Tax Factors and Planning Strategies Involving Domestic and Cross-Border Employee Leasing

Employee leasing creates opportunities for creative tax planning using pocket-shifting, type-shifting and time-shifting strategies, the implications of which have a direct impact on the pricing of professional and employee services. Tax shelters based on employee-leasing arrangements have become widespread among high-income professionals and are increasingly commonplace among corporations. However, the IRS and Treasury Department have announced that they intend to put an end to all cross-border employee-leasing tax-avoidance practices, launching a voluntary compliance program and closely scrutinizing companies whose deferred-compensation plans use employee-leasing programs.

This paper gives an overview of the fast-growing employee-leasing sector and examines the tax factors and tax-planning strategies involving the increasingly popular practice. As an illustration, the paper also describes the mechanics of the employee-leasing offshore deferred-compensation shelter known as the Irish leasing scheme, which the IRS designated as a tax-avoidance transaction in early 2003. Finally, the paper examines the principles and reasoning employed by the IRS to challenge employee-leasing arrangements in recent rulings and notices.