The Base Erosion and Profit Shifting (BEPS) project led corporate tax reporting changes raise the profile of business travellers within an organisation. No longer is it purely questions for HR that are limited to potential payroll withholding and individual tax liabilities. It is vital for multi-national businesses to consider whether there is sufficient presence in a particular country to create a permanent establishment (PE) for corporate tax purposes.
Changing PE rules
The OECD’s on-going BEPS project has recommended a tightening up of the definition of a PE. While the OECD’s new draft guidance on the Attribution of profits to Permanent Establishments does not substantively modify the existing rules, changes to double tax treaties introduced through the BEPS Multilateral instrument will lower the threshold for creating a PE in certain countries. The intention is to prevent the artificial avoidance of PE status in tax jurisdictions.
As the changes to double tax treaties take effect during 2018 and 2019, this will effectively lower the bar for when a PE arises. This is likely to increase the compliance costs for businesses as well as introduce uncertainty.
Country by Country Reporting
The BEPS project is also driving more transparency for the future as a result of the introduction of Country by Country Reporting (CBCR) for larger multi-national businesses. Under CBCR, businesses are required to report various pieces of information including profits, taxes and number of employees, on a country by country basis. This will require them to have systems in place to accurately extract the necessary data, and also consider whether the picture painted is in line with how they would like to be viewed.
So not only will it be more important than ever for multi-national businesses to have processes in place to manage and control their PE position, their systems must enable them to comply with the wider transfer pricing and disclosure requirements arising from BEPS.
What systems and recording do you need?
Each business will need to determine what processes are appropriate based on their specific circumstances. However, generally they should consider providing clear protocols to internationally mobile individuals in terms of their activities in different countries, for example where individuals have regional or sales roles.
They should also have a mechanism to monitor the location of their cross border workers, for example when they travel overseas or work at home in cases where home is in a different country to their employer. This way, potential PEs can be identified early and proactively managed to minimise costs. The business can also minimise the risk of any reputational damage as well as the increased tax authority scrutiny that can arise when errors have previously been made.
Apart from the tax considerations there are other issues to factor in. Although EU nationals generally have free rein to travel within the EU, moves between other countries will almost certainly involve obtaining the necessary work permits/visas. Some countries will have additional requirements such as registering with the local police or town hall. It is not uncommon for commuters to start working in a country before the necessary paperwork is completed and there has even been the occasional case of an expat being arrested as a result – this does not usually go down too well! It can also impact on the company’s future ability to do business in that location if they are prevented by the relevant authorities from doing so due to prior non-compliance.
One longer-term factor often overlooked is pensions. Employees invariably want to remain within their home country scheme and continue contributions in that country. Although this is nearly always possible where an individual remains employed and resident there, it may not necessarily provide optimum tax relief. Pension schemes in one country are not always recognised as allowable retirement vehicles in other countries. This can lead to unexpected tax charges, reduced tax relief and therefore a reduction in overall return on investment upon retirement.
Forward planning is essential to minimise disruption to the employee and the business and to quantify hidden or unknown costs; robust tracking measures must be implemented to ensure global tax compliance. In this digital age, companies are turning to technological solutions to help in their continued drive to keep abreast of the rapidly changing tax map. Online platforms, such as BDO QuickTrip, combine with a smart ‘phone app to provide a simple yet innovative solution to enable companies to track their business travellers through the use of GPS (although this function can be turned off if required). A system of built-in alerts notifies you when a tax event may be on the horizon so that planning measures can be implemented and reports can be produced throughout the year to ensure you actively manage your compliance obligations and plan ahead.
For help and advice on your internationally mobile employees, please contact Andrew Bailey.
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