Transfer Pricing

August 2025

Secondment and TP Risk When: Employees Trigger Tax Trouble

“Secondments might look like simple HR moves — but tax authorities see more.”
If a foreign employee works in India, is it really a secondment? Or is it a cross-border service?

The answer could trigger:

Arm’s length charges
PE exposure
Transfer pricing compliance

In TP, even people can create risk. Here’s what you need to know.

As businesses globalize, sending employees on secondment to group companies in other countries has become routine. But for Transfer Pricing (TP) professionals, this simple HR move can quickly turn into a tax compliance puzzle.

The key question:

Is the secondee truly an employee, or is this actually a cross-border service? Let’s unpack this grey area.

What is a Secondment?

In a secondment arrangement, an employee of one entity (say, the foreign parent) is temporarily assigned to another entity (like an Indian subsidiary). The secondee works under the host company’s direction but remains on the home company’s payroll.

Why Tax Authorities Are Watching

Tax authorities are now scrutinizing secondment deals for two main reasons:

TP Angle:
If the secondee is effectively rendering a service from the parent to the subsidiary, the arrangement should involve an arm’s length service fee.

PE Risk (Permanent Establishment):
If a foreign employee is acting with authority or managing operations in India, it may trigger a PE, creating corporate tax exposure in India.

Key Indicators that Matter whether an arrangement is a true secondment or a service provision depend on the facts and conduct, not just the contract.

Some common red flags that suggest a service, not a secondment:

The secondee continues to report to the foreign entity
Key decisions are made under instructions from the parents
The subsidiary lacks control over day-to-day activities
The foreign company benefits from the output

On the other hand, a genuine secondment involves:

Full supervision by the host entity
Routine operational role, not strategic control
Cost recharge on a no-markup basis
No profit element or independent benefit to the foreign entity

In India’s Stand: Judicial Trends

In Morgan Stanley (2007), the Indian Supreme Court held that if the secondees are under the control of the Indian company and only reimbursed on a cost basis, then there’s no PE and no TP markup required.

But more recent cases show that:

Substance trumps form and authorities may demand documentation to justify why no markup was applied.

How to Stay Compliant

Draft clear secondment agreements – specify reporting structure, role and control. Maintain FAR (Functions, Assets, Risks) analysis to justify the treatment, ensure cost-only reimbursements are documented properly and evaluate PE exposure annually – especially in managerial or technical roles.

Final Thought

Secondments are no longer just an HR topic—they’re a TP trigger and a risk area. With increasing cross-border movement and global staffing models, businesses must treat these arrangements with the same rigor as any intercompany transaction.

Transfer pricing is no longer just about pricing; it’s about people, presence and purpose.

Let’s take some examples to understand the topic:

Seconded Employee Acting as Economic Employer

Example:
An Indian subsidiary of a German MNC receives a senior manager on secondment from Germany for 2 years. Though officially employed and paid by the German HQ, the employee works under the control and supervision of the Indian entity, performs key managerial functions and is fully integrated into its operations.
TP Risk:
Risk of PE (Permanent Establishment) in India for the German entity.
Arm’s length compensation (cost-plus markup or service fee) may be required from India to Germany.
Indian entity might be deemed the “economic employer” → tax exposure.

Intra-group Service vs. Employee Leasing

Example:
A US parent seconds a group of engineers to its Singapore subsidiary for a product rollout. The engineers continue to be on the US payroll and report administratively to the US, but they are executing the Singapore entity’s project.
TP Risk:
Is this a “service arrangement” or “employee leasing”?
Failure to charge a service fee or incorrect cost allocation can lead to TP adjustments.
Unclear contractual terms → double taxation risk.

Employee Secondment Triggering PE in the Host Country

Example:
An Italian parent company sends a key marketing executive to India to lead market expansion. Though technically employed in Italy, she negotiates contracts, leads operations and uses an Indian office regularly.
TP Risk:
PE risk under Indian tax law (via “fixed place” or “dependent agent” PE).
Could result in taxation of the Italian parent’s profits in India.
Transfer pricing adjustment to ensure arm’s length allocation of profits attributable to PE

Conclusion

Navigating the Secondment Tightrope

Tax authorities in India and globally are increasingly looking beyond the paperwork, applying substance-over-form principles to challenge arrangements that lack commercial justification or economic clarity. The risks are real: PE exposure, demand for arm’s length remuneration, denial of deductions or even double taxation.

Secondment arrangements must be treated with the same rigor as any controlled transaction. That means:

Documenting the purpose and terms clearly
Defining control and reporting lines unambiguously
Maintaining FAR analysis and cost-sharing logic
Periodically reviewing roles for PE triggers