Shyamal Majumdar: Localised pay for expat staff

THE HUMAN FACTOR

Talk to any headhunter and the impression would be that expatriate executives are entering the country by planeloads.

This may be pure hyperbole (according to home ministry estimates, there were only about 13,000 foreigners working in India on a regular basis in 2002), but the fact is that the number of expatriates working in India is increasing by around 3,000 every year.

Headhunters give several reasons for this influx: first, India is now fourth in the Global Relocation Report list of emerging job destinations; second, quite a few Indian companies have built up an impressive brand equity abroad; and third, most developed countries are yet to recover from the huge economic downswing, forcing companies to downsize.

There is another reason too: while US and European companies are replacing their expat managers with Indians, the growing number of Asian multinationals in the country are yet to pass on the baton to local managers.

Examples: Coke, which has had three expat CEOs in nine years, has settled for an Indian. Pepsi always had an Indian CEO. The top brass in companies like Electrolux and Whirlpool are Indians.

In most of the US and European companies operating in India, the length of expatriate assignments has been inversely correlated with the company's age. Expatriates help set up operations and return to their home countries as operations consolidate.

The south-east Asian multinationals, however, have a different approach to the need of expatriates. Consider companies like LG, Samsung, Hyundai, Sony, Toyota and so on. The CEOs in all these companies are invariably expatriates.

"They pride themselves on their quality and process so much that it is difficult for them to give the top job to a non-Japanese or non-Korean," says a consultant. There are a few exceptions like Maruti where the CEO is an Indian, but a significant number of Japanese have still remained onsite to assist in crucial functions.

Despite the very comfortable standard of living that expatriate employees enjoy in India, their concerns are still too many. The cultural difference is the most obvious one.

In its advisory to foreigners wanting to work in India, the Global Relocation Survey has added cautionary footnotes like "a woman strolling through the local market in shorts would no doubt attract unwanted attention from the locals."

The survey also advises expatriates to learn to expect (and even embrace) the unexpected. For example, "getting stuck in a rush-hour cattle traffic jam outside New Delhi or Mumbai should not be taken as a frustrating experience," the survey says.

While such surveys tend to exaggerate things to drive home a point, the more genuine concern "" and this has been a sore point with foreign companies operating in India for ages "" is the income tax applicable to foreign employees.

The most contentious issue has been the taxation of that component of salary and perquisites that is paid abroad. As per Indian law, any expat employee who has stayed in India for more than 90 days (183 days under most Double Tax Avoidance treaties) has to pay tax on his entire income irrespective of whether he receives it in India or outside India. Most multinationals still pay two kinds of salaries to their expatriate employees "" one paid in India and the other paid in their home country.

The income-tax department has often claimed that most multinational companies do not disclose the full amount paid abroad in order to avoid paying taxes. Such disputes have led to the IT department slapping notices on many multinational firms. The result has been varied: while in some cases the Income tax Appellate Tribunal has overruled the IT department, in quite a few others the companies have had to pay hefty penalty.

Such disputes have been sought to be put to rest by the amendments in Section 9 of the Income tax Act, which clearly says even "retention remuneration payable to an employee outside India shall be regarded as income earned in India."

This was further amended to provide that the "rest period or leave period, which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India." Tax experts like H P Agrawal say this is grossly unfair to expatriate employees in India.

To reduce the confusion over individual country tax laws and keep the cost of long-term expatriates in check, HR consultancy firm Mercer has suggested a flexible policy on "localisation of pay". In much of the developing world, Mercer suggests what it has curiously termed the "naked" expat form of localisation.

Under this situation, the company may seek to phase out or terminate expatriate allowances, while retaining the home country salary and benefits package.

In countries like India, for example, a US or European salary is enough to permit an exceptional standard of living, even without the conventional allowances. However, immigration and tax issues can still provide some difficulties and must be checked, the firm suggests.