Structural Options for Employer in Deputation of Employees

In this article, we will be discussing the various structural options available to employers while considering deputation of employees.

Introduction

Many multinational organisations are required to deputise their staff overseas on international assignments in today's world of globalisation. Such deputations have ramifications under tax, regulatory, and other laws, among other things. The amount of such consequences would be mainly determined by the structure of the assignments.

With the advancement of global commercial mobility, multinational corporations have begun to delegate their personnel to their group firms or affiliates for the purpose of providing specialised services for a set length of time. Because Indian labour laws are quiet on matters such as secondment and the relationship is mostly managed through contractual arrangements, it is critical that corporations choose a proper structure when deputing their personnel.
 
What Is Deputation?

A sort or form of recruitment is deputation. Officers and employees from the Central Government, State Governments, and Union Territories are appointed or elected to positions inside the Central Government for a set length of time, after which they must/must return to their prior positions at the parent company or body.

If the position is isolated, it is much preferable to make the kind of recruitment a short-term contractual arrangement, since otherwise, if officials are hired directly, they will have no way of going up or progressing in their careers.

It's important to distinguish between Deputation and Absorption. There is a significant difference between the two terms. In terms of absorption, an officer who begins his or her career on Deputation may be absorbed into a permanent position provided the rules of recruitment require that absorption be given proper respect as the prescribed recruitment technique. Such a technique can only be implemented in the case of Central or State Government officers/officials who are currently on deputation.
 
Structural Provisions

A firm's structural provisions for deputing an employee to another company include the following:

Secondment Arrangement: An employee of the home country employer ("Secondee") is transferred to the host country employer for a specific assignment and agreed-upon time under an international secondment arrangement. The essential idea is that the Secondee will continue to work for the original employer during the secondment and will return to the original employer at the end of the secondment term. In most cases, a secondment agreement is made between the home country employer and the host country employer, and an assignment agreement is signed between the Secondee and the home country employer, or a letter may be sent to the Secondee advising him or her of the terms of secondment. An agreement between the host country employer and the employee may also be signed to make the process of obtaining an employment visa easier.

Either of the employers, or both, may pay the secondee. Normally, the employee's salary is continued by the home country employer, and the expense is recovered by the host country company under the terms of the contract. A 'per diem'/daily allowance for expenses in the foreign nation may also be paid by the host country employer.

Dual Employment: Dual employment refers to an employee working for two employers at the same time, allowing him or her to split his or her time and work for both the home and host country employers. It's also possible that the person works actively on site for the host country company while the employment agreement with the home country employer falls out of favour or is terminated. Even when the employee is no longer employed by the employer in the home country, the employer continues to pay the employee (maybe a small sum or basic salary) to maintain social security benefits and recognise continuity of employment. In addition, under the provisions of the new employment agreement, the host country employer provides salary to the employee.

Because both secondment and dual employment usually entail a temporary movement of an employee overseas, the two possibilities are quite comparable. Secondment differs from dual employment in that secondment is simply a temporary loan of an employee to another organisation, whereas dual employment entails sharing an employee resource.

Work In The Home Country Is Terminated, And New Work Is Started In The Host Country: If both the company and the employee want a clean break in service, this alternative could be considered. This option is typically used for longer-term assignments and to comply with immigration regulations. The employee might willingly leave under this option, and the employee's employment with the home country employer would expire in the normal process. The employee accepts the foreign assignment and forms a new employment agreement with the host country employer (with or without recognition of past period of service). After completing an overseas assignment, the employee may choose to return to his or her home country, and as a result, the employee may demand some guarantee from his or her home country employer regarding job security upon his or her return.
 
Important Factors To Consider

The following are some of the major elements to consider while designing a deputation arrangement:
  1. Employee Payroll: During the overseas assignment period, it is critical to examine the employer's payment obligations to the employee in terms of salary and other payments such as overtime, bonuses, expenses, and so on. To meet the legal requirements in their separate jurisdictions, a split payroll between the two employers may be required.
  2. Impact on Social Security Duties: Social security obligations must be considered both in the home country and in the host country, based on criteria such as the existence of bilateral social security agreements and applicable laws.
  3. Tax Implications: In terms of the tax legislation of the home nation and the host country, the tax implications must be examined in relation to the employers and employees. Aspects such as the employee's tax domicile, payroll structure, and the nations' bilateral tax treaties are all important in evaluating the exposure under applicable tax rules. It should also be determined whether the adopted secondment structure results in the development of a permanent establishment in the home country employer organisation.
  4. Immigration: When defining the delegation structure, keep immigration law in mind. For example, in order to be eligible for an Indian employment (work) visa, a foreigner must earn a minimum annual salary of US$25,000. When defining the delegation structure, keep immigration law in mind. For example, in order to be eligible for an Indian employment (work) visa, a foreigner must earn a minimum annual salary of US$25,000.
The income split agreement, documentation, and social security duties must be structured in accordance with the home country's and host country's legislative requirements. Furthermore, the terms and conditions of the secondment and other agreements must be carefully drafted so that all parties are clear on issues such as salary payment, tax withholding, performance appraisals, disciplinary action and grievances, compliance with host employer instructions and policies, social security benefits, termination rights, and so on.
 
Assignment Period

Based on assignment duration, abroad assignments can be divided into the following categories:
  1. Employees on short-term business assignments, such as 90-100 days, travel for a short length of time.
  2. Employees are on deputation for periods ranging from three months to one year for short-term project engagements.
  3. Long-term assignments — where personnel are on deputation for a duration of one to four years.
  4. Permanent transfers — employees who are transferred to the host country on a long-term basis with no plans to return to India in the near future.
 
Social Security And Deputation

Except for those who have been specifically exempted under the laws, foreign nationals, i.e. International Workers (IWs), working in establishments in India to whom Employees' Provident Fund (PF) regulations apply, are obligated to contribute to the PF.

Social Security Agreements: Assignees from countries with whom India has signed an SSA who are contributing to their home country's social security and have a Certificate of Coverage (COC) from their home country would not be obliged to contribute to Indian social security. The COC must be submitted to the PF officials.

Bilateral Comprehensive Economic Agreement (BCEA): India has signed bilateral comprehensive economic agreements (BCEAs) with a number of countries. Assignees from countries with which such agreements were signed before October 1, 2008, and who paid into their home country's social security system would be free from Indian social security contributions if certain conditions were met. Prior to October 1, 2008, India and Singapore signed a BCEA. As a result, assignees from Singapore can benefit from the BCEA's exemption if they meet the requirements.

Mandatory Contribution: Both the employer and the employee are required to contribute 12% of their monthly earnings to the PF programme. The employer will contribute 8.33 percent of monthly income to the pension fund, with the remaining 3.67 percent going to the Provident Fund.

The complete salary, whether received in India or overseas, shall be included in the salary.

The PF must be deposited by the 15th of the next month. The assignees' information must also be submitted on a monthly basis in a regulated format.

Withdrawal:  An assignee can withdraw the sum deposited in the plan in certain conditions. In addition, the sum withdrawn must be paid into the assignee's bank account or the employer's bank account in India.

PF Withdrawal:
  • If an SSA exists, then according to the SSA's requirements;
  • If no SSA exists, then
1. Upon retirement from duty after reaching the age of 58.
2. When a person retires due to a permanent and total inability to work due to a bodily or mental ailment, as verified by a medical practitioner.

Pension Withdrawal
  • Where the SSA exists, the withdrawal benefit is determined by its provisions.
  • Annuity - available after 58 years of age if certain conditions are met.       
 
Tax Obligations, Employer And Deputation

Permanent Establishment Exposure: If the assignment is not properly organised, deputation of assignees to India may result in a PE of the overseas entity in India. As a result, the profits attributable to the assignees' services may be taxed in India.

Compliances: For employment income, India uses a "pay-as-you-earn" taxation structure. Employers are required to withhold taxes and deposit them in the government's treasury. The taxes must be calculated at a monthly average rate and deposited by the 7th of the following month. In the tax withholding return, an employer must additionally provide employee-by-employee monthly compensation and taxes on a quarterly basis. A yearly tax deduction certificate must be supplied to the assignee.

Direct Taxes Code (Dtc): It's worth noting that the existing Income Tax Act is expected to be replaced by the Direct Taxes Code in the future, however the exact date is unknown at this time.

The DTC Bill's main ideas (which have yet to be adopted by Parliament) are as follows:

  • It is proposed that the education tax be abolished.
  • Foreign Nationals who met the definition of "resident" were exempt from paying wealth tax on their foreign holdings. It is proposed that they be included in the scope of the wealth tax on some foreign assets.
  • Under the DTC regime, wealth tax would be imposed on assets worth more than $10 million, as opposed to $3 million under the Wealth Tax Act.

Since the first draught, the DTC proposals have undergone substantial revisions, and considering that deliberations are still ongoing, there may be more changes before it becomes legislation.
 
Other Regulations

There are a number of other restrictions that foreign nationals working in India should be aware of. The following are a few of them:

Visa: In order to work in India, an expatriate must obtain a work visa. To be eligible for the E-Visa, foreign nationals must earn a minimum pay of USD 25,000 per year, as well as meet certain additional requirements, according to the Ministry of Home Affairs. Because of the nature of their employment in India, expatriates visiting India for even a short period of time may require an E-Visa, and attention should be made to secure the necessary visa for visiting India.

Registration: Foreign nationals working in India must register with the FRRO within 14 days after arriving in the country. During their time in India, this registration must be updated on a regular basis.

Person Of Indian Origin And Overseas Citizen Of India Card Holder: Persons of Indian Origin (POI) and Overseas Citizens of India (OCI) card holders must meet the following visa and registration requirements:
 

Particulars

PIO Card Holder

OCI Card Holder

Visa

Not Required

Not Required

Registration With FRRO

Required If Stay Exceeds 180 Days

Not Required

 

Exchange Control: 
After paying relevant taxes and social security, and submitting appropriate documentation, India has liberalised its exchange control restrictions, allowing expats to freely repatriate their income back to their home country. Employers are also permitted to send direct payments to employees' international bank accounts after deducting necessary taxes and social security contributions.
 
Challenges To Employee Deputation

One of the most difficult aspects of such deputies is "payroll structuring." Tax and social security consequences in India/the host nation, immigration restrictions, exchange control regulations, employee administrative convenience, and so on must all be addressed when deciding where the employee's payroll should be kept. When it comes to assignment types, a typical trend is to keep the employee's payroll in India. In the case of business travelers/short-term assignees, the practise of paying "per-diem" and other allowances overseas is extremely widespread. Similarly, shifting payroll to the host country is favoured when staff are deputed on a long-term assignment/permanent transfer basis. Some firms also use the option of "split payroll" from time to time, taking into account local legislation, employees' desire to keep a portion of their paycheck in India, and other factors.

When deciding on a payroll site, it's also important to think about whether or not "employee retirement benefits," such as the provident fund in India and social security duties in the host nation, will be maintained. Several countries have signed the Social Security Agreement (SSA) with India (eg. Belgium, Germany, France, Sweden, Switzerland, Japan, Australia etc.) Employees deputed to these countries can take use of the benefits arising from such SSAs, including exemption from social security payments in the host nation, as long as they follow the necessary conditions.

The alignment of salary based on the host country's minimum wage requirement is an important element to consider when establishing assignment salaries. Various nations, such as Belgium and the United Kingdom, have minimum wage laws, and Indian companies who send personnel to these countries must pay their employees according to these laws. In order to comply with such regulations, the assignment salary may need to be restructured.

Aside from assignment and payroll arrangement, another key consideration is the tax consequences for both the company and the employee. Overseas assignments can sometimes result in an additional financial burden for employees due to host nation tax liabilities incurred as a result of their job. To compensate employees on this account, firms typically provide the benefit of 'tax equalisation,' in which the employer company bears any excess tax liability incurred as a result of the employee's deputation. This is then appropriately grossed up for employee tax purposes.

The taxability of per diem / cost of living / daily allowance granted to employees working overseas on short-term contracts is frequently a source of contention. The Income Tax Act exempts such allowances from taxation if they are specifically awarded to pay daily expenditures, are paid while the assignee is on "tour," and are genuinely spent by the assignee to meet his or her daily expenses. For claiming such an exemption, adequate paperwork is required, such as supporting bills, declarations from employees for expenses incurred, and so on.

Short-term business assignees can claim a tax exemption, often known as a "short stay exemption," in the host nation under the conditions of the relevant tax treaty. The treaty's Article on "Dependent Personal Services" governs this exception in general. The exemption provision demands that you meet certain conditions, such as staying in the host country for a certain amount of time, passing the "economic employer test," and determining whether your wage is paid by a fixed base or permanent establishment ('PE') of an Indian business in the host country. To reach a determination in this regard, a thorough examination of the facts in relation to the legislative provisions is required.

Employee deputation under the requirements of the tax treaty and/or local tax legislation of the host country may allow the Indian firm to form a ‘PE' in the host nation. While deputing assignees overseas, an assessment of PE risk in the host nation is required, and risk mitigation measures must be implemented accordingly.

The question of whether tax exemption can be sought under the respective tax treaty at the withholding stage, where the employee payroll is kept in India, is one that frequently arises. Some recent judgements have found that salary accrues when services are delivered and that simple "reception" of salary in India does not trigger taxation.

If the employer claims the exemption at the withholding stage, there will be no tax deducted from the wage payment in India. The administrative burden of seeking a refund of such TDS through an employee's return will be reduced as a result of this. However, because the TDS provisions of the Income Tax Act do not specifically mention exemption under tax treaty terms for the purpose of computing salary liable for TDS, this position may be litigious.
 
Conclusion

Corporate employees and executives were recently given the excellent news that they will be able to travel abroad for work on a regular basis. According to the Authority of Advance Ruling (AAR), if a corporate employee is deputed abroad for a period of six months (180 days) or more, that person would be classified as a Non-Resident India (NRI) and will be eligible for a tax-free benefit on his Indian income.

This means that the corporate employee/executive will continue to get his Indian compensation in his Indian bank account for international work or assignments. In most cases, such executives are also given a daily allowance during their time abroad. Now, while using the Indian Tax Act, both the remuneration and the daily allowance are taxable, as per the former rules. Now, under the recent AAR rule, if an employee is leaving the nation for work, he is qualified to obtain the status of NRI if he has not resided in India for at least 182 days or more than the minimum number prescribed.