Future of Work: don’t forget the corporate income tax consequences!
The COVID-19 lockdown created the most extensive mass teleworking experiment in history. The highly contagious nature of this disease has resulted in severe social and travel restrictions being imposed by countries all around the world. This has led to a situation whereby employees and other personnel, including chief executive officers and senior executives, relocated and/or were obliged to perform their activities from a different country to that of their employer (hereinafter called their “home state”). Next to employment law, immigration and individual tax considerations – which fall outside the scope of this note – special attention should be paid to potential adverse corporate income tax consequences. Indeed, the role and activities of the remote worker may be substantial enough to create a taxable presence for the foreign employer entity (i.e. a permanent establishment – hereinafter “PE”), could raise questions about the foreign employer entity’s tax residency and could also trigger transfer pricing (hereinafter “TP) challenges. In order to assess aforementioned potential effects, a distinction should be made between the period of the actual COVID-19 lockdown (sub A) and the era after the pandemic (sub B).
A) During the COVID-19 lockdown: embracing the force majeure principle
In principle, throughout the lockdown period companies should generally not be preoccupied with corporate income tax consequences as long as the remote working can be linked to the travel restrictions following the COVID-19 measures imposed or recommended by at least one of the governments of the jurisdictions involved. Indeed, the COVID-19 pandemic is an exceptional situation and individuals who get stranded and start working remotely are typically doing so as a result of imperative government measures. This is a clear situation of force majeure and not a condition imposed by the employer. Based on an OECD report, there seems to be a general sentiment among countries that the pandemic is to be considered an exceptional circumstance whereby the government directives are extraordinarily impacting the employee’s normal routine and should therefore not create involuntary PEs for the foreign employer entity. Moreover, the OECD is affirmative in stating that teleworking from home should not create a PE because a PE must have a certain degree of permanency and should also be at the disposal of the enterprise– which is not the case when one is “involuntarily” working from home because of the public health measures. The same reasoning applies with respect to agents as well. If an employee concludes habitually contracts on behalf of the employer entity in his/her home jurisdiction, this would in principle suffice to trigger PE-status. However, the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 crisis should not create a PE for the foreign employer entity. Indeed, the employee is only doing so because of the exceptional nature of the COVID-19 pandemic.
The relocation, or inability to travel, of senior executives or members of the Board may raise concerns about a potential change in the “place of effective management” of a company. The concern is that such a change may have as a consequence a change in the company’s tax residence under relevant domestic laws and affect the country where a company is regarded as a resident for tax treaty purposes. However, the OECD confirmed that the temporary change in location of the Csuite is an extraordinary and temporarily situation due to the COVID-19 crisis and should not trigger a change in tax residency of the company. The afore mentioned considerations on force majeure therefore apply as well.
B) Post COVID-19: potential corporate income tax consequences
If lockdown measures get abolished, many multinational corporations (hereinafter “MNC’s) will probably institutionalize teleworking policies for their foreign employees to work (partially) from their home state, either from the home office or from the premises of the local subsidiary. These companies are advised to monitor their remote operations closely and understand the potential tax effects. In what follows, we will highlight some risks MNC’s could be facing in this respect. The main risk is basically that if the foreign employer entity can be considered to have a fixed place of business or an agent in the home states of their employees, they may going forward encounter multiple PE challenges and from that, potentially also profit allocation and/or TP exposures. Whether or not these exposures will also materialize, is obviously depending on the actual facts. The facts and circumstances will determine whether there is a permanent establishment and also the amount of profit that would have to be allocated to it.
- Fixed place of business PE: it may be difficult to uphold the non-PE status if the facts would show for example that, based on an intercompany agreement, the employees are allowed to use the premises of the local subsidiary and the offices are put at the disposal of the foreign employer. The same applies equally with the use of home offices of the employees involved, if it appears from the facts that the foreign employer entity does not make a company office available for the employees. Special attention should also be made to the remote working of key employees and senior management members, as they could lead to the recognition of a so-called “management PE” for the employer entity in the respective home states. Finally, MNC’s should also be careful with allowing employees to carry out commercial activities in their home state through premises that are at the disposal of the foreign employer
- Agency PE: a PE could also be identified if the evidence suggests that employees are regularly negotiating or concluding binding contracts in their home state on behalf of their foreign employer.
- Profit allocation: If a PE would be identified in the employee’s home state due to remote working situations, an appropriate part of the enterprise’s profit (or loss) is to be allocated to this PE, which would then become taxable in that state. Also, measures need to be taken to ensure the avoidance of double taxation in the employer’s entity state of residence. In short, profit allocation is done using the arm’s length principle: it will be necessary to determine the profits that would have been realized if the PE had been a separate and distinct enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the rest of the enterprise.
When referring to actions to mitigate potential PE and TP risks that come with teleworking policies, several alternatives are available, going from proactively reporting a PE in all countries where employees are working remotely to putting the remote employees on the payroll of a local subsidiary and have a service level agreement in place. Other more sophisticated solutions (e.g. entering into a Cost Contribution Agreement or the set-up of a Global Employment Company) could be contemplated as well. More holistically, and where relevant, the company may also contemplate to review its current operating model. Especially in centralized business structures, one could wonder whether it is still feasible to have one (global) principal or whether the proliferation of CXOs and senior management justifies the set-up of several regional principals. This might be easier said than done and attention should be paid not only to potential “business restructuring” settlements, but also to the indirect tax and systems impact.
MNCs that are planning to allow remote working in a post COVID-19 era, should plan this well ahead. Indeed, it is clear that a more flexible approach to remote working means that there might be significant ramifications in terms of taxable presence, tax compliance, potential double taxation and the group’s transfer pricing arrangements. The more senior teleworking employees are, the more severe the potential PE exposures and TP consequences could be. Every potential way of dealing with these challenges has its merits and should be considered taking into account all different angles (the factual position, individual tax, social security, PE, economic ownership of assets, allocation of profits, TP, etc.). Unfortunately, also in the new normal there will be no ‘one answer’ nor a ‘one size fits all’ solution. Collaboration between the HR / mobility team and the tax team is the key to success;
If you have any questions concerning the items in this newsflash, please get in touch with your usual Deloitte Legal - Lawyers contact at our office in Belgium or:
• Tim Wustenberghs, firstname.lastname@example.org, + 32 2 800 71 48
• Eric von Frenckell, email@example.com, +32 2 800 70 61
• Robert Neyt, firstname.lastname@example.org, + 32 2 800 71 72
For general inquiries, please contact: email@example.com, + 32 2 800 70 00
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