Second first?? Transfer pricing issues in secondment of personnel - deployment from one related employer to another on a temporary basis

Tax Executive, The, July-August, 2002 by Patricia Gimbel Lewis

The integrated nature of a secondment transaction strongly suggests the netting of all payments from USCO's perspective. Treating USCO's payments to Joe and FORCO's reimbursement to USCO as separate transactions (e.g., as a capital contribution to FORCO plus a distribution back) would be at odds with the essence of the transactions as a loan, due to the expectation of reimbursement. (11)

C. Germany Kicks Off the Public Debate

Germany is the first country to promulgate specific administrative guidelines for the transfer pricing aspects of cross-border personnel secondments. The German guidance, in the form of a circular published by the Federal Ministry of Finance on November 9, 2001 ("Secondment Circular" or the "Circular"), is premised on applying arm's-length principles to determine how the applicable costs should be borne for tax purposes. (12)

1. Characterization

The Secondment Circular implies that secondment is not the "provision of services" by the sending company. This conclusion is reached by defining secondment not to occur if an employee works for another entity to fulfill the first company's obligation to render services or accomplish defined work and the employee costs are included in the charge for the services or work. While arguably somewhat circular, this approach suggests that the contractual arrangement chosen by the parties--service contract or secondment contract--controls.

The consequence is that no profit markup is appropriate for the seconding company. The properly allocated costs are considered original costs of the economic employer (see below).

In addition, the Circular indicates that the transfer of knowledge or experience via the mere employment of the seconded individual does not require additional remuneration for intangibles, because this is an integral part of and reason for the secondment.

2. Covered Transactions

The Circular is limited to secondment defined as follows: The transfer of personnel between related parties for a limited period, where the receiving party either enters into an employment contract with the transferred employee or is to be regarded as the individual's "economic employer." A company is considered the economic employer if it integrates the seconded employee into its business, has a right of direction and control over the employee, and bears the costs incurred for the seconded employee, either by paying the employee directly or by having the other enterprise advance the remuneration on its behalf. Integration is assumed if the assignment exceeds three months. The Circular thus covers both shifted employees and loaned employees.

3. Cost Allocation Rules

The Circular sets forth somewhat different standards for determining the amount of costs to be absorbed or transferred, depending on whether the secondment is outbound or inbound. The premise is that the cost split must correspond to the respective business interests of the companies.

* Outbound Secondment--Presumptively, all costs must be absorbed by the foreign receiving company. To have any deductible expenses in Germany, the German sending company must show its own separate business interest;