Secondment and TP Risk When: Employees Trigger Tax Trouble
“Secondments might look like simple HR moves — but tax authorities see more.”
If a foreign employee works in India, is it really a secondment? Or is it a cross-border service?
The answer could trigger:
- Arm’s length charges
- PE exposure
- Transfer pricing compliance
In TP, even people can create risk. Here’s what you need to know.
As businesses globalize, sending employees on secondment to group companies in other countries has become routine. But for Transfer Pricing (TP) professionals, this simple HR move can quickly turn into a tax compliance puzzle.
The key question:
Is the secondee truly an employee, or is this actually a cross-border service? Let’s unpack this grey area.
What is a Secondment?
In a secondment arrangement, an employee of one entity (say, the foreign parent) is temporarily assigned to another entity (like an Indian subsidiary). The secondee works under the host company’s direction but remains on the home company’s payroll.
Why Tax Authorities Are Watching
Tax authorities are now scrutinizing secondment deals for two main reasons:
TP Angle:
If the secondee is effectively rendering a service from the parent to the subsidiary, the arrangement should involve an arm’s length service fee.
PE Risk (Permanent Establishment):
If a foreign employee is acting with authority or managing operations in India, it may trigger a PE, creating corporate tax exposure in India.
Key Indicators that Matter whether an arrangement is a true secondment or a service provision depend on the facts and conduct, not just the contract.
Some common red flags that suggest a service, not a secondment:
- The secondee continues to report to the foreign entity
- Key decisions are made under instructions from the parents
- The subsidiary lacks control over day-to-day activities
- The foreign company benefits from the output
On the other hand, a genuine secondment involves:
- Full supervision by the host entity
- Routine operational role, not strategic control
- Cost recharge on a no-markup basis
- No profit element or independent benefit to the foreign entity
