A new era in the way employees work but what about tax?
The COVID crisis has left many of us facing new challenges. We have embraced different ways of approaching our working routines and priorities. After the initial doubts and operational hurdles, many companies have found new rhythms and innovative ways of keeping their employees connected. So much so that companies and their employees are reviewing whether working from home or anywhere could become the new norm.
There are many ramifications linked to this new reality, however. One of these is companies’ tax model and footprint, which, for international businesses, is connected to transfer pricing. The physical location and contribution of employees to profit has been a cornerstone of calculating a multinational’s tax base based on transfer pricing principles. The latest OECD proposals (BEPS 2.0.) are certainly shaking things up by extending taxation beyond pure physical location for some multinationals. But while the international tax world is moving faster than ever, the role of location is – well – not yet remote.
Key questions for transfer pricing
Let’s take an example. A Swiss headquarter plans on hiring several Group Senior Directors across key functions. Previously, the roles were based in Switzerland. Now, the individuals would be working for a significant portion of their time from their home countries elsewhere in Europe. Questions that will need addressing from a transfer pricing perspective include:
- Will the transfer pricing model need to change?
- What historical risks will this create?
- Will the company be able to demonstrate that key roles and risks remain controlled from the Swiss headquarter for the group’s important value drivers?
- Will the company have to set up and attribute profits to a permanent establishment of the Swiss headquarter or another entity for these employees?
- What additional operational and compliance requirements will be needed to track these employees’ contribution to profit over time (basis for the relevant corporate tax base)?
- How will the roles and location of these employees as well as related reporting lines be described in the transfer pricing documentation?
- How will this topic be managed with tax authorities? Proactively? During tax audits?
What next: feasibility assessment and compliant guidance
The multi-faceted implications of working from anywhere (Finance, HR, IT, Legal, Payroll, Taxes, etc.) make it critical to have a multidisciplinary approach to defining priorities and a strategy. Many organizations are assessing their opportunities and risks.
Transfer pricing is of course just one of the many aspects of the working-from-anywhere debate. It is however often a key aspect of multinationals’ tax strategy. Teams managing tax and transfer pricing matters therefore play an important role in informing their organization’s decisions on the topic early on by:
- Assessing opportunities and risks as well as the level of uncertainty involved based on the company’s business and transfer pricing model.
- Evaluating the financial impact of envisaged changes (e.g. profit reallocation between countries with different tax rates).
- Providing input into the business plan around additional resources required to manage the issue in practice (from risk assessment to compliance).
Some companies may altogether decide to refuse flexible working across borders due to the sheer range and complexity of issues compared to the anticipated benefits. Others may decide to start with a smaller number of employees. Because of the “facts and circumstances” nature of transfer pricing, it is hard to define blanket rules. But transfer pricing resources can help businesses and their many supporting teams (such as Finance, HR, IT, Legal, etc.) shape new rules based on their goals and priorities. Suggestions of building blocks include:
- Focus on countries with relative more certainty (e.g. in terms of rules or access to advance agreements).
- Select categories of roles where possible, for example:
- "Auxiliary” in the context of your business to mitigate permanent establishment risk.
- "Supporting”, i.e. sufficiently removed from the generation of profit to mitigate the total tax impact.
- Consider roles that may be remunerated based on new BEPS 2.0. nexus definitions.
- Evaluate planned changes to your business model that may provide an opportunity to review (pockets of) the employee footprint and related transfer pricing consequences.
Then, it is about implementation, implementation, implementation. Again, a multidisciplinary approach is required to mobilize stakeholders and establish policies, processes, and responsibilities. Monitoring (e.g. tracking employee location, reviewing business model and/or legislative changes) should also be implemented. A process for managing critical requests may also be required. Finally, ongoing communication to raise awareness, deploy policies and address questions will also count for a lot of the success (or challenges).