By Special to The Nation
The overall Thai economy growth is forecast to remain flat in 2020. Due to such sluggish domestic economy performance, many Thai-based businesses either are resorting to opportunities offered by the international market, including investing abroad or buying up Thai assets that are previously owned by foreigner investors, or attracting highly skilled talents from other countries.
While expanding their overseas operations, companies might face the situation where employees have to be seconded for a period of time to complete certain assignments abroad, and vice versa.
Traditionally, the employee will usually be seconded by the home entity directly to the host entity (eg the main entity at the designated location). The home entity may continue to control the employment as well as the work product(s) of such seconded employee.
However, depending on the volume and complexity (eg number of countries involved), both the home entity and the host entity may be exposed to various risks, including governance, compliance and reporting risks, tax-related exposures, and other talent mobility considerations.
To be more specific, internationally mobile employees can create significant tax exposures, especially in light of the recent Base Erosion and Profit Shifting (BEPS) developments initiated by the Organisation for Economic Co-operation and Development (OECD).
For example, seconding employees to carry on business of the home entity at the place of the host entity for a period of time could be considered as constituting a permanent establishment (PE) of the home entity situated in the host country, thereby creating tax obligation of the home entity in that host country.
In this regard, to facilitate global expansion via outbound investment whilst managing associated obligations and risks, companies, having the needs to (frequently) send or receive employees for international assignments, can consider to accomplish so through a global employment company (GEC).
The GEC structure has been around and is essentially a special purpose entity established for the purpose of scrutinising mobility status of employees and facilitating international mobility arrangements in order to quarantine risks.
Under the GEC model, the seconded employee will cut ties with the home entity and conclude a new employment contract with the GEC (ie, the GEC will be the employer of record). The GEC will then assign the employee to the host entity. The GEC model would be the most optimal to manage high volumes of mobile employees with a number of home and host country combinations.
The GEC model comes with several advantages. For instance, a GEC can help:
1 Streamline the internal policies and processes for improving operational efficiency (e.g., eliminate lengthy negotiations on compensation and benefits concerning each secondment), thereby facilitating timely redeployment of talent;
2 Increase the available talent pool for deployment in the best interests of the organisation and the employees;
3 Establish specialized central management of administrative and regulatory obligations for better compliance (e.g., visa and immigration processes);
4 Mitigate cross-border tax-related impacts (e.g., PE exposure, personal income tax complications, and transfer pricing issues).
It is worth noting that, in order for the GEC model to achieve its objective, choosing the right location to set up the GEC is one of the most critical exercises involved in the model.
Key considerations of the favored locations includes stable political, economic, and regulatory environment, ease of traveling in and out of the country, less stringent foreign exchange control, availability of local talent and relevant support services (required by the GEC), as well as the existence of a robust treaty network.
Additionally, depending on the intention of operating through a GEC, the potential structures could be either global, regional or in-country. In other words, the structure could range from a straightforward in-country entity (in this case, a Thai entity) set up for the sole purpose of checking employee’s mobility status to a larger scaled entity which might be involved in managing more complex aspects of global talent mobility.
Nevertheless, the GEC model is not free from challenges. One of the challenges are the evolving transfer pricing rules governing intercompany pricing of transfers of property and services.
In light of the worldwide anti-avoidance trend, intercompany transactions are increasingly being scrutinised and movement of highly skillful employees could be viewed, in certain circumstances, as transferring valuable intellectual property rather than just a provision of services, thus warranting careful pricing analysis.
To avoid complications and challenges from tax authorities, it is essential for companies to set up a proper transfer pricing policy in relation to secondment arrangements when implementing the GEC model.
Although the GEC structure has been introduced years ago, the implementation of the structure has not been particularly pervasive. However, given the vast scale of cross-border talent migration nowadays, it is believed that the GEC structure is coming back in trend to better support multinational enterprises with their ever-complexing worldwide operations.
From the perspective of Thai-based companies looking to expand overseas, managing global talent mobility through a GEC would allow Thai-based multinationals to enjoy various benefits, such as operational efficiency and tax risk management, as mentioned above in the article.
Contributed by Anthony Loh, Partner, Tax & Legal Services,