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PENSION, GOVERNMENT SERVICES, STUDENT RECEIPTS, DIRECTORS’ FEES/REMUNERATION

PENSION, GOVERNMENT SERVICES, STUDENT RECEIPTS, DIRECTORS’ FEES/REMUNERATION. Presented for: International Tax Committee, ICAI Presented by: Mr. Kuntal Dave July 19, 2013. TABLE OF CONTENTS. Article 16 of UN Model - Directors’ Fees and Remuneration

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PENSION, GOVERNMENT SERVICES, STUDENT RECEIPTS, DIRECTORS’ FEES/REMUNERATION

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  1. PENSION, GOVERNMENT SERVICES, STUDENT RECEIPTS, DIRECTORS’ FEES/REMUNERATION Presented for: International Tax Committee, ICAI Presented by: Mr. Kuntal Dave July 19, 2013

  2. TABLE OF CONTENTS • Article 16 of UN Model - Directors’ Fees and Remuneration • Article 18 of UN Model – Pension and Social Security Payments (Article 18A and 18B) • Article 19 of UN Model – Government Services • Article 20 of UN Model – Students 2

  3. ARTICLE 16 OF UN MODEL • Directors’ Fees and Remuneration of Top-level Management officials: • “Director’s fees and other similar payments derived by a resident of Contracting State in his capacity as a member of the Board of Director of a company which is a resident of the other Contracting State may be taxed in that other state” • Article 16(1) applies when the following conditions are satisfied: • Directors’ fees and other similar payments are derived by a “person” • The person is a “resident” of a Contracting State (State R) 3

  4. ARTICLE 16 OF UN MODEL…(Cont’d) • Directors’ fees and similar payments are derived from a “company” • Such a company is a resident of other Contracting State (State S) • Such payments are derived in the capacity of a member of the Board of Directors of the company. • Thus, Directors’ fees etc. may be taxed in state, regardless of where services are performed or meetings are held. • So the primary right of taxation is allocated neither to R country nor to S country but to the R of the Co. • As per Article 3(1)(a) of UN Model defines the term ‘person’ which includes an individual, a company and any other body of persons. • Article 4 defines ‘resident’ 4

  5. ARTICLE 16 OF UN MODEL…(Cont’d) • Section 253 of the Companies Act, 1956 only an individual can be appointed as a director of a company. • “Directors’ fees” include sitting fees for attending the meetings of the Board of Directors or a committee of the Directors. [Dieter Eberhard Gustav Von Der Mark Vs. CIT – 235 ITR 698(AAR)] • “Other Similar Payments” includes benefits in kind e.g. provision by the company of a residence or vehicle, insurance coverage, club membership and stock option – UN Commentary–Para 2 • ‘Director’s fees’ neither a Dependent Service nor an Independent Service and therefore overrides Article 14 and 15 5

  6. ARTICLE 16 OF UN MODEL…(Cont’d) • Directors’ commission would fall within the expression “similar payments” [235 ITR 698 (supra)] • Severance pay in form of annuity on his retirement as a director also will be covered under this Article and not Article 18. • Directors’ fees etc. should be derived by a “member of the Board of Directors” • Thus, a manager, who is not a Director is not covered. • Director may function in “dual capacity” as a director and also as an employee or a consultant. So remuneration for employment may be covered by or Article 15. Similarly, professional consultancy fees derived by a Director may fall under Article 14. • Article 16 of OECD Model is identically worded as Article 16(1) of the U.N. Model 6

  7. ARTICLE 16(2) OF UN MODEL READS: • Salaries, wages and other similar remuneration derived by a resident of a Contracting State, in his capacity as an official in a top – level managerial position of a company which is a resident of the other Contracting State may be taxed in that other State: • Article 16(2) applies when the following conditions are satisfied. • Salaries, wages or other similar remuneration are derived by a person. • The person is a resident of a Contracting State (State R) • The salaries etc. are derived from a company. 7

  8. ARTICLE 16(2) OF UN MODEL…(Cont’d) iv. Such a company is a resident of the other Contracting State (State S) v. The salaries etc. are derived in the capacity as an official in top-level managerial position of the company • Thus, salaries, etc. of top-level managerial personnel may be taxed in State S of the company irrespective of the place where the duties are performed. The reason could be that director – top level management personnel may be required to perform duties in several countries • “Top level managerial position” refers to key position that involves responsibility for the general direction of the affairs of the company. It covers a person acting as both a director and top- level manager e.g. Managing Director – UN Commentary–Para 4 8

  9. ARTICLE 16(2) OF UN MODEL…(Cont’d) • Would it also cover a person deputed/seconded by a collaborator to Indian Co. under Article 16(2), by way of director or executive? • Nature of Fees (remuneration received in capacity of a director and not for other functions like advisory services, consultancy services. However under UN Model other remuneration will also get covered) • Who are directors ? (individuals as well as legal bodies, if the domestic law so permits) • OECD Model does not contain provision corresponding to Article 16(2). 9

  10. ARTICLE 18 OF UN MODEL Pension And Social Security Payments: • Two models: Article 18A or Article 18B • Article 18A(1) reads: ‘Subject to the provisions of the paragraph 2 of Article 19, pensions and other similar remuneration paid to a resident of a Contracting State in consideration of the past employment shall be taxable only in that State’ • Thus, pension and other similar remuneration shall be taxable only in the State R on satisfying the following conditions: • Pension and other remuneration are paid to a person • The person is a ‘resident’ of a Contracting State (state R) • The pension etc., is paid in consideration of the past employment. 10

  11. ARTICLE 18 OF UN MODEL…(Cont’d) • A ‘Pension’ signifies a periodic allowance granted on account of past services i.e. Pension is a compensation of the past employment. • Other similar remuneration may encompass non periodic payment e.g. commuted pension. Compensation/annuity for injury while on duty. • Does not deal with contribution from individuals who render independent personal services within the meaning of Article 14 • In addition, the US Model provides taxability of • Social Security benefits and public pensions in the source state • Payments made to support a minor child only in the State of Residence of person obliged to make payment 11

  12. ARTICLE 18 OF UN MODEL…(Cont’d) • The pension payable to a government employee is earned by rendering long and efficient service and therefore can be said to be a deferred portion of the compensation for service rendered. Pension also has a broader significance in that it is a social -welfare measure rendering socio-economic justice by providing economic security in old age to those who toiled ceaselessly in the hey-day of their life. [D.S. NakaraVs UOI (Air 1983 (SC)130)] • Pension received from employer outside India is exempt from tax in India under Article 18 of the India Malaysia Tax Treaty. [Rajamani Raman Vs CIT] 12

  13. ARTICLE 18A(2) READS: • ‘Notwithstanding the provisions of a paragraph 1, pension paid and other payments made under a public scheme which is a part of the social security system of a Contracting State or a political subdivision or a local authority thereof shall be taxable only in that State’ • Thus Article 18(2) assigns to State S an exclusive right to tax pensions and other payments made under a public scheme which is a part of the social security system of the Government. • In India, public scheme of social security system of Government includes: • Workmen Compensation Act,1923 • Maternity Benefit Act,1961 • Employees State Insurance Act,1948 • Employees Provident Fund & Misc. Provisions Act, 1952 • Payment of Gratuity Act,1972. etc. 13

  14. ALTERNATIVE ARTCLE 18B READS: • Subject to the provisions of paragraph 2 of Article 19 pension and other similar remuneration paid to a resident of a Contracting State in consideration of past employment may be taxed in that state. • However, such pensions and other similar remuneration may also be taxed in the other Contracting State if the payment is made by a resident of that other state or a permanent establishment situated therein. • Notwithstanding the provisions of paragraph 1 and 2, pensions paid and other payments made under a public scheme which is a part of the social security system of a Contracting State or a political subdivision or a local authority thereof shall be taxable only in that state. 14

  15. ALTERNATIVE ARTCLE 18B…(Cont’d) • Thus, Article 18B(1) recognizes the right of State R to tax pension etc. Further Article 18B(2) also grants a right to tax pension etc. paid by a R or a PE situated in State S i.e. state in which the pension payments originate and not the state in which the services had been performed. • Article 18 of OECD Model is similarly worded as Article 18A(1) of the UN model. • Article 18, thus, covers pension etc., in respect of private employment and also to pensions in respect of services rendered to a state government pension – which are not covered by Article 19(2) 15

  16. Article 19 OF UN MODEL GOVERNMENT SERVICES: Article 19(1)(A) reads; ‘Salaries, wages and the other similar remuneration, other that a pension, paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that state or subdivision or authority shall be taxable only in that state’ • Thus, salaries etc. are taxable only in payment state if the following conditions are satisfied. • There is a payment of salaries, wages and other similar remuneration (other than pension). • Such a payment is to an individual. • Such a payment is by a Contracting State or a political subdivision thereof (Government Entity) 16

  17. Article 19 OF UN MODEL…(Cont’d) • As per paragraph 2 of the UN Model ‘other similar remuneration’ means compensation for employment and includes benefits in kind e.g. provision by the employer of a residence or vehicle, insurance, coverage club membership etc. • Article 19(1)(A) of OECD Model is worded as Article 19(1)(A) of UN Model. 17

  18. Article 19 OF UN MODEL…(Cont’d) • Article 19(1)(B) of the UN Model reads: ‘However, such salaries, wages and other similar remuneration, shall be taxable only in the other contracting state if the services are rendered in that other state and the individual is a resident of that State who: • Is a national of that state, or • Did not become a resident of that state solely for the purpose of rendering services’. 18

  19. Article 19 OF UN MODEL…(Cont’d) • This article applies if the following conditions are satisfied: • Salaries, etc. are such as are referred to article 19(1)(A) • Services are rendered in the other Contracting State. • The individual rendering services is a resident and national of the Receiving State, or did not become a resident of that state solely for the purpose of rendering services. • Under the Vienna Convention, the Receiving State can tax remuneration paid to certain personnel of foreign diplomatic mission and consular posts, who are permanent residents or nationals of that State. 19

  20. Article 19 OF UN MODEL EXAMPLES • An individual, who is a resident and citizen of Germany, is employed by the Government of France. He commutes daily to France for employment, where will his salary be taxed? • A French national is working in the French Embassy in Germany. He is a resident of Germany. Which country will have the right to tax the salary received by the individual? 20

  21. Article 19(2)(A) OF THE UN MODEL • Reads: ‘Any person paid by, or out of funds created by, a Contracting State or political subdivision or local authority thereof to an individual in respect of services rendered to that state or subdivision or authority shall be taxable only in that State: • As per Article 19(2)(A), pension is taxable in paying State if the following conditions are satisfied. • There is a payment of pension. • Such a pension is paid to an individual. • The payment is by or out of funds created by a Government entity. • Such a payment is in respect of services rendered to that Government entity. 21

  22. Article 19(2)(B) OF THE UN MODEL • Largely, Article 19(2)(B) of OECD Model is identical Article 19(2)(B) of the UN Model. • Article 19(2)(B) of the UN Model Reads: ‘However, such pension shall be taxable only in the other Contracting State if the individual is a resident of and a national of, that other state’. • Article 19(2)(B) of OECD Model is more or less similarly worded. 22

  23. RULE 19(3) OF THE UN MODEL…(Cont’d) • Article 19(3) of the UN Model reads: ‘The provisions of Articles 15,16,17 and 18 shall apply to salaries, wages and other similar remuneration, and to pensions, in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof’. • Thus, Article 19(3) provides that Article 15,16,17 and 18 apply if the following conditions are satisfied. • Salaries, wages and other similar remuneration including pension are paid and • Such remuneration etc. is in respect of services rendered in connection with a business carried by a Government Entity. 23

  24. RULE 19(3) OF THE UN MODEL…(Cont’d) • So, Article 19(3) provides that Article 19(1) and Article 19(2) do not apply if the services are performed in connection with a business carried on by Government Entity. • Article 19(3) of OECD Model is worded more or less in similar words. 24

  25. ARTICLE 20 OF THE UN MODEL: STUDENTS • The said article reads as under: ‘Payments which a student or business trainee or apprentice who is or was immediately before visiting a Contracting State a resident of the other Contracting State and who is present in the first mentioned State solely for the purpose of his education or training receives for the purposes of his maintenance education or training shall not be taxed in that State, provided that such payments arise from sources outside India’. • Thus this Article provides that host country would not tax visiting country students, apprentices or business trainees on satisfying the following conditions: 25

  26. ARTICLE 20 OF THE UN MODEL…(Cont’d) Article 20 applies to a student or business trainees or apprentice. The student is or was immediately before visiting a Contracting State, a resident of other Contracting State. He is present in the host state solely for the purposes of his education or training. He receives payments for the purpose of his maintenance education or training. Such payments are received from sources outside the host state. 26

  27. ARTICLE 20 OF THE UN MODEL…(Cont’d) • ‘Immediately before’ invokes the notion that there is, between two relevant events, no intervening space, lapse of time or any significant event. [Lister Vs. Forth Dry Dock & Engineering Co. Ltd. (1989) 1 All ER 1134 (HL)] • As per Para 3 of OECD commentary (2008), the Article covers only payments received for the purpose of recipients maintenance, education and training. Also, such payments should not exceed the level of expenses that are likely to be incurred to ensure the recipients maintenance, education or training. • The question is, even if receipt is more than the level of expenses, can the State S tax? Unless student or trainee is resident of the host State. 27

  28. ARTICLE 20 OF THE UN MODEL…(Cont’d) • The payments that a student receives for the purpose of his maintenance, education or training should be from sources outside the host state. As per paragraph 4 of OECD commentary (2008) , payments that are made by or on behalf of a resident of a Contracting State or that are borne by a PE which foreign enterprise has in the host state are not to be considered as arising from sources outside the host state. • Article 20 of the OECD Model is identical to Article 20 of the UN Model. 28

  29. ARTICLE 20 OF THE UN MODEL EXAMPLES • Mr. X, a student (Citizen of India) is in USA solely for the purpose of his education. He has never visited USA before. He regularly receives payments from his father residing in India, for the purpose of his education and maintenance. Discuss the taxability of such receipts. • Continuing the above example, discuss the taxability of amount Mr. X receives as salary from the part time job in the USA. He is doing the part time job for the purpose of his education and maintenance in the USA. 29

  30. ARTICLE 20 OF INDO-SINGAPORE DTAA- STUDENTS & TRAINEES. An individual who is or was a resident of a Contracting State immediately before making a visit to other Contracting State and is temporarily present in the other State solely: As a student at a recognized university, college, school or other similar recognized educational institution in that other State. As a business or technical apprentice; or As a recipient of a grant, allowance or award for the primary purpose of study, research or training from the Government or either State or from a scientific, educational, religions or charitable organization or under a technical assistance programme entered into by the Government of either State; 30

  31. ARTICLE 20 OFD INDO-SINGAPORE DTAA- STUDENTS & TRAINEES…(Cont’d) shall be exempt from tax in that other State on: • All the remittance from abroad for the purpose of his maintenance, education, study, research or training. • The amount of such grant, allowance or award; and • Any remuneration not exceeding USD 500 per month or its equivalent in local currency in respect of services in that other state provided the services are performed in connection with his study, research or training or are necessary for the purpose of his maintenance. 31

  32. ARTICLE 20 OF INDO-SINGAPORE DTAA- STUDENTS & TRAINEES…(Cont’d) • The benefits of this Article shall extend only for such period of time as may be reasonable or customarily required to complete the education or training undertaken, but to complete the education or training undertaken, but in no event shall any individual have the benefits for more than five consecutive years from the date of his first arrival in that other Contracting State. 32

  33. THANK YOU. 33

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