Global employment companies

16 March 2006

Tracey Horne

Tracey Horne, Senior Associate, Employee Incentives & Benefits at Bird & Bird looks at the advantages and disadvantages of using a global employment company.

From the use of a simple shell company through to shared service centres and the complete global employment company solution, the demand for a central HR function for internationally mobile employees has enjoyed a resurgence in recent years.

Although the advantages for mobile employees are numerous, it is often suggested that the real driving force behind the re-emergence of global employment companies (GECs) is the corporate tax department’s desire to manage the ‘permanent establishment’ and transfer pricing risks. With the increase in the number of investigations by tax authorities into these issues, not only in the UK but across Europe and North America, the risks are becoming ever more prevalent.

However, when properly designed and implemented, GECs can provide a one-stop shop for mobile employees and the HR departments which manage them, from the consistent delivery of benefits to providing a real career structure for the habitual expatriate. More and more global corporations are finding that the traditional, locally managed, international assignment is outdated and often insufficient to satisfy the compensation and benefits demands of long-term mobile employees.

This article provides a brief explanation of the anatomy of a GEC and highlights the advantages, disadvantages and challenges of GECs.

What is a GEC?
A GEC is an incorporated entity which forms part an organisation’s group structure and is used to house and manage the global mobile workforce of that organisation. The GEC provides employee services to other entities in the group in return for a management fee. This fee is then used to pay compensation and benefits. Its primary role is to establish an optimal framework for supporting global mobility. This framework gives management a flexible and cost-effective means of recruiting and supplying talent that the business units needs worldwide.

A GEC will generally recruit two distinct groups:

  • a pool of senior executives who are ready and able to spend a significant period working in one country after another without the prospect of ever returning to their home country.
  • contract workers who are available for work, without much notice, on a series of short-term production or plant set-up projects anywhere in the world.

The GEC employs the individual and acts as a central HR and payroll function managing his employment wherever he might be in the world.

A GEC is normally established in a ’tax-friendly’ jurisdiction which is politically and economically stable. Currently, the Channel Islands, the Cayman Islands, Bermuda, the Bahamas and Cyprus are the most popular.

Advantages of using a GEC
As mentioned above, a GEC acts as the central hub for all internationally mobile employees and looks after all HR functions associated with international assignments. This has the following advantages:

  • Cohesive policies and benefits: a GEC can implement and operate one global policy governing all assignments, rather than an ad hoc country by country approach. A global benefits policy can be implemented, perhaps offering benefits available only to mobile employees. For example, a GEC is a useful vehicle to house a global retirement plan, especially in industries such as mining and oil exploration where employees perpetually move throughout their career. A GEC is also useful for continuity, because it will make employees more aware of the universal policies which apply to them, regardless of where they may be.
  • Corporate glue: a GEC can help to bind a global company together. It may house employees from numerous jurisdictions, yet they will all be treated consistently under one policy. These will assist in alleviating a ’HQ-vs-subsidiary’ approach, allowing the company to truly have a global culture.
  • Streamlined administration: locating administration in one location is inevitably more efficient, saving both costs and time.
  • Compliance management, data collection and processing: details on each individual can be housed and updated centrally, minimising errors. Keeping track of time spent in different locations is often crucial when calculating an assignee’s tax liability and is often poorly managed when done in the assignee’s home country.
  • Global pool: a GEC can house the global talent pool. This is useful for companies that have a large expatriate workforce as it aids HR with succession planning, enhances the individual’s career management and encourages the most effective use of international talent.
  • Cost control: the parent company will be able to keep better control of managing assignments if the administration is kept in one central location, rather than being dealt with on a country by country basis.
  • Alignment with corporate tax objectives: the parent company’s corporate tax department will be better able to manage corporation tax liabilities in relation to minimising “permanent establishment” exposure and will be able to implement and operate a global, cohesive transfer pricing policy.

Disadvantages of using a GEC

  • Cost: the cost of establishing and maintaining an independent subsidiary company to manage global assignments may be prohibitive for smaller companies.
  • Acceptance: employees who are not habitually mobile may not wish to be employed by an off-shore GEC located in a far-off location, preferring instead to be kept within their familiar home country system.


Challenges
The challenges of successfully creating and managing a GEC should not be underestimated. The following issues need to be considered and addressed:

  • Global pay delivery: in relation to the non-habitual mobile employee, will the remuneration package offered by the GEC match expectations generated by home country pay levels? If the expectations of an employee are not met, they are less likely to accept an international assignment.
  • IT challenges: does the GEC have sufficient resources to be able to establish and maintain effective IT systems to efficiently capture relevant data on all mobile employees?
  • Transfer pricing issues: does the parent company have established and cohesive transfer pricing policies which can be implemented and operated on a consistent global basis?
  • Company support: does the GEC have full company support – not just from head office? Without acceptance at all levels the changes of establishing a successful partnership will be reduced.


Conclusion
The growing sophistication of global companies requires a talented pool of mobile employees which can be utilised efficiently and at short notice. Establishing a GEC, while not without some issues to be overcome, can, for large multi-national corporations, be the solution to an otherwise potentially unreliable system of ad hoc home country assignments. And clearly employing assignees on ad hoc home country assignments is unsatisfactory for both the company and the habitual expatriate.


Tracey Horne works as a Senior Associate in the Employee Incentives & Benefits department at Bird & Bird, the international law firm.

Bird & Bird will be presenting at ECA’s forthcoming seminar ‘Efficient tax and social security management for international assignments’.

In addition to hearing more about GECs delegates will hear from tax experts and HR professionals about a number of tax and social security issues including:

  • Tax today
  • Understanding social security
  • Managing variable pay for international assignments
  • Hiring contractors internationally
  • Global share plans

The one-day seminar is being held on Tuesday 28 March at the Grange Holborn Hotel in London. For a full programme of the event visit: www.eca-international.com/tf/tax_conference.asp