Remote working – New Guidance by the OECD

However, offering a remote working scheme intricate tax challenges for employers, particularly those overseeing cross-border operations. Companies must face the risks of establishing a taxable presence in foreign jurisdictions, known as a Permanent Establishment (PE), and the broader challenges of profit attribution to such PEs, or profit allocation across different entities of a global enterprise. The potential consequence from remote working introduces significant tax and transfer pricing considerations that demand careful attention. 

Evolution of the Permanent Establishment in the OECD Model Tax Convention

The interpretation of what constitutes a PE has evolved with the growth of both the digital economy and remote working trends, to allow an analysis that considers the new forms of working, with particular attention given to home-office-friendly policies. The latest long-awaited guidance by the OECD on November 19th clarified that a certain degree of permanence by employees working from home (or other relevant place) is the initial criteria for triggering a permanent establishment. Specifically, the threshold was set at 50 per cent of the employees’ working time over the course of twelve-month period. Exceptions apply if the activities are limited to preparatory or auxiliary.

If the 50 per cent threshold above is reached, other facts and circumstances should be evaluated. For example, if an employee’s work is closely tied to a specific location, the employer may have to pay taxes on the employee’s remote work location.

However, until the new OECD Model Tax Convention is agreed by two given jurisdictions, countries continue to have deviating standards for determining if a PE exists. Some jurisdictions may say a PE is triggered if the company gains a specific advantage from having a presence there, while others may look at whether the employee was implicitly encouraged by the employer to work from home. Understanding the stand-point from a given jurisdiction is crucial for companies navigating remote work in a global landscape.

Attribution of profits to a PE

After acknowledging the existence of a PE, the PE would need to be remunerated in accordance with the arm’s length principle, considering the nature of the activities performed by the employee abroad. Taxable profits attributed to the PE must be those that the PE would have generated if it was a separate and independent enterprise. Once profit is allocated to the PE, it is possible to eliminate double taxation by exempting the foreign corporate profits from the head office entity.

Allocation of profits between associated enterprises

When there is already a taxable presence in a certain jurisdiction by means of an established entity, cross-border remote working arrangements must be analyzed for possible shifts in profit potential between the entities.

Specially, responsibilities and decision-making shift between these entities can alter how profits are distributed between the entities. This means that the characterization and transactions between entities may need to be reassessed to align with these changes.

Lastly, an important factor to consider is how remote work can lead to business restructuring issues. For instance, if personnel engaged in developing the intellectual property of a company shifts from one entity to another. Transfer pricing implications from such personnel relocation may require to analyze a potential remuneration for shifting profit potential from one entity to another.

By analyzing the facts and circumstances from your case, RED Tax BV can provide insights into how flexible remote working policies might impact your company’s transfer pricing landscape.

In case you are triggered by the above, please feel free to contact rocio.martel@red.tax.