Secondments International Trends

1
Secondments International Trends Russian
Problems

• AEB Meeting 20 January 2005

2
Overview of the Presentation

• What is a secondment?
• Why do companies use them?
• Typical Problems in the International Arena
• Specific Problems in Russia
• Summary

3
What is a secondment?

• A secondment is where an individual employed by
  one company is working for a different company,
  typically (though not always) in the same group.
• It is also called a
• provision of personnel agreement
• International hiring out of labour agreement
• Personnel leasing agreement

4
What is a secondment?

• There should be a contract between the employer
  and the host entity covering the terms under
  which employees will be seconded.
• There should also be invoicing between the two
  entities charging the host company for the use of
  the employers personnel.

5
What is a secondment?

• There is a very important conceptual difference
  between a services agreement and a secondment
  agreement.
• In a services agreement the employer provides a
  product (the services) through its personnel.
  Hence the recipient is buying the fruits of the
  activity of the personnel.
• In a secondment the employer simply provides the
  personnel. It is up to the host what the
  personnel then do.

6
Why do companies use secondments?

• A number of reasons
• The predominant reason is human resource need.
• Sometimes commercial considerations, notably in
  JV situations.
• Tax Accounting issues.

7
Why do companies use secondments?Human Resource
Issues

• At a basic level expatriates wont go if they have
  to terminate their home country employment.
• Pensions
• Other benefits programs
• Employment rights
• Career progression (out of sight out of mind)
• Ongoing expense profile in home country

8
Why do companies use secondments?Human Resource
Issues

• Possible host country HR issues
• Confidentiality on compensation with local staff
• Differentiation on compensation with local staff
  or other expatriate staff
• Issues with JV partners on compensation levels

9
Why do companies use secondments?Commercial
considerations

• We sometimes see start up ventures or JV projects
  where the provision of the expatriate is
  something of an investment, and the host business
  would not (or does not wish to) accept the full
  cost of the expatriates earnings.
• Also note that expatriates are often on
  secondment for developmental purposes, so the
  true benefit of his work is not just to the host.
• Secondment allows the ability not to charge the
  whole cost.

10
Why do companies use secondments?Tax
Accounting Issues

• On the other side of the argument is the basic
  accounting need to allocate costs to the
  businesses that enjoy the benefit of the
  expenditure secondment invoices allow this.
• Similarly home country Tax Authorities will not
  always allow deductions for salary costs of
  employees working in a different country for a
  different company.

11
Typical Problems in the International Arena

• Permanent establishments
• Deductibility of charges
• Withholding on charges
• VAT
• Payroll reporting social security liabilities
• Individual Taxation

12
Specific Problems in Russia Russias take on
the International issues

• The corporate tax bits
• Tax deductibility
• Withholding
• VAT
• The individual employer obligations
• Payroll withholding
• Social Security
• Personal Taxation
• Treaty eligibility
• Filing obligations

13
Specific Problems in Russia Is dual employment
a solution?

• The corporate tax bits
• Tax deductibility (Risk area)
• Withholding (Minor risk area)
• VAT (Not technically, but practically)
• The individual employer obligations
• Payroll withholding (Okay)
• Social Security (Okay, other than cost)
• Personal Taxation
• Treaty eligibility (Okay other than cost of
  losing it)
• Filing obligations (Okay)

14
Specific Problems in Russia Russias own
specific issues

• Legal Authority
• Immigration Work Permits

15
Specific Problems in Russia Russias own
specific issues

• Legal Authority
• Specific Problem with General Directors can you
  second a General Director?
• The three legged secondment as a solution.
• General problems with non-employees sitting in a
  company position.

16
Specific Problems in Russia Russias own
specific issues

• Immigration
• Secondments not dealt with in the Law on the
  Status of Foreign Nationals
• Knock-on effect of solutions into the other
  problems
• Dual employment only a practical solution
  because you are now exercising two employments in
  Russia and need two work permits

17
Summary

• In the session we have
• Established what the main reasons are companies
  will use secondments.
• Looked at what the typical problems are and seen
  Russias take on this.
• Looked at a couple of Russia specific issues.
• Next session will focus in much more depth on the
  work permit issue