For Vikas, the concept of jugaad (improvisation) is like second nature. The company, in which he is the HR Head, had recently acquired a company in South Africa.
This was the first overseas acquisition the company had done and the success of the new subsidiary was extremely critical to the group’s overall success. The CEO therefore had decided to post some of their top level executives to the new subsidiary.
Vikas was keen that these executives land in South Africa without delay, assuring them that the company will “take proper care of them”.
When he told me about this, I asked him a few pointed questions that set him thinking. Some of the questions I asked Vikas were:
What visas are these executives travelling on?
The executives had business visas that they used for the frequent business trips they made to the country.
However, they were now going to South Africa not as business visitors but as employees of a South African company.
With that status, they needed work permits, more specifically the intra-company transfer work permits.
If they travelled on the wrong visa, they could face severe penalties including deportation. Vikas quickly made a note to speak to his contacts in South Africa and organize the documents necessary for the work permit.
What are their compensation terms?
Vikas, in the usual zeal and entrepreneurial approach he is notorious for, had worked out a living allowance to be paid to the executives, again assuring them that he would “deal with” other things as and when they cropped up.
I reminded him that the cost of living in South Africa would be very different than India and the Indian salary, simply converted into African Rands, even if topped up with a living allowance may not provide the executives the same lifestyle they had in India.
Moreover, they would incur additional costs in establishing their residence in the new country, buying furniture etc. Since most of them were married and their families were was moving with them, they would also incur other costs like tuition fees for children.
The tax rates in South Africa was much different and Vikas had evidently not worked out the after-tax (take home) pay that each executive would receive and its impact on their personal finances and savings.
I advised Vikas that the timing was right for his company to start developing a separate policy for international assignments. Such a policy would list out various allowances and benefits individuals were entitled to when moving to a foreign location and the administrative mechanisms for implementing the same.
Ideally, the policy should cover all the needs of the individual during the entire life-cycle of his assignment with the objective that the employee be kept “whole” in terms of his standard of living, net pay and savings.
The policy should also provide for medical and life insurance coverage and emergency evacuation in the event of any critical illness, political instability or natural disasters.
Companies who posted employees to countries that had a high crime rate even had policies to cover kidnappings and provision of personal security guards.
Vikas, who was listening patiently as I listed out some of the key ingredients of an ideal assignment policy, voiced his concern that all these “frills” would make these assignments hugely expensive, “spoil” his executives and become a drag on the company’s bottom-line.
Vikas was right. Medium or long term overseas assignments i.e. assignments of durations of two years or more, are very costly, often costing 2-3 times the assignees normal salary costs.
That is why, in the current environment of economic slowdown, companies have been reducing the number of long term assignments, substituting them with local talent or short term business trips.
They have also become very picky on who they send on overseas assignments so that they derive the best results out of such moves.
At the same time, with proper planning and professional advice, it is still possible to reduce assignment costs by taking all tax and social security benefits that were available under the foreign country’s laws and structuring the compensation in an effective manner.
Providing an “all inclusive” lump-sum allowance instead of an itemized list of expense reimbursements and benefits, though easier to administer, generally led to higher tax and social security costs.
Vikas was weary by now but it was clear that the he had got the message. He asked me if there were any other things that he should be mindful of, clearly not expecting that I would add a few more.
“Yes there are”, I said gleefully but before I could elaborate on some of the other wonderful stuff in my repertoire like employment laws, minimum wages, severance etc., he had picked up his bag and left, excusing himself and promising to meet me again soon.
By: Amitabh Singh, Tax partner, Ernst & Young India.
Article courtesy of Economic Times.