One of the reasons why companies prefer split-employment structure is for tax planning. If Ian’s job was fully based in India, he would have been taxed at the rate of 34% on his entire salary. But on account of the split employment, he can have 50% of his salary being taxed at not more than 20% (the maximum tax rate applicable in Singapore).
However, implementation of such a structure poses challenges for companies from regulatory and administrative perspective. Appropriate structuring of the employment arrangement supported by adequate documentation is a pre-requisite in a situation where an employee has multi-country presence. A dual-employment arrangement, which involves separate employment contracts with respective entities, may result in tax savings in many cases. However, when the time to be spent in one of the countries is not significant, avoiding dual-employment arrangement may be better.
In this relation, attribution of salary income to each of the countries is an important step. This needs to be justified with regard to the roles and responsibilities of the employee and the time spent in each of the countries. Generally, this forms the basis on which tax is paid and various social-security contributions are made. However, the fact that the tax and social security authorities in certain countries may have different approaches to treating such dual-employment arrangements may create risk for litigation.
India taxes its non-residents and not ordinarily residents on the employment income received or accrued in India. Hence, in a multi-country employment situation it can be contended that the salary attributable to employee’s non-India employment should be excluded from taxation in India.
In the case of ordinarily residents, who are taxable in India on their worldwide income, even the salary relating to overseas employment will be taxed in India subject to any relief provided by the tax treaties. This could possibly expose the Indian employer to the obligation of withholding tax on salary attributable to overseas employment. Hence, the real India tax benefit from a split-employment structure is unlikely to be derived after initial three to four years of an assignment.
Appropriate structuring of employment arrangement is important for mitigating the corporate tax (permanent establishment) exposure for an employer in the other country. Pay-roll location, re-charge of the salary costs between employers, meeting the minimum-wage requirements for immigration compliance are some of the aspects to be considered while planning these assignments.
To sum it up, careful planning of assignments is required to ensure that neither the employer nor the employee land themselves in a situation of non-compliance of tax, social security and other regulations in any of the countries.
The writer is manager, tax & regulatory services, EY. Views expressed are personal