Taxation of Expatriate Employees | Secondment | Cross Border Movement

Table of Contents

1. Introduction
2. What is Secondment?
3. Laws and Regulations influencing Cross Border Movement

1. Introduction

MNC’s increased integration into growing economies has led to a substantial rise in the cross-border movement of people. The people involved in such cross-border movement are known as expatriate¹ i.e. a person temporarily residing and employed in another country while still remaining citizen of his home country and such cross-border movement is known as secondment or deputation. The term expatriate is derived from Latin word, ex-patria, which means out of the country. Expatriate is defined as, a person who lives outside their native country²; a person residing in a foreign country.³

2. What is Secondment?

Secondment means the temporary assignment of an employee from an entity (lending employer) in a foreign country to an entity (receiving employer) carrying on business in host country, supported by the existence of an employer-employee relationship between the individual and the receiving employer.⁴ Such secondment is generally necessitated on account of business needs⁵, knowledge enhancement⁶, cost reduction.⁷ The movement of people can be inbound i.e. a person based in a home country (say Australia) working in host country (say India) or outbound i.e. a person based in a home country (say India) working in host country (say Australia). Such movement of people can be in different capacities viz., employee, professional etc. Further, the movement can be for different duration depending upon the nature of assignment viz., short term, medium term, long term and permanent relocation.

3. Laws and Regulations influencing Cross Border Movement

Cross-border movement involves compliance with various laws and regulations in host country (i.e. India) such as immigration law, personal income tax, corporate tax, transfer pricing, social security, exchange control, goods & services tax, corporate law, customs baggage rules.

• • Immigration Rules: A foreign national⁸ can visit India only with a valid visa issued by the Indian Government and the purpose of visit should match with the visa category such as employment visa, business visa, project visa, student visa, tourist visa etc. In other words, the foreign national should travel in the host country on correct visa category.The expatriate coming under employment visa and business visa is required to get himself registered with FRO or FRRO, as the case may be, in India in certain cases, depending upon the duration of visit and/or visa issuance conditions.
  • Personal Income Tax: The taxability of salary paid (whether in India or abroad)⁹ to an expatriate employee for services rendered in India depends upon the residential status of the expatriate. The residential status of the expatriate is determined under the domestic law of the host country as well as the home country. In case of a conflict i.e. where the expatriate becomes resident of host country as well as home country, recourse is made to the tie breaker rules given in the DTAA entered between host country and home country to decide the country of which the expatriate should finally be treated as a resident. However, where there exists no DTAA, the benefit of tie breaker rules would not be available.The salary paid to expatriates consist of various cash components including per diem allowance and components in kind such as social security, hypothetical tax, ESOP etc. Certain home countries cast an obligation on the employer to contribute to the social security schemes in respect of employees hired in non-home countries. The inclusion of the social security contribution in taxable salary quantum of expatriate has been debated time and again in the past but the courts have held that such inclusion cannot be done as it amounts to contingent payments to which the employee has no right till the contingency occurs. Similarly, in certain cases, the expatriates are required to pay¹⁰ a notional tax equivalent to a home country tax which would have been paid had (s)he remained in the home country with that level of salary, commonly known as hypothetical tax.The taxability (or deduction) of the hypothetical tax in the hands of expatriate is also a debated issue and different views are taken by the courts in the past depending upon the facts and circumstances of each case. Further, to ensure that the expatriate is not at disadvantage in secondment, the employer undertakes to bear the tax to be paid in the host country so that the net take away home salary in the hands of expatriate does not suffer.
    One of preferred modes of retaining the key employees for longer duration is issuance of ESOPs. The domestic law provides for taxation of securities received by an expatriate under an ESOP at the time of allotment of the specified security. The ESOPs are, generally granted after serving the company for certain period and in case of an expatriate, who renders services in more than one country during the vesting period i.e. period between grant and exercise of ESOPs, the benefit is taxable in host country to the extent attributable to services rendered in such country.Salary earned by an expatriate for rendering services in India is taxable in India except where the expatriate claims tax exemption on account of short-term visit, either under the domestic law or under the DTAA, upon fulfilment of specific conditions mentioned therein.
  • Corporate Tax: Business income derived by a foreign entity in India is taxable only where such foreign entity is carrying on business through a permanent establishment situated in India. In general sense, permanent establishment means a fixed place of carrying out business by the foreign entity. Such fixed place of business can be in any form like a space in office, hotel room, guest house etc. The said concept also includes within its ambit a permanent establishment arising on account of rendition of services known as Service PE as well as permanent establishment arising on account of conclusion of contracts known as Agency PE. The presence of expatriates of a foreign entity in India may create a PE exposure for the foreign entity. In certain cases, the foreign entity may be liable to tax in India with respect to services rendered under the source rule in the form of fees for technical services even though permanent establishment is not created.
  • Transfer Pricing: The domestic transfer pricing regulations require the transactions to be executed between the associated enterprises¹¹ at arm’s length. Accordingly, the transactions arising on account of secondment should satisfy arm’s length principle as envisaged in the ITA.
  • Social Security: Contribution towards social security in India is primarily governed by the EPF Act. The EPF Act is applicable on employees of covered establishment i.e. establishment which is registered¹², having a monthly pay up to ` 15,000. The EPF Act mandates contribution of 12% of monthly pay, each by employer as well as employee<sup>13</sup> towards EPF scheme (including pension scheme) apart from contribution of 0.50% towards an insurance scheme by the employer.An expatriate<sup>14</sup> working for a covered establishment is mandatorily required to contribute 12% towards EPF scheme irrespective of the fact that the monthly pay exceeds ` 15,000. The employer of such expatriate is also required to make an equivalent contribution towards EPF scheme. The contribution so made can be withdrawn upon completion of Indian employment if an effective SSA exists between India and the home country.¹⁵ However, if no SSA exists between India and the host country, the contribution made in the EPF scheme can be withdrawn upon attainment of 58 years of age or in case of permanent and total incapacitation.
  • Exchange Control: A foreign citizen as well as Indian citizen, being an employee of a foreign entity may receive the whole salary payable towards services rendered in India, in a bank outside India. Further, where such expatriate is on deputation to office/branch/subsidiary/joint venture/group company of the foreign company, in India, the whole salary payable towards services rendered can also be received in a bank outside India. However, the payment of salary should be subject to applicable deductions such as income tax, social security contributions etc.Where the expatriate i.e. a foreign national, is in direct employment with an Indian entity, the entire salary is required to be received by the expatriate in India and thereafter, remitted outside India after payment of appropriate income tax, social security contributions etc.
  • Goods and Services Tax: The amount paid by the Indian entity to the foreign entity towards secondment of expatriate may be liable to GST in the hands of the Indian entity under reverse charge mechanism, in certain cases. Therefore, the arrangement between the foreign entity and the Indian entity towards secondment of foreign entity’s employees to work for the Indian entity needs to be evaluated from GST perspective. The GST paid under reverse charge mechanism, if any, can be claimed as credit by the Indian entity if attributable towards taxable supply by Indian entity. However, if the foreign entity creates a fixed establishment in India, the foreign entity is required to discharge GST on services rendered through expatriates.
  • Corporate Law: The Companies Act, 2013 requires that any contract or arrangement executed between related parties should be subject to approval of shareholder and consent of board of directors. However, where the transactions are entered in ordinary course of business and are at arm’s length, the shareholders’ approval and consent of board of directors may not be required.
  • Customs Baggage Rules: The expatriates who have dutiable goods in their possession or who carry goods in excess of their eligible duty-free allowance are required to fill up the customs declaration card clearly mentioning the quantity and value of goods that is being brought.

1. Also known as secondee or assignee.
2. The Oxford Dictionary.
3. Webster Dictionary.
4. Para 35, Circular No. 75-6R2 dated 23rd February, 2005, CRA. The secondment, however, need to be differentiated with deputation. The key differences between secondment and deputation are as under:

5. To undertake specific project on behalf of the home country, or to meet distinctive business needs of the host country which cannot be meted by available talent pool in the host country.
6. To expose the individual to acquire international exposure both from professional as well as personal perspective.
7. Where the cost of expatriate is less vis-à-vis recruiting a local employee for executing an assignment.
8. Except nationals of Nepal and Bhutan.
9. Split salary.
10. To the employer.
11. Related entities.
12. Registration is mandatory once employee strength (including persons employed through contractors) becomes 20 or more.
13. Employer has the right to recover the contribution made on behalf of the employee i.e.employee’s contribution.
14. Foreign passport holder.
15. May be withdrawn subject to the conditions mentioned in the SSA.