Tax Treatment of Employee Mobility and Short-Term Secondments

Introduction : The internationalization of the operations of firms has become common today and one way this manifests itself is through the mobility of personnel from one country to another. International mobility is simply a part of the operations of contemporary businesses. The firm may send its workers from one nation to another for a certain period of time to provide some kind of expertise to other units of the firm in order to manage the projects or expand the business. Such transfers may often be referred to as short-term assignments. In such cases, the worker will be employed by the firm within his or her home country while undertaking the duties of that firm in another country. Although short-term assignments appear as a temporary measure of employment, tax problems will arise in such cases.

Taxation of international personnel will depend on various factors. These include residency of the worker, the place where the work was done, employer, allocation of salaries and whether or not there exists double taxation treaties between the countries. Because of these moving employees is not something the human resources team handles. It needs help from the employee, the payroll team, tax experts, the company in the home country and the company in the country. This article looks at the issues related to where the employee lives, how money is handled and how taxes are taken out. It focuses on counting days splitting money between different parts of the company and making sure everyone knows what they are responsible for, in big companies that work in many countries.

Legal Provisions

The Income-tax Act of 1961 is a law in India that says where you live is very important when it comes to paying taxes. The rules for figuring out where you live are in Section 6. This section says that it matters a lot where you're physically in India during the time we are looking at for taxes. When people move to countries for work it is very important to keep track of when they travel and how long they stay in each place. If you are moving to a country for work you need to keep good records of when you arrive, when you leave and how long you are in each country.

Section 5 of the law says that the amount of taxes you pay is based on where you live. For people who move to countries for work it is very important to know if you are a resident or not because it can affect how much taxes you pay in India. Section 9 is also important because it talks about money that is made in India. If you work in India, we need to look at where your salary comes from and how that affects your taxes in India.

When it comes to taking taxes out of your pay check the Income-tax Act of 1961 has rules about that in Section 192. This is important for employers who need to take taxes out of their employee’s pay checks. If someone is working in a country it can be hard to figure out who is responsible for taking out taxes. We need to look at the laws in each country and any special agreements between countries to figure that out.

Legal Analysis

Tax residency is one of the first issues that should be examined when an employee moves across borders. A secondment that is described internally as “short-term” does not necessarily mean that the employee will have no tax exposure in the host jurisdiction. The applicable domestic law may impose tax based upon physical presence, source of employment income or other connecting factors. In addition, a DTAA may modify or allocate taxing rights between the two countries. Though the frequently encountered tax treaties' income-employment rules can offer relief in some cases, the applicability of these rules depends on the wording of the applicable treaty and the facts of the case. The use of day-counting thus becomes a necessity. Employers must keep track of every relevant period during which the individual works in each respective jurisdiction, and should not base any assumptions on estimates of the assignment dates. Travel and changes in the assignment period, as well as extra visits, might affect an employee's tax situation. An efficient travel calendar that is based on immigration and payroll data can help to determine whether the employee is approaching a particular threshold.

Payroll poses yet another problem that is distinct from the above but related. In a normal employment situation, the entity providing the remuneration for the employee and the one benefiting from the services provided by the employee could be one entity. But in the case of secondment, the payroll could be divided into two with one entity paying salary to the employee while the other supervises the work done. This will raise issues relating to the right method of withholding, salary expenses as well as the issue of potential payroll taxes in the host jurisdiction.

A split payroll system can be used when there is division of remuneration between the two jurisdictions. This means that in such a scenario, while one part of the employee’s remuneration will be done by the home entity, the rest will be handled or reported by the host entity. While the split payroll system makes things easy, it still poses the risk of double withholding, under withholding, inconsistent reporting as well as errors in foreign exchange calculation. There is need for good communication between the two payroll systems to avoid any confusion.

Another significant matter pertains to the difference between the formal employer and the economic employer. The employer listed in the contract of employment does not have to be the only entity that matters from a tax perspective. In cases where the host company enjoys the benefits of an employee and pays the associated costs of employment, the tax authorities may look into the essence of such a deal rather than the wording of the contract. It follows that the terms of inter-company arrangements must reflect the underlying business rationale for the secondment.

Relevant Case Laws

The Supreme Court made a decision in the case of CIT v. Eli Lilly & Co. (India) Pvt. Ltd. This decision is very important when we talk about taxing employees and what employers have to do when it comes to paying taxes. The case shows us that we need to look at the salary that is paid for work done in India and the employer has to take care of deducting taxes. This is also important for people who work in countries because where you work can affect how much tax you pay in India.

The decision in the case of Centrica India Offshore Pvt. Ltd. V. CIT is also important when we talk about sending employees to work in countries and how that affects taxes. This case shows us that we need to look at what peoples’ actually doing when they work in India for a company that is based in another country. It is equally essential to take into consideration the relationship between the work done in India and the company operating in the other country. From the cases mentioned above, we can conclude that having an agreement cannot be used to determine how the tax system works regarding employment in the other country. In this case, Supreme Court cases such as the one in CIT, v. Eli Lilly & Co. (India) Pvt. Ltd. are very relevant.

Practical Implications

For companies that have groups of employees a good plan for moving people should start before the employee arrives in the country where they will work. The company that the employee is leaving. The company that they are going to should look at how long the employee will stay, where they will live, where they will work, how much they will be paid and what payroll responsibilities they might have. The two companies should also decide which company will pay the salary and whether the arrangement needs money to be paid back or charged between the companies. Keeping records can help show that the move is real and make it clear what each company is responsible, for.

A good mobility policy needs to have a system in place to keep track of when employees travel and how long they are assigned to places. The people who handle payroll and taxes should be able to get the information about employee travel so they can figure out if anything needs to be changed in the employee’s schedule. In case where an employee is remunerated by more than one employer or has a special payroll scheme, then the policy needs to specify which employer has responsibility for filing the income information of the employee and taxation. This is very crucial to specify the responsible parties because in case of inadequate communication between the companies involved, there is likely to be a lack of compliance, despite the fact that each of the companies assumes that another party is handling the issue. It is the mobility policy that should ensure the clarification of responsibilities regarding mobility issues.

Conclusion

In the context of employee mobility and short-term work in a particular country things become quite complicated because of the laws on employment and taxation. Although an employee works in another country on a temporary basis, he or she still has to pay taxes and deal with various payroll issues. In addition to that, it is necessary to account for such factors as employee's residence, the physical location of an employee, source of revenue and others. Moreover, one has to take into account the provisions related to international taxation. That is why it is very crucial to control the number of days an employee works in a particular country and payroll processes.

When speaking of companies operating in other countries, it should be noted that the best strategy here is development of a plan that involves taxation and compliance with the legislation, rather than employee mobility. It becomes possible due to proper documentation, coordination between departments, responsibility of each department for its part in the process, constant monitoring and an adequate plan for employee mobility.

Author: Ishita Jain in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

Endnotes

1. Income-tax Act, 1961, §§ 5, 6, 9 and 192 (India).

2. CIT v. Eli Lilly & Co. (India) Pvt. Ltd., (2009) 312 ITR 225 (SC).

3. Centrica India Offshore Pvt. Ltd. v. CIT, (2014) 364 ITR 336 (Delhi).

4. Relevant Double Taxation Avoidance Agreement provisions concerning income from employment.

5. Central Board of Direct Taxes, relevant guidance and circulars concerning taxation of salary and deduction of tax at source.