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Global Employment Companies are back in ‘vogue’

…but do these old vehicles have new business drivers?

Global Employment Companies are making a comeback, with organisations competing globally for talent and an increased focus on corporate governance and transparency. GES Insights takes an in-depth look into the new business drivers for old vehicles.

For those of us who have been working in the field of global mobility for longer than we would care to admit, we have seen several cycles of activity around Global Employment Companies, or ‘GECs’ as they are often known.

At our last Deloitte web briefing for HR managers, over 350 clients tuned in to listen to our thoughts on the topic of GECs for clients across Asia. Many of those online with us were not part of the corporate HR and mobility functions in their organisations. Around half of the participants were either from their organisations’ risk or tax functions, or were senior finance or corporate executives.

GECs have been implemented in various forms over the past 20 years: from the use of simple shell companies through to shared service centres, to complete centres of excellence designed to meet corporate governance requirements and fit within organisations tax risk management frameworks.

Historically, a key driver for GECs was to create a vehicle to employ ‘global nomads’ – those employees who moved from expatriate assignment to expatriate assignment, otherwise known as ‘career expatriates’. Sometimes, they were designed for a senior cadre of executives enabling them to participate in common global benefit plans, to help create a shared global culture and an alignment of interests; or to enable social security savings.

Now new business drivers are bringing GECs back into vogue. In this article we review some of those drivers, but firstly we refresh what we mean by GEC structure.

A GEC is an incorporated entity which forms part of an organisation’s group structure. It is used to house and manage a certain segment of the global employee population. This may include the entire globally mobile workforce, or it could be a small group of senior executives.

The GEC provides services to other entities in the group in return for a management fee. This fee is used to pay the employees, operate the services provided by the GEC and create a profit for the GEC.

The new business drivers

Today’s business drivers reflect a new operating environment where organisations compete globally for talent and tax governance is front page news.

On the back of this increased focus on corporate governance, transparency of employee mobility has become a key GEC driver. Whilst in the past assignees tended to be sent from their home country HQ to overseas outposts, today there has been a dramatic increase in the number of home and host country combinations. This brings complexity in both pay delivery and income tax compliance.

This myriad of ‘spaghetti’ assignments is hard for global mobility teams to manage. By using a GEC to employ mobile employees, all employees will have an employment contract from the same jurisdiction. The GEC location always being a common factor reduces complexity and increases visibility.

Another newly emerging driver for setting up GECs has arisen from the global ‘war for talent’. Several organisations have had to resort to sourcing skilled labour from countries where they have no operating presence. These employees are sometimes referred to as ‘third country nationals.’

Organisations in this situation have sometimes found difficulty agreeing which operating entity in the group will employ these third country nationals. Depending upon the location of the group parent company, some organisations using the parent entity as the employer have found it is a costly option with demanding labour laws. Often employees with no connection with the jurisdiction of the parent do not value the local benefit plans.

Other organisations have increased their complexity by employing third country nationals through a number of different operating entities.

As a result, it is becoming more common for organisations in this situation to use a GEC, where they need to employ people from jurisdictions where the group has no operating presence.

From the poll we conducted as part of our client web briefing, of those clients considering or with an existing GEC, the most popular selected GEC driver was to help mitigate the risk of creating a permanent establishment.

A permanent establishment (PE) is defined as a fixed place of business which gives rise to an income tax liability. It is often created by the presence of employees or the activities of an employee in a certain location.

If an individual is an employee of the GEC and undertakes these activities in the overseas jurisdiction, such that a PE of the GEC is created, it is the profits of the GEC (rather than the profitable group entity or HQ entity) that are subject to tax in the jurisdiction. The profits of the GEC are usually limited to a mark-up on the management fee.

So while GECs are back in vogue, the key drivers for setting them up have changed. Corporate governance, transparency, the war for talent, third country nationals’ and permanent establishment risks reflect the new operating environment of today. 

If you are already operating a GEC, it may be worth revisiting the structure, especially in light of the increased focus on the key drivers.

If you are considering setting up a GEC today you may want to consider the business objectives and assess the potential benefits against today’s drivers; and consider how you will manage risk in today’s climate of increased scrutiny.

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