Approach secondment agreements with due caution

International assignment programmes which encompass secondment agreements are presently an area of concern for many companies in India from both a service tax and a corporate tax standpoint. This article would focus on the service tax implications of secondment agreements.

The General Agreement on Trade in Services (GATS) distinguishes and defines four modes of supplying services: cross-border trade (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3) and presence of natural persons (Mode 4).

We are concerned here with trade in services which entail the presence of natural persons in foreign territories i.e. Mode 4, to the extent that they relate to secondment agreements.

While the service tax laws have been in force from 1994, the implications in relation to secondment agreements are relevant from June 2005 and thereafter. With effect from 16 June 2005, an amendment was made to service tax provisions so as to impose the service tax on taxable services provided from outside India to a recipient in India. Also from this date, the definition of manpower recruitment agency services was amended in order to extend it to manpower supply services as well. From this date therefore, manpower supply services provided from outside India and received in India became taxable. The service tax was required to be paid by the recipient of the service in India, as a reverse charge. Further, the tax so paid would be eligible to be offset against output taxes, if any. This offset facility would however not be available if no output taxes were payable by the recipient of the service.

Now, the reimbursements that are effected by the recipient companies in India to the overseas companies with regard to salaries and other expenses related to the seconded personnel, who hold dual employment with both the overseas company and the Indian company, would be charged to tax. This is because such reimbursements will be construed as consideration flowing from the Indian company to the overseas company for supply of manpower. However, should there be no dual employment, in that the seconded personnel have resigned from the services of the overseas company and are therefore solely the employees of the Indian company, and consequently there are no secondment agreements in force, an argument can be advanced that no supply of manpower has at all happened, notwithstanding that the seconded personnel are actually in place in the Indian companies.

If these conditions were to obtain, the Indian company could then contractually agree with the overseas company to reimburse payments effected by such overseas company, on account of salaries etc., to the seconded personnel. In such an event, there would still be the applicability of taxable services in the nature of business auxiliary services. However, the absence of consideration for the service, which is limited to effecting the remittances into the bank accounts of the seconded personnel, will support an argument that the service tax will not apply. Of course, if such reimbursements are not routed through the overseas company at all and if direct remittances from India were made to the overseas accounts of the seconded personnel, the question of applicability of the service tax will not arise at all. This particular point is disputed by the authorities, but there is a strong argument that the tax will not apply.

Going further, even if a formal resignation of the secondee from the employment of the seconder company is not effected, as long as the secondments are documented through local employment agreements, with limited purpose agreements with the seconder company for reimbursements of payments made by that company for and on behalf of the host country, into the accounts of the secondee employees, such reimbursements would still not arguably carry any service tax implications, if the underlying documentation was to clearly support that the seconded employees would be working entirely under the discretion and supervision of the Indian company and that the secondees will also further have no authority to bind the overseas company during the tenure of the secondments. These conditions are similar to those that are required under Irish VAT law, for a similar dispensation to obtain. These are discussed below.

With effect from 1st January 2007, there has been a revision in the treatment of inbound employee secondments under Irish VAT and there is no longer an obligation on the Irish receiving party to "self account" for the Irish VAT on secondment recharges. A number of conditions must be satisfied in order to benefit from this treatment, i.e:

(i) The secondment must be from a foreign company to an Irish company or branch within the same group, (ii) the Irish receiving company must exercise control and day to day management over the secondee, or the secondee must have managerial responsibilities over Irish company or branch, and (iii) appropriate withholding and social insurance taxes/costs need to be paid.

To conclude, secondment agreements could result in service tax implications and adequate care and attention needs to be paid in this regard. The Government would do well to consider exempting such agreements from service taxes, based on certain underlying principles, as illustrated in the Irish example above.

The writer is leader, Indirect Tax Practices, PwC. Views expressed are personal