Anyone, anywhere
Your CEO has just announced that people can "work from anywhere". Management believes that a totally flexible policy will attract and retain talented individuals and could save money by reducing their office footprint and recruiting people in lower cost locations. A likely consequence is some people working in jurisdictions where your business has no legal entity.
This raises several complex questions:
- How does your business know where its people are working at any one point in time?
- Does your business need to register for local payroll and social security in all the countries where its people are working?
- Does the business have a taxable permanent establishment (PE) in the territory because of its people working there?
Some businesses have tried to share the tax risk with their employees. For example, implementing a policy where people can work in overseas locations if they limit the number of days spent there, and if the individual is responsible for paying the relevant local taxes (including the employer’s taxes, for which the business reimburses them) and liaising with the local tax office to agree the arrangement.
What does this mean for transfer pricing?
The transfer pricing challenge created by a dispersed, remote workforce is that the roles and responsibilities of each person must be reviewed to understand whether they create a PE and if they do, what profits should be attributed to that PE.
In practise, many businesses look to apply a cost-plus remuneration (ie, allocate profits to the PE based on the full costs of the person working there plus an arm’s length mark-up), for one or two people in a territory. This may be reasonable if those people represent a very small proportion of the overall headcount and they perform low-risk, routine services for your wider business.
However, if even one person in a given country is part of a group’s global or senior management team then a cost-plus methodology may not be a fair remuneration for the efforts of that person and an alternative transfer pricing method, such as a sales commission or a profit-split model, may be better suited.
Scattered senior management
The business has operations in over 30 countries and global management are spread across Europe, North America, and Asia. Some members of the global management team are living in territories where they're not employed by the local operating entity. This is a highly centralised operation with the global management team controlling and managing the key risks in the business.
A widely dispersed management team can give rise to issues, such as:
- where the management team are also directors of entities, where are those entities managed and controlled for tax purposes?
- where are the individual members of the management team tax resident?
- if the management give rise to PEs, what are the transfer pricing implications of that PE?
What does this mean for transfer pricing?
Given the seniority of the global management team and their role in controlling the key risks, it's likely that they represent the provision of a non-routine, value-added service to the wider group, and may be fundamental in the development of the group’s intellectual property.
Your business may need to explore whether a value-add fee or profit-split transfer pricing methodology applies with the result that some profit may be allocated to the locations where the senior management is located, even if that's different from the location of their employing entity.
A new world for transfer pricing?
A globally mobile workforce may be good for attracting and retaining talent, but it can create tax issues through the creation of ‘a taxable presence’ in new locations for the business along with the associated filing, administration, and local tax payments.
Determining the right transfer pricing methodology: cost-plus method, a value-add fee, profit-split, etc, can be complex because you may need a lot of information about the roles and responsibilities of each person who is located outside their ‘home’ country.
For more insight and guidance, get in touch with Liz Hughes.
