In today’s world of globalization, many multinational companies require to depute their employees overseas on international assignments. Inter alia, such deputations trigger implications under tax, regulatory and other laws. The extent of such implications would largely depend on the manner in which the assignments are structured.

Basis assignment period, overseas assignments can broadly be categorized into –

• Short term business assignments – where employees travel on very short periods, say up to 90-100 days
• Short term project assignments – where employees are on deputation for periods ranging from 3 months to 1 year
• Long term assignments – where employees are on deputation for periods ranging between 1 year up to 4-5 years
• Permanent transfers – where employees are generally transferred to the host country on a permanent basis, without intention of returning to India in the near future.

 One key challenge in such deputations is “payroll structuring”. Various factors need to be considered for determining the location where the employee’s payroll should reside, viz. tax and social security implications in India/ the host country, immigration laws, exchange control regulations, employee’s administrative convenience, etc. A common trend seen, considering the assignment type, is to retain the employee’s payroll in India. Here, the practice of “per-diem” payment and payment of other allowances overseas in case of business travelers/ short term assignees is quite common. Likewise, shift of payroll to the host country where employees are deputed on long term assignment/ permanent transfer basis, is preferred. Also sometimes, the option of “split payroll” is invoked by some organizations, keeping in mind the laws of respective countries, employees’ requirement of retaining part salary in India and such other considerations.

While deciding on the payroll location, it is also imperative to consider the continuation or otherwise of ‘employee retirement benefits’, particularly provident fund in India and social security obligations in the host country. India has entered into Social Security Agreement (SSA) with several countries (eg.  Belgium, Germany, France, Sweden, Switzerland, Japan, Australia etc.) The benefits arising under such SSAs, including exemption from social security payment in the host country, can be availed for employees deputed to these countries, subject to compliance with the prescribed conditions.

One key factor while structuring assignment salary is alignment of salary based on minimum wage requirement in the host country. Various countries such as Belgium, UK etc. have minimum wage norms and the Indian companies deputing employees to these countries need to adhere to these norms for salary payment. This may require restructuring of the assignment salary in order to comply with such regulations.

Further to assignment and payroll structuring, an important issue for deliberation is ‘the tax implications for employer as well as the employee’. Overseas assignments could often result in an incremental tax impact for the employees, with respect to host country tax liabilities arising on account of exercise of employment. To compensate the employees on this account, companies generally extend the benefit of ‘tax equalization’, whereby additional tax liability, if any, due on account of the employee’s deputation is borne by the employer company. This is then suitably grossed up for employee tax computation purposes. While Tax equalization protects the employee from tax cost fluctuations, it also results in ‘incremental cost’ to the company while budgeting its total assignment costs.

For employees working overseas on short term assignments, taxability of per diem / cost of living / daily allowance paid to them, is often an issue which attracts controversy. The Income Tax Act provides tax exemption for such allowance provided the allowance is specifically granted to meet daily expenses, is paid while the assignee is on ‘tour’ and such allowance is actually expended by the assignee towards his/her daily expenses. Adequate documentation such as supporting bills, declaration from the employees for expenses incurred etc. are required to be maintained for claiming such exemption.

In case of short term business assignees, an exemption from tax, popularly known as ‘short stay exemption’, can be claimed in the host country under the provisions of the relevant tax treaty. This exemption is generally governed by the Article on ‘Dependent Personal Services’ in the treaty. The exemption clause requires meeting prescribed criteria, such as ‘stay threshold’ in the host country, meeting ‘economic employer test’ and examining if salary is borne by fixed base or permanent establishment (’PE’) of Indian entity in the host country. A detailed analysis of facts vis-à-vis the legislative provisions needs to be undertaken to arrive at a conclusion in this regard.

The Indian entity may constitute ‘PE’ in the host country by virtue of the employee deputation under the provisions of the tax treaty and / or local tax laws of the host country. An evaluation of PE risk arising in the host country is warranted while deputing assignees overseas and the risk mitigation measures need to be undertaken accordingly.

An issue which often arises is whether tax exemption can be claimed under the respective tax treaty at the withholding stage where the employee payroll is maintained in India. In case of employees qualifying as ‘Non-resident’ in India, some recent rulings have held that salary accrues where services are rendered and mere “receipt” of salary in India will not trigger taxation.

Claiming such exemption at withholding stage by employer will facilitate no deduction of tax while making salary payment in India. This will reduce administrative burden of claiming refund of such TDS through employee’s return. However, this position may be litigative considering that the TDS provisions under the Income Tax Act do not explicitly include exemption under the tax treaty provisions for the purpose of calculating salary liable for TDS.

In summary, the following points are worth noting while deputing assignees abroad :

By Employee –

• Before proceeding on deputation the employees should familiarize themselves with the basic tax laws of the host country and its impact on their assignment.
• The tax implications arising in India during the assignment period should be reviewed.
• In case of permanent transfers, there may arise additional tax liability in India in the year of departure if the employee qualifies as tax resident of India under the treaty provisions. If the Company’s equalization policy does not apply to permanent transfer cases, such tax liability would be borne by the employee.
• The employee would be required to obtain tax residency certificate (TRC) from the country of which he is resident in case any tax benefits are claimed under the tax treaty provisions.

By Employer -

• The employer should ensure compliances under tax, social security, immigration and other laws of the host country, are taken care of.
• Alignment of all documents issued in connection with the assignment such as assignment letter, letters issued for immigration, inter-company agreements regarding assignment etc. should be warranted.
• For claiming exemption from social security payment in the host country under the provisions of the SSA, Certificate of Coverage (CoC) should be obtained from the Indian PF Authorities.

As global mobility is on the rise with more countries becoming part of the ‘international market’, tax and regulatory issues as discussed above, are also evolving. Hence, it is imperative that we consider the above issues and trends carefully while finalizing any employee deputation structure.