merely shell/conduit companies.

Some countries impose tax on estate of a person. For example, in the US there is a tax on taxable estate of a person upon his death. UK also imposes a tax on estate when an individual dies.

Some countries may impose tax on the wealth of a person. France has a wealth tax in respect of both resident and non-resident individuals.

In India, wealth tax is imposed on land and building, jewellery, cars, yachts and aircrafts.

In order to manage their tax issues and to avoid/mitigate multiple litigations, HNIs should keep proper records of their incomes, taxes and their physical stay in different countries. They should file their tax returns and make other tax-related compliances within the stipulated deadlines in different countries.

For compliance with estate/inheritance/wealth tax, they should maintain proper records of their assets such as immovable properties, investments. Further, valuation of assets for tax purposes also poses challenges. HNIs should ensure that the assets are fairly valued by qualified experts as per the relevant legal provisions prevailing in different countries.

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Budget targets HNIs

The incomes of HNIs are subject to tax at the highest rate. In this budget,a surcharge of 10 per cent has been proposed on individuals having taxable income above Rs 1 crore, thus taking the peak tax rate up to 33.99 per cent from current 30.9 per cent.

Luxury/high value items (having HNIs as consumers) are a major source of indirect tax revenue for the Government.

For instance, in this budget, the basic customs duty on imported high-end motorcycles (engine capacity of 800cc or more) and cars (more than $40,000 in CIF value and/or engine capacity exceeding 3000 C for petrol and 2500 C for diesel cars) has been increased from 60 per cent and 75 per cent to 75 per cent and 100 per cent, respectively.

(Article by Grant Thornton India LLP, a leading assurance, tax and advisory firm)

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