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

b. Transfer Pricing Rubric: The Circular circumscribes the issue as an allocation of deductions rather than an allocation of income through its characterization approach. This is arguably congruent with the statutory provisions of Code section 482, though it is outside the current section 482 services regulations because of the premise that no services are being "provided."

c. Internal consistency: It is troubling to see different standards for outbound and inbound situations.

d. Administrability: The spectre of a detailed arm's-length cost determination and the required documentation is daunting. The benefit test may be particularly hard to quantify. One commentator indicates, however, that advance pricing agreements may be entertained by German tax authorities. (13)

Regrettably, the final version of the Circular omits the safe harbor in an earlier draft, which would automatically have accepted a secondment cost allocation if the sending company assumed 20 percent of the total expenses.

D. Conclusions

Secondment practices in our pervasively global business world cry out for clear, objective, and easily administered rules. Because of the frequency, the relatively small dollars involved, and the incredible potential for complexity and conflict, safe harbors or bright lines are highly desirable. Moving (perhaps through the OECD) toward a global standard for identifying the deduction-entitled entity--and ideally for achieving consistency for various tax and legal purposes--is a critical step. This standard could be the German "economic employer" concept, a U.S.-style "proximate-and-direct-benefit" test, or an employment tax "control" approach--whichever is most likely to achieve general acceptance. Obviating any need to consider arm's-length returns on secondment costs would be the icing.

But we are not there yet. The U.S. perspective on secondment is obscure. Explicitly carving secondment situations out of service-provider transfer pricing rules, or at least from any mark-up requirements thereof, is appealing, even at the cost of theoretical purity. This is easiest to support if significant intangibles are not involved, but one could argue for the same approach even if they are present. Allowing the parties' contract to govern the basic characterization issue would be a practical resolution, adding limitations if necessary to avoid abuse (e.g., maximum length of assignment, intent to return, or minimum length of historic employment with sending employer). The ongoing section 482 services regulations project provides an opportunity for the IRS to provide needed clarification concerning the transfer pricing characterization of secondment.

In the interim, taxpayers must do their best to navigate the inconsistent characterization waters. Surrendering the relative ease of secondment for the clarity of switching the individual's employer is a trade-off that must be evaluated on a case-by-case basis.

E. An Important Aside: Doing Business/ Permanent Establishment Issue