Multinational organisations have been operating during a pandemic for six months now. Over that span many employers have increasingly accepted, and sometimes mandated, flexible working hours and remote working. In some cases, directors and employees are now working in countries outside their usual places of employment, due to travel restrictions, personal choice, operational needs or other reasons.
As working practices, travel restrictions and public health conditions continue to evolve, multinational organisations should regularly review their own employment location practices in light of certain core concepts of corporate tax residency and permanent establishment. Under the "new normal" of remote working - including cross-border remote working - organisations will face new risks related to double taxation, penalties and interest, all of which will erode margins and cash flow at a time when both are critical.
Tax residency
Many countries' local regulations and double tax treaties determine corporate tax residency through incorporation or the more nebulous concept of "place of effective management." Essentially, a corporate entity will be subject to the corporate tax regime in a country in which it is legally established (for example through incorporation) or where it holds board meetings (in cases where the board exercises effective management and control).
This may seem straightforward, but the rise of remote work has added new challenges and risks for many multinational organisations. To take a typical example, let's say a chief executive officer and other senior executives typically flew to one country for meetings, but now are precluded from doing so due to coronavirus-related travel restrictions. As a result, they may hold board meetings from different countries using video conferencing. Since the board is no longer holding meetings in that country, is the entity still a corporate tax resident there? If yes, will the board be fulfilling their tax-related duties under local law, and if no, can the organisation argue that the current facts represent exceptional circumstances?
In order to help answer these and similar questions, the OECD has issued practical guidance stressing that tax authorities should bear in mind the current exceptional global situation when reviewing activity. Many tax authorities around the world have confirmed that they will be taking a more holistic view of the facts and circumstances of each tax residency determination, though this is a temporary state of affairs.
Even in our current situation where tax authorities are taking a more holistic view of tax-residency factors, some corporate entities may have the tax-residency balance tipped out of their favour, particularly if they don't have a previously sound fact pattern of compliance.
Organisations should also keep in mind that the above issues and questions have been in existence for a number of months now, as have travel restrictions. Organisations should ensure that any temporary measures - such as board meetings being held in locations other than the location where the entity should be tax resident - do not become long-term practices that complicate tax residency determination or invite tax authority scrutiny.
Permanent establishment
Organisations must also ensure they do not fall foul of their corporate tax nexus - or permanent establishment - positions on a multi-country basis when employing workers remotely across borders.
As mentioned, many organisations have allowed (or required) employees to relocate to other countries during the pandemic. Given travel restrictions, some employers and employees have had little or no choice but to relocate employee work locations and have the employees remain in those locations. These relocations have in many cases helped ensure continuous working during office closures or helped facilitate wider operational requirements. In some situations, relocations have allowed employees to be closer to family or have increased productivity by placing employees in locations previously accessed only through fly-in, fly-out arrangements.
It should be stressed that the temporary presence of an employee at a home (i.e. residential) office in a country other than the country where they are employed should not typically cause permanent establishment risk for the employer. Such arrangements do not have a level of permanence, and any business activities carried on are not done so on a continuous basis.
The permanent establishment risk increases, however, when the offshore working model ceases to be temporary. In other words, when an employee working remotely outside of their country of employment changes from a temporary to a more permanent arrangement, permanent establishment may be triggered in the remote-work location. In such cases, the employer may face potential double taxation, penalties and interest.
There are other considerations in this scenario, including those related to global mobility (e.g. visa considerations) and local payroll and employee income tax. (For more information, see our article on managing operational change.)
Transfer pricing
As organisations adjust and reassess the allocation of resources in light of the pandemic, many are finding they must revisit their global transfer pricing positions and documentation.
If key functions that were undertaken before the pandemic are not currently undertaken in a particular country due to employees working remotely in new locations, then the intra-group arrangements priced and documented on the basis of those functions may not have a sufficient level of robustness and should be revisited. As temporary employee arrangements take on a level of permanence - perhaps in response to new operational or economic drivers - organisations may find it increasingly difficult to justify pre-pandemic transfer pricing arrangements to tax authorities who demand adjustments.
Any intra-group pricing that shifts upwards or downwards should be thoroughly documented to ensure that the position is not only explainable, but that the position and associated documentation is compliant with local tax requirements.
Additional considerations
Travel restrictions, remote working and employees working outside their initial country of employment are all becoming normalized. Many multinational groups have adapted to these realities and moved beyond pandemic "survival mode." They're now rightly focused on examining their operational supply chains and assessing their resource allocations, including the locations of their employees. Reviewing certain core concepts of corporate taxation on a multi-jurisdictional basis and in light of these new realities will help organisations effectively manage their tax risk and cash tax outflow.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
