Deloitte OECD interview series – part one: The corporate tax aspects of global mobility and hybrid working

A flexible work environment has become possible due to advances in technology, tested rigorously during the COVID pandemic, and is now a key instrument for businesses in some sectors in attracting and retaining employees. Such flexible working arrangements are often employee driven rather than employer driven.

It is commonly observed that companies have started recruiting and retaining employees located in countries other than that of the employing entity, resulting in the need for businesses to adapt quickly to the tax (and employment law) requirements of more countries and the changing locations and circumstances of their workforce.

The focus of most tax authorities during the COVID pandemic was on whether remote work, temporarily caused by factors such as travel restrictions, created a potential ‘fixed place of business’ permanent establishment, particularly via a home office.

Underpinning the permanent establishment analysis are key principles on fixed place of business that have been included in double tax treaties or the OECD commentary on permanent establishments for many years but that can be interpreted differently and depend on factors such as the types of activities, the length of presence in the country, or the type of location (for example, business premises, home office, temporary location for a business trip) as the determining factors for a fixed place of business permanent establishment. Countries can take different views on the importance of each of these factors such that there are inconsistencies, giving rise to potential uncertainties for businesses.

As well as uncertainties around whether permanent establishments are created, there is also the question of how global mobility affects the attribution of assets (such as intangibles) and risks, and ultimately profits. This becomes relevant where employees perform:

• Significant people functions or key entrepreneurial risk-taking functions; or

• Functions linked to control over risk and/or the development, enhancement, maintenance, protection, and exploitation of valuable intangible assets.

The question is how any changes to the location of such employees would affect the attribution of (intangible) assets, risks, and profits. This also brings into question possible exit taxes and/or the creation of fragmented intangible ownership.

The tax consequences of remote working go farther than taxable business presence and transfer pricing; they expand into aspects such as the employer of record and payroll obligations, social security, employment income tax, and, potentially, the question of residence and the place of effective management of the company.

Businesses have been emphasising that more certainty and consistency is required for employers and employees to deal with the tax consequences of global mobility, remote working, and hybrid working models.

In his interview with Deloitte, Manuel de los Santos, the head of the transfer pricing unit at the OECD’s Centre for Tax Policy and Administration, elaborated on the expectation of the OECD/G20 Inclusive Framework on BEPS members that further guidance will be provided on the topic of global mobility and hybrid working models.

“We see that there is a massive expectation regarding the work on remote working and global mobility, teleworking arrangements, and the like,” he said. “That makes sense, because when we monitor the reality of business, we see that businesses are now under a lot of pressure in terms of addressing something that could be commercially driven but could also be driven just by the decision of employees deciding to move. And then, MNEs are having a difficult time to either retain talent or to hire new talent.

We don’t want tax to be in the way of how businesses need to operate to be efficient

Manuel de los Santos, head of the transfer pricing unit at the OECD’s Centre for Tax Policy and Administration

“We want to design this project to address, or to improve, the possibility of businesses to grow; we don’t want tax to be in the way of how businesses need to operate in order to be efficient. And it’s in that context why we are taking probably quite a lot of time to learn what are those pressing points that businesses have identified today. There are quite a lot of those that are relatively easy to think through. For instance, you may have a home office permanent establishment and the question is how you attribute profit to that or whether it’s actually worth it to attribute profit to it, if it’s a routine activity, for example.

“But there are other issues that are much more significant, that are not only limited to permanent establishments, where I think we need to take a bit of time. And we are always encouraging people to reach out to the OECD Secretariat, because we are at that point in time where we are looking for brainstorming and getting a good sense of what are the pressing points, so that we can scope out the project with the membership.”

During the discussion, Manuel de los Santos provided further details on the questions of taxation rights and nexus, as well as the consideration for profit attribution.

“It’s important to have that in perspective, that there are pieces that will need to be worked out very closely for the ‘treaty people’ and the ‘transfer pricing people’,” he said. “A thing that is also important to bring to mind is that we will have situations where it’s not just a question of whether that permanent establishment exists or not and then profit allocation just follows; it’s that the new reality is probably putting pressure on the principles that we have in Chapter I [of the OECD 2010 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations Report on the Attribution of Profits to Permanent Establishments].

“You can think about quite simple scenarios that bring a lot of complexity to the analysis; for instance, when you have a group of people making decisions and they are actually undertaking risk control functions under Chapter I and maybe 20% of them decide to move outside to a different jurisdiction where they are hired locally… when you try to fit that pattern, which is a relatively simple or common example [of] the rules in Chapter I, you are going to have a lot of difficulties in getting to an answer that is workable in practice.

“I don’t think it’s that much about the principles not working in theory, but it’s how you translate them into practice where we probably need to focus our efforts in terms of administration and compliance.”

The next topic covered during the interview related to the concern of home office permanent establishments, especially if there is the potential for many small home office permanent establishments to be created. Deloitte asked Manuel de los Santos about the OECD’s initial thoughts on home office permanent establishments and whether the Commentary on Article 5 of the OECD’S Model Tax Convention on Income and on Capital will likely be further amended.

“That’s one of those issues that we intend to tackle first in this process, because we also think about this as a staged approach, where you start thinking about what are the quick fixes that we can do in order to help businesses to continue operating in an efficient and commercially rational way,” he said. “But at the same time, there will be larger questions that we will need to address, probably in the mid-term. And the home office permanent establishment is one of those that people are very familiar with.

“It is something that is not new to the OECD; there has been a lot of discussions in the past. It’s a matter of this now becoming more acute, but we know what we are talking about. I think it’s a conversation that should be relatively simple compared to other questions we are going to have.”

Deloitte pointed out in the interview that many businesses are keen to have a key number of days threshold included in the OECD’s Commentary on Article 5, in the belief that a presence for performing business activities there for only a certain number of days should not lead to a permanent establishment in the country abroad. This could, Deloitte suggested, be helpful regarding the increasing trend for limited remote work (not only for permanent establishments involving a fixed place of business, but also for dependent agents). The same question arises in cases of a recurring nature (for example, on a quarterly or yearly basis, but for a more limited number of days).

“That’s one of the areas we want to focus on, because I don’t think the areas that you have been highlighting are among those where we see a high risk, e.g., of losing tax revenue,” Manuel de los Santos said. “We are, rather, thinking about those situations from the compliance perspective.

“If you have a situation where you have a home permanent establishment and that home permanent establishment might be undertaking routine activities, then perhaps the profit that should be allocated to that permanent establishment and the compliance cost are not equivalent, and, therefore, there might be a simpler solution that helps tax administrations to administer the system but also MNEs to have a simpler compliance process in that respect.

“All the comments that we are receiving, such as considering safe harbours or threshold rules, they are incredibly helpful. We also see that some jurisdictions are already starting to talk bilaterally and implementing those types of approaches. Even if they are intended to be on an interim basis, I think they are going to be good food for thought for us going forward.”

As part of the next question, Deloitte elaborated that, in practice, tax authorities take different views of the importance and meaning of the term ‘at the disposal’ in the Commentary on Article 5. For some, a factual right to use is sufficient. This could contradict, for example, other tax authorities’ views, often with the result that one country does not accept the foreign permanent establishments. The question is whether, as part of the work on remote working, that concept of being ‘at the disposal’ will be revisited and/or clarified.

“What I can’t tell is whether we are going to be able to fix those divergencies that we know exist,” Manuel de los Santos said. “But I can tell you that, in the context of the scoping out [of] this exercise, that’s one of the issues that have come up, along with the issue of the home office permanent establishment, that is on the table. We recognise we have an issue here; we just now need to see whether we have the capacity in terms of priorities to actually fix that one. Definitely, it’s going to be something we are going to be looking at in the future.”

There are perhaps two key areas of business interest, as the OECD Inclusive Framework continues its work on remote working and global mobility. The first is whether the OECD Inclusive Framework can establish safe harbours; for example, covering aspects such as the number of days that can be spent working in another country before a permanent establishment need be considered, expanding the definition of auxiliary activities, and providing further guidance on permanent establishment creation through using a home office.

The second is whether the OECD Inclusive Framework members can introduce simplifications, especially where any profits that would be attributed to a home office permanent establishment relate only to a ‘routine’ activity.

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