Secondment of Employees
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1 Secondment of Employees Potential tax risks in lieu of Centrica Ruling 04 September 2014
2 Agenda Reigniting the debate Recent developments Related tax issues that need to be addressed
3 Secondment arrangements: Typical attributes F Co. Entry: At the request/ initiation of F Co./ I Co. For specific fixed tenure O/s India India Reimbursemen t of salary costs Seconds employee - Secondme nt agreement LIEN - Post secondment, resumes services for F Co. Assignment Agreement Tenure: Works under Control & Supervision of I Co. F Co. to pay part of the salary with cross charge to I Co. Continuation of Social Security Benefits by F Exit: Co. Secondee to return to F Co. No power to I Co. to terminate Secondee s employment in F Co. I Co. Employment agreement Secondee Relevant documents: Assignment agreement between F Co. and Secondee Employment agreement between I Co. and Secondee Secondment agreement between F Co. and I
4 Tax controversy on Secondments:Two School of Thoughts (SOTs) Who is the Employer - I Co. or F Co.? SoT 1: Economic Employer is relevant SoT 2: Legal Employer is relevant Key Factors: Supervision, guidance & control of Secondees by I Co. No responsibility of F Co. for work of Secondee Employment costs of Secondee borne by I Co. Key Factors: Subsisting employment relationship with F Co. Right to receive salary is against F Co. Work done by Secondee in India in furtherance of business of F Co. Right to hire and fire from employment with F Co. F Co. acts as a service provider to I Co. through secondees Taxability: F Co. not taxable in India as no services, therefore No PE or FTS Taxability: F Co. taxable in India as Service PE Tax exposure on other income of F Co. by application of Force of Attraction, if applicable No service-tax exposure on salary payment Tax levy to F Co in some cases as FTS Only Secondee s salary taxable in India Service-tax exposure under reverse-charge to I Co. Tax consequences contingent upon who is held to be employer I Co. or F Co. Conflicting decisions on the two SOT s with no concensus
5 Relevant tests for determining Employer-Employee decoded Act/ DTAAs No definition of Employer or Employee OECD Instruction/ direction on manner to do work Control and responsibility over work Equipments at individual s disposal Selection/ recruitment of Secondees Power to terminate/ recall Work related Entry/ exit Obligation to remunerate Right to impose disciplinary actions Determination of rules for work schedules, holidays Rules & Regulations
6 SoT 1: I Co. is Economic Employer Judicial precedents: Trib. Case Timing Bgl. AON Specialist Jan-14 Mum Temasek Holdings Sep-13 Bgl. Abbey Business Jul-12 Bgl. Ariba Technologies Apr-12 Mum Tekmark Global Feb-10 Bgl. IDS Software Jan-09 Bgl. Solutions Stock Engineer Dec-08 Principles emanating: Secondee works under supervision, guidance and control of I Co. I Co. had the right to instruct Secondee I Co. could terminate services of Secondee F Co. does not take any risk or responsibility for work of Secondee Salary cost of Secondee borne by I Co. All rulings unanimously uphold Economic Employment doctrine No talk of Lien
7 SoT 2: F Co. is Legal Employer How it all started? O/s India India I Co. (MSAS) Back-office Supreme Court in Morgan Stanley: Deputation of Secondees creates Service PE for F Co. F Co. (MS Co.) Backoffice support services Investment bank Deputationists Stewards Lien along with Control & Supervision held key factors What SC said? No Service PE arises as a result of Stewardship activities: YEAR Stewards not involved in day to day management of I Co. Stewards activities seek to protect interest of F Co. Output meets requirements of F Co. Deputation 20 of Secondees creates Service PE of F Co.: Employees 1 retain lien on their jobs with MS Co. 4 MS Co. entails it being responsible for the work of secondees Secondees sent by MS Co. upon specific request of MSAS While in India, Secondees lend their experience to I Co. as employees of F Co. What SC did not say? Elaboration on meaning of Lien Elaboration on ambit of Stewardship activities?
8 SoT - 2: F Co. is Legal Employer: Recent Ruling on Lien Centrica Offshore (Delhi HC) (2014) Who is employer Service PE Lien on employment with F Co. No evidence of termination of employment with F Co. I Co. has right to terminate Secondment arrangement but not employment of F Co. Right of recourse with F Co. upon non-payment of salary to I Co. Secondees act in furtherance of F Co. s business in India Reliance placed on MS (SC) F Co. has Service PE in India FTS Arrangement akin to F Co. rendering technical services to I Co. through its employees Taxability as FTS as Make Available test in India-UK/ Canada DTAA fulfilled No principles laid down on final taxability of attribution of profits to Service PE or as FTS
9 SoT - 2: F Co. is Legal Employer: Recent Ruling on Lien JC Bamford (Delhi ITAT) (2014) Lien on employment with F Co. Who is employer No employment contract between I Co. and Secondees furnished before Tribunal Secondees to resume services with F Co. upon completion of Secondment No evidence of termination of employment with F Co. before joining I Co. Service PE Reliance placed on MS (SC) F Co. has Service PE in India FTS Arrangement akin to F Co. rendering technical services to I Co. through its employees FTS held to be Effectively not connected to Service PE No principles down on principles relating to final taxability on attribution to Service PE Other Judicial precedents supporting STO -2 : Target Corporation (AAR), Verizon Date Services (AAR), AT&S India (AAR)
10 Related tax issues Need to be addressed
11 Thank You Ashish Gupta Partner, Tax International Executive Services KPMG in India Building No.10, Tower B, 8th Floor, DLF Cyber City, Phase II Gurgaon T : +91 (124) M: E: agupta1@kpmg.com
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