The Hindu Business Line : Fire and lease back

DOCTORS are consulted, cars are rented, auditors are appointed, machines are leased and employees are hired. How about leasing employees? Though a new concept to India, employee leasing has always happened in varied forms. We have all heard of convicts going to work in jailor's garden, audit apprentices doing chores for the memsahib, and government drivers ferrying the babu's family.

There are organisations that offer service providers — ranging from ayah to watchman, sales reps to death dancers. So, there's nothing wrong if a company provides people with marketing, accounting administrative and customer servicing expertise to client firms, which wish to stay lean rather than lengthen their payroll. These are known as professional employer organisations (PEOs). Temping business, as it is otherwise called, is estimated at $140 billion, more than half of which originates from the US. Temps could make up about two to three per cent of an organisation's total manpower, but the percentage is a rising number. But there is a dark side to PEO business, its misuse. For instance, a recent case that came up before a US court was about `fire and lease back,' something that sounds vaguely similar to `sale and lease back' arrangement with plant and machinery. In this, a few PEOs in Oklahoma City entered into `fire and lease back' arrangements with numerous businesses. According to the Justice Department's papers and press release, the arrangement worked this way: "The business fires its employees, and the defendants' PEO hires them and `leases' them back to the business."

They used "more than 35 shell corporations" to evade "collection of nearly $6 million in federal employment and unemployment taxes." They were continually "setting up new corporations as old ones failed to pay taxes," running in the process "elaborate corporate shell game," stripping debt-ridden PEOs of assets and income. The result was a virtual Tom-and-Jerry exercise for the taxman, who was "faced with the Herculean task of monitoring, tracing, and connecting an ever-changing and increasing number of different corporations and their shifting assets."

Another case involved www.affluentadvisors.com, where it was alleged that the company paid the temps only the necessary minimum to meet their basic needs, but collected substantially more in lease payments. The difference was diverted to a Barbados-based company of the PEO. Also, that the temps were advised "not to report the diverted portion of their income on their own tax returns" though they still had "access to the money."

In India, when sale and lease back arrangement was used for tax evasion, the Central Board of Direct Taxes advised its officers to verify if assets are factually non-existent, having been created by hawala transaction, and also see if there was any "alteration in the situation of assets." Likewise, not long ago, the Internal Revenue Service (IRS) of the US cautioned medical professionals that promoters of abusive tax schemes are targeting them. The professional would retain the same employer, perform the same services and retain the same compensation, but he would resign from his present employer to sign an employment contract with a foreign employee leasing company giving it exclusive rights to his services. Look at the substance rather than form, advises the IRS. Also, ask three questions: "Is the arrangement designed to `hide' income? Is the arrangement designed to evade income or employment taxes? Is the arrangement just too good to be true?" What if you get `yes' or `maybe' as answer? "There could be severe consequences." So, think twice before calling it quits.

OohLaLaw@hotmail.com

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Fire and lease back

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