Tax Residency Certificate (TRC)

The Indian government has made mandatory requirement of furnishing Tax Residency Certificate (TRC), for non-residents seeking Double Taxation Avoidance Treaty (DTAA) benefits. The provision further states that to claim benefit of Tax Treaty the non-resident would have to produce TRC issued by the Treaty partner. 

Thus, while making payment to a non-resident or to a foreign entity, it is also mandatory to ask for tax residency certificate from non-resident or the foreign entity in order to avail benefits of Tax Treaty signed between the contracting states. The objective behind bringing in the requirement of TRC seems to safeguard against cases wherein the taxpayers who were not tax resident of a contracting country were claiming benefit under the DTAA entered into by the government with that country. Thereby, even third party residents (residents of a third country) claimed unintended treaty benefits. This article would address better understanding of Double Taxation Avoidance Treaty and and Tax Residency Certificate requirements.

Taxation of Non-resident: Lets do a quick recap of the taxation aspect of resident and non-resident in India. In India, the liability under the Income tax Act arises on the basis of residential status of the assessee during the previous year. An individual can be termed as a resident, if he stays during the previous year (1st April to 31st March) either for:

• 182 days or more in previous year
• 60 days or more and has been in India in aggregate for 365 days or more in four years preceding previous year.

Any person who does not satisfy this requirement is termed as non- resident. In case of resident individuals and companies, their global income is taxable in India. However non-residents have to pay tax only on the income earned in India or from a source/activity in India. Non-residents are liable to tax on Indian source income, including:

• Interest, royalty and fees for technical services paid by an Indian resident;
• Salary paid for services rendered in India;
• Income arises from business connection or property in India.

Withholding Tax: Where any payment is to be made to a non-resident, the payer is obliged to deduct tax at source. As per Section 195 of the Income Tax Act, there is an obligation on the person responsible for payment, to deduct tax at source at the time of payment or at the time of the credit of the income to the account of the non-resident. The tax is to be deducted at the rate prescribed in the Act or rate specified in Double Taxation Avoidance Agreement whichever is beneficial to the assessee.

What is Double Taxation Avoidance Treaty (DTAA)?

Different countries follow different rules of taxation and this might result into a situation where the same income is being/getting taxed in more than one country. This situation is called double taxation. To prevent these type of situations government of two countries usually enter into  mutual agreements known as Double taxation avoidance agreements (DTAA). These are also called Tax Treaties. Section 90 of the Indian Income tax, 1961 empowers the central Government of India to enter into an agreement with the government of any other country outside India or specified territory outside India to provide for:

• Granting relief in respect of Income being taxed/ Chargeable in both the countries;
• Avoidance of double taxation;
• Exchange of information;
• Recovery of Income tax

All non-residents are entitled to claim benefits under the domestic tax law or the relevant tax treaty to the extent it is more beneficial to them.

Tax Residency Certificate: The Finance Act, 2012 had introduced the requirement of a Tax Residency Certificate (TRC) into the tax provisions thereby making it mandatory for every non-resident seeking to avail themselves of the tax treaty benefits, to obtain a certificate from the Government of the country in which such person is a resident for evidencing such person’s residency in that country. The requirement is with respect to income arising from the Indian fiscal year ending on March 31, 2013 and subsequent years. The Government has also prescribed the procedure for obtaining TRC by resident Indian assessee. The application would be required to be made in Form 10FA and the TRC will be issued in Form 10FB. One of the most basic conditions of availing tax benefit of any tax treaty is that the tax payer should be tax resident of at least one of the two Contracting States. Thus, a TRC only provides for a proof of the tax residency of that person in one country thereby making him eligible for availing treaty benefits.

Why was TRC introduced?

It was noticed that in many cases the taxpayers who were not tax resident of a contracting country were claiming benefit under the DTAA entered into by the government with that country. Thereby, even third party residents (residents of a third country) claimed unintended treaty benefits.

Highlights of major amendments relating to DTAA and TRC in the recent past: Amendment of section 90 of the IT act, 1961 in the Finance Act, 2012: It said that it is mandatory for a non-resident taxpayer to obtain a TRC containing the prescribed particulars to avail the benefits under a Tax Treaty.

Notification No 39 dated September 17, 2012, issued by the Central Board of Direct Taxes: It prescribed the specific particulars that are mandatorily required to be mentioned/ contained in a TRC. The revised Bill also deleted the requirement of TRC to contain the prescribed particulars, as introduced by the Finance Act, 2012. However, a new provision has been inserted which provides that the non-resident taxpayer claiming Treaty relief shall be required to provide such other documents and information, as may be prescribed. Similar amendments have been introduced in the provisions of section 90A of the Act as well.

Benefits of TRC: The Finance Bill, 2013: It proposed a stipulation that submission of TRC by a non-resident would be a necessary but not sufficient condition for claiming Tax Treaty benefits. This was in line with the clarification articulated in the Memorandum to Finance Bill, 2012. The Finance Act 2013/ Amendment of Section 90A: The aforementioned stipulation of TRC being a necessary but not sufficient condition, as introduced in the original Bill, was deleted in the revised Bill.

• A prescribed format will allow foreign residents to know in advance the essentials required to claim tax credits. This will speed out the entire process of payment.
• Tax Residency Certificate (TRC) clause gives tax authorities the power to probe the beneficiary of the taxes under these treaties.

What happens when TRC is not provided by non-residents?

• In cases where nonresident is not able to provide TRC or there are delays happening, the payer entity instead of applying the beneficial Treaty provisions may withhold taxes at higher rates. In that case, the non- resident may have to seek refunds in India by filing its Return of Income.

• Also, in cases of net of tax arrangements where tax is borne by the Indian entity, they may have to look for factoring out these requirements.

To Conclude: Thus, before making payment to non-residents or to foreign entities, it is mandatory to ask for a Tax Residency Certificate from the respective non-residents in order to avail benefits of Tax Treaties. Also, the government can now instead of asking for the prescribed information in the TRC itself, could ask for the same separately through other documents and information. This is a favourable development since investors from some countries were facing a problem because their governments were refusing to amend the format of the TRC merely to suit the Indian Government requirements. Foreign investors are integral part of Indian markets and will continue to be so. Measures must be taken in order to ensure that the flow of FDI in India continues to grow.