secondment employees creates PE

Now a days, due to globalisation, number of company transfer their employees to foreign group company under secodment arrangement due to  which risk of creation of Permanent Establishment (PE) has been crrated.  While looking for some solution, we found a article given below, which is based on US laws related to the same. The article does not provide the satisfactory answer and also the law will differ for country to country, but atlease able to provide some insight. Kindly have a look.



Don't Cross that Bridge When You Come to It! The Importance of Building Infrastructure in International Assignments

by Andrew Gewirtz, KPMG LLP, Short Hills

(KPMG LLP in the United States is a KPMG International member firm)
Nothing is more vital to international assignment programs than establishing the proper foundation, or infrastructure, in a way that defines terms and relationships and clarifies many issues of technical and strategic importance. While oftentimes the focus for international assignment program managers and line management is on international assignment costs, the costs and several other factors pertinent to the success of an international assignment depend upon the assignment's infrastructure.
This article will discuss some basic assignment issues such as the Secondment Agreement, the employer/employee relationship, and permanent establishment, and how they shape—and are shaped by—the assignment infrastructure. Failure to secure the proper infrastructure may result in insufficient "roadway" on the journey across the international assignment "bridge" that links expatriation and repatriation, with serious consequences for the assignee and the company.
Secondment—Making the Agreement the Infrastructural Bedrock
The formal definition of the international assignment sets the stage for some critical determinations and implications. For this article, we will focus on long-term assignments, or secondments. In terms of infrastructure for an international assignment, the Secondment Agreement is the bedrock.
Secondment is the temporary "loaning" of an employee to another entity for a fixed period of time (i.e., the assignment period). During the assignment period, the employee provides services to the host company; however, control of the employee including the right to terminate employment or award pay increases is generally retained by the home country employer. In many cases, a seconded employee remains on the home country payroll, with some or all compensation costs charged to the host country entity. To protect all involved parties, the arrangements between the home and host entities with regard to the services of a seconded employee should be specified in a Secondment Agreement.
A Secondment Agreement can be as general or as specific as needed to suit the purposes of the home and host organizations. In general, the agreement should provide that the home entity will loan or second the employee to the host entity based on mutual agreement of the parties. The agreement should indicate the specific position, duties, and obligations of the employee including any restrictions on the type and scope of services to be provided. Designation of day-to-day control of the employee's services can be specified along with compensation and benefits arrangements and any appropriate allocation of costs.
By defining the terms of the relationship with a Secondment Agreement, the organization lays a strong assignment foundation and lends credence to the most sacred of all relationships, particularly within the context of an international assignment: the employer/employee relationship.
Determining the Employer/Employee Relationship
Generally, the "employer" determination is based upon facts and circumstances. Basically, an employer/employee relationship is deemed to exist where the company has the right to control and direct the individual who performs the services.
Based on an examination of case law and rulings, the Internal Revenue Service (IRS) issued a Revenue Ruling (Revenue Ruling 87-41) that identified the common law factors used to ascertain whether sufficient control was present to establish an employment relationship between an individual and a company for federal employment tax purposes.¹ Although this ruling addressed the determination of an individual's status as either an employee or an independent contractor, the same common law factors can be used to assess whether an individual is an employee of a domestic or foreign entity.
This Ruling cites 20 separate factors to consider in evaluating employment status. These factors include, but are not limited to, whether a company has the ability to:

• Hire, supervise, train, or discharge the employee;
• Set hours of work;
• Exercise control over the order or sequence of work;
• Require work reports on a regular basis; and
• Pay periodically or by the job.

The degree of importance of each factor will vary depending on the occupation and the factual context in which the services are performed.
Within the framework of international assignments, it is common to conclude that the home country entity remains the employer, particularly when it retains the right to recall an employee prior to the end of an assignment, appoint a substitute, or discharge the employee.
Although it is common practice for the home country to remain the employer, there is an opportunity to shift the employer designation to the host country entity. This position is supported by a 1995 U.S. Tax Court case, Adair v Commissioner.
The Adair case was not directed to the question of determining the appropriate employer. Rather it focused primarily on the taxpayer's eligibility for the foreign earned income exclusion. In this context, the Tax Court in Adair held that the paramount factor to determine "who is the employer" in the international assignment setting is the daily control exercised over an employee's work performance. More significantly, the court acknowledged that an employee's retention of home country pension, medical, and insurance benefits alone is not determinative of an employer's identity. In affirming the taxpayer's position that the retention of benefits does not provide conclusive proof of an employer's identity, the court reiterated its opinion that determination of the employer is dependent upon all the facts and circumstances, with control of daily work performance as the paramount factor.
Note: So, who is the employer of your international assignees? Your Secondment Agreement can hold the key. (With no Secondment Agreement, critical infrastructure is missing and one had better check the roadway under foot.)
U.S. Federal Income Tax Withholding
The determination of who is the "employer" is critical with regard to payroll tax issues. Where an employment relationship is deemed to exist, the employer may have an obligation under U.S. tax law to withhold, deposit, report, and pay applicable income and social taxes.
Under U.S. tax law, employers are required to withhold income taxes on all wages paid to U.S. citizens or resident aliens, unless specifically exempted from withholding by law or treaty, regardless of whether the wages were earned in a foreign country or that the employer is not a U.S. person or company. A foreign employer would be required to satisfy the income tax withholding obligation and make the necessary payroll arrangements to effect compliance.
The U.S. Internal Revenue Code (IRC) provides specific exemptions to the withholding requirements by excluding from the definition of wages for withholding purposes the following types of remuneration:

• Amounts paid to a U.S. citizen for services performed in a foreign country where it is reasonable to believe that the income will be excluded from gross income under the foreign earned income exclusion; or
• Amounts paid for services performed by a U.S. citizen in a foreign country if the employer is required by the law of that foreign country to withhold income tax.

Non-U.S. employers are generally not required to withhold Social Security (Federal Insurance Contributions Act (FICA)) taxes on wages earned by U.S. citizens or resident alien employees in a foreign country.
Note: Is your company satisfying its U.S. income tax withholding obligations based on the assignment infrastructure? If not, the toll on the bridge to repatriation could be pretty steep.
Permanent Establishment
One of the concerns of a home country entity whose employees are working in a host country is that the presence of these employees may create a corporate tax exposure for the home country entity in the host jurisdiction. If the home country entity is determined to have a permanent establishment (PE) in the host country, the home country entity may be liable for corporate tax in the host country.
A PE includes a fixed place of business through which the activities of an entity are wholly or partially carried on. A PE may be created inadvertently by the activities of employees in a foreign jurisdiction.
A PE can arise, for example, if an employee has an office or other fixed place of work in a foreign country or if the employee regularly concludes contracts in the name of the employer. If a person (other than an independent agent) acts on behalf of the enterprise and habitually concludes contracts in the name of the enterprise in a foreign country, those activities can create a PE for the entity.
If a foreign subsidiary is an agent acting in its own name, the presence of seconded employees who conclude contracts in the name of the foreign subsidiary would create less risk of a PE than seconded employees who concluded contracts in the name of the parent corporation. Under most income tax treaties, a dependent agent creates a PE only if it concludes contracts in the host country in the name of (i.e., on behalf of) the home country entity.
Frequently, a corporation that transfers its employees to work for a host country entity continues to pay these employees, in whole or in part, from the home country payroll. Absent proper planning, if the home country corporation continues to be the employer, the employees may create a PE in the host country.
One way to help reduce the risk of a PE of the home country employer in the host country is to shift the employer designation from the home country to the host country entity (see the discussion of the Adair case in the previous section on Determining the Employer/Employee Relationship) and have the home country corporation acting merely as the payroll agent for the host country corporation. The payroll agent will pay the employee and charge-back the costs to the host country entity as compensation and not as part of a general management fee. This arrangement may work in most host foreign countries, but the laws of the relevant country should be consulted.
In the event that a payroll agent designation is desired, the prospective payroll agent must apply to the IRS for authorization to act as an agent and perform acts required of the true employer. There are specific procedures to be followed when applying to act as a payroll agent for employees. These procedures are described in a Revenue Procedure issued by the IRS (Revenue Procedure 70-6, 1970-1 C.B. 420).
Taking this approach to avoiding PE exposure should not be taken lightly as it may solve one problem, but it may create others. Professional advice is very often needed here.
Short of designating the host country entity as the employer, the risk of creating a PE may be reduced by having a properly drafted Secondment Agreement that specifies the terms and conditions of the assignment and that precludes the employee from negotiating or concluding contracts in the host location on behalf of the home country entity.
Note: Most companies with international assignees continue to maintain the home country entity as the employer, even though it may create some PE exposure. Do your secondment agreements measure up to the task of reducing PE risk?
Conclusion: the Consequences
There are unquestionably additional assignment-related topics, not included in this article, that come to mind that are "infrastructure dependent"; for example: benefits, delivery of compensation, social security obligations, and so on. It should suffice, for now, to suggest that a properly-structured international assignment, including a carefully drafted Secondment Agreement, will allow your company to:

• Comply with home and host country employment tax laws by properly establishing the employer/employee relationship;
• Mitigate permanent establishment exposure for the home country entity;
• Meet its home and host country payroll reporting and withholding obligations;
• Deliver compensation to international assignees using the most effective, efficient, and equitable method;
• Establish consistent and equitable processes and procedures for all your assignees;
• Take advantage of host country tax planning opportunities to reduce assignment-related tax costs.

The foundation provided by a Secondment Agreement will allow a company's international assignees to have a successful and rewarding international experience while protecting the individual and the organization from unnecessary and unwanted tax costs and noncompliance risks. If it is discovered that your company's international assignment infrastructure is not built on a sure footing, it's not too late to reinforce it.
Note: Don't wait to cross that bridge when you come to it.