The fact that travel including international travel has been heavily restricted by the Covid-19 pandemic means that individuals have been unable to leave certain jurisdictions including the UK and India.
Before the Covid pandemic it was increasingly clear that the rules which determine “where someone lives” for tax purposes (which include in many cases “where they work”, for example) are not always suited to a world of uninterrupted connectivity and the internationally mobile. Covid-19 has challenged the rules for a different reason – are the rules appropriate when movement out of a country is not possible due to government restrictions or mass flight cancellations.
Mythily Katsaris and Hamilton Forrest take a look at how the authorities in the UK and India are reacting to this question, discuss the risk for individuals becoming tax resident in the UK or India by virtue of being stuck in one of these jurisdictions and certain measures that may be relied on to prevent this from happening.
UK Tax Residence
An individual’s UK tax residence is in general determined by a combination of the number of days they spend in or out of the UK in a particular tax year (i.e., 6 April to 5 April) and their links with the UK.
This means that if an individual ends up spending more days in the UK than they had planned to, due to the Covid-19 travel restrictions, they are at risk of becoming unintentionally tax resident in the UK.
Under the UK’s statutory residence test a day does not count as a day spent in the UK if a number of exceptions apply. The most pertinent exception here is known as the “exceptional circumstances exception”.
This exception applies where both of the following conditions are met:
- an individual would not be present in the UK at midnight on the day in question but for exceptional circumstances beyond that person’s control that prevent him or her from leaving the UK; and
- the individual intends to leave the UK as soon as those circumstances permit.
This exception can only apply to a maximum of 60 days in any tax year.
Her Majesty’s Revenue & Customs have announced that days spent in the UK due to the following will count as “exceptional circumstances”:
- if you are quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus;
- if you are advised by official Government advice not to travel from the UK as a result of the virus;
- if you are unable to leave the UK as a result of the closure of international borders; and
- if you are asked by your employer to return to the UK temporarily as a result of the virus.
Although the above is, of course, helpful in connection with the tax year which ended on 5 April 2020, it remains to be seen whether it will be as helpful for the current tax year. This, in part, will depend on how long the UK lockdown measures continue to operate for.
If someone has been unable to leave the UK since the lockdown begun, they should be mindful of the fact that 4 June 2020 is the 60th day of the current tax year which means that they will not be able to rely on the “exceptional circumstances exception” for any days beyond this date in the current tax year.
India Tax Residence
Under Indian income tax law, an individual’s tax residency is determined by his or her time spent in India during a given financial year (i.e., 1 April to 31 March) as well as the time he or she spent the preceding financial years.
Proposals in India’s 2020 federal budget to significantly extend the tax residency rules have thankfully been diluted in the final version of Finance Act 2020. Under the original proposals, non-resident Indians and persons of Indian origin would be deemed tax-resident if they were in India for only 120 days in the relevant year, rather than 180 days, with effect from 1 April 2020. Indian citizens who were not tax-resident in any other jurisdiction would also be deemed Indian tax residents if they received income from a business or profession in India, thereby bringing their worldwide income into India’s tax net.
These measures caused jitters among wealthy non-resident Indians (NRIs), and owing to various representations made, the final bill, which was approved by the Indian parliament on 23 March included a new 120-day deemed residency rule, but would only apply to those with income from Indian sources above INR1.5 million, and if they have spent a total of 365 days in India in the last four years as well as 120 days in the current year. Such people will be liable to Indian income tax on their worldwide income. Individuals earning less than INR1.5 million (excluding foreign-source income) will continue to be subject to the earlier 182-day residency regime, and will be taxed only on income sourced in India or foreign-source income derived from a business controlled in India. They are not required to disclose overseas trusts, bank accounts or financial interests.
To the relief of many, the proposal to deem Indian citizens as Indian tax resident if they are not liable to tax in any other country, regardless of whether such individual meets the residency test laid out above, was dropped. However, a ‘resident but not ordinarily resident’ (RNOR) person in this position may still be viewed as a resident for the purpose of automatic information exchange with India under the Common Reporting Standard. Also, a RNOR who exercises control over companies and trusts outside India may create Indian tax residency risks for the overseas entities. There is also a risk that foreign-source income of an RNOR may be taxed on the basis that he or she controls the overseas entities that distribute the income.
Against the backdrop of these recent changes, if an individual has travelled to India before the pandemic, who because of the Covid-19 travel restrictions and the lockdown in India has had to stay in India beyond 182 days tax residence threshold, they are at risk of becoming unintentionally tax resident in India.
The Central Board of Direct Taxes (CBDT) in India has decided to relax the day counting for the purposes of determining the tax residency status of individuals who had come to India on a visit before 22 March 2020 for the financial year 2019-20. This is in the three following ways:
- for such an individual who was unable to leave India on or before 31 March 2020, his or her period of stay in India from 22 March 2020 to 31 March 2020 will not be taken into account for determining residence status;
- for such an individual who has been quarantined in India due to Covid-19 on or after 1 March 2020 and has departed on an evacuation flight on or before 31 March 2020 or has been unable to leave India on or before 31 March 2020, his or her period of stay in India from the beginning of his quarantine to the date of his departure or 31 March 2020, as the case may be will not be taken in to account for determining residence status; and
- for such an individual who has departed on an evacuation flight on or before 31 March 2020, his or her period of stay in India from 22 March 2020 to date of departure will be excluded for determining residence status.
This is obviously a welcome concession for foreigners and NRIs that were unable to leave India due to Covid-19 before 22 March, and allows them to disregard 10 days from their day count for the financial year 2019-20.
Concerns have however been raised in respect of the current financial year 2020-21, with the continued lockdown and travel restrictions. That said, authorities have issued a press release which suggests that when international flights resume operations, NRIs can expect a circular to be issued which will exclude the period of stay in India, of individuals effected by Covid-19 situation, up to the date of normalization of operations of international flights.
Whilst the press release does offer NRIs some degree of comfort, we will need to wait and see if the Reserve Bank of India issues similar guidance on residency norms, under the Foreign Exchange Management Act. There is also no guidance or clarification on whether the CBDT relaxation would cover foreign companies which may be impacted under the Place of Effective Management rules, on account of their key managerial persons or their directors overstaying their days in India under the current lockdown.