Remote Work Boom Sparks Industry Call for Clearer Tax Rules

Tax professionals are calling for more consistency in global tax rules covering remote workers, saying the current patchwork of approaches across jurisdictions is causing big headaches for multinational companies.

The OECD has been working on new guidance on workforce mobility and launched a consultation in November asking for stakeholder feedback. In their comments, practitioners and business groups detailed tax issues they want addressed by the organization, such as when a worker’s presence in a country makes a company’s business there taxable or what a high-level executive working overseas can mean for a company’s transfer pricing positions.

Remote worker issues “are often not driven by problems with current international tax principles, but by uncertainty and often administrative complexity in their application to new mobility patterns,” CFE Tax Advisers Europe said in a letter to the Organization for Economic Cooperation and Development.

Remote working hits a broad range of tax issues, the group said, including around the creation of permanent establishments—which happen when a company’s business activities go beyond mere ancillary services and create a taxable presence in a country.

The designation also subjects the corporate entity to transfer pricing rules, which require companies to price transactions between their related entities as if they were between independent parties.

“In some jurisdictions, the mere presence of an employee may immediately create a taxable presence,” the National Foreign Trade Council wrote in its letter. Other jurisdictions require a much higher level of activity. “This uncertainty is compounded where payroll reporting, withholding, and social tax obligations are triggered independently of whether a permanent establishment exists,” the NFTC said.

Movement of high-level executives and board members can complicate the application of transfer pricing guidelines, “particularly in relation to intercompany services and profit attribution,” the NFTC said.

Company Response

Companies are dealing with the uncertainty by adding restrictions on where employees can work, “often going beyond what is required by the broader business, to manage tax risks and compliance,” KPMG said in its letter.

This could impact a business’s ability to fully leverage remote work opportunities and potentially restrict hiring, business growth, and competitiveness, KPMG said.

Companies could potentially use a fragmented workforce as a strategy to avoid permanent establishment status and mitigate their tax bills, The Amsterdam Centre for Transfer Pricing and Income Allocation at the University of Amsterdam said in its letter to the OECD.

This could be done, for example, by “ensuring that, while an individual performs some non-strategic work abroad, they return to their State of residence to attend key meetings or make significant decisions,” according to the letter.

None of these tax challenges for multinational businesses are expected to go away anytime soon. In a KPMG survey, 37% of respondents said they expect the level of international remote working to increase in the next 12-18 months, while 38% said they expect it to remain the same. Just 11% said they expect it to decline.

Earlier this month, the OECD’s Council, comprising representatives from each of its member countries, approved a raft of updates to the organization’s model tax convention, including a section on worker mobility. The updates clarify that an individual’s home, or “other relevant place” such as a second home or a rental property, will be considered a place of business if the individual carries out 50% of total working time for an enterprise in that location over a 12-month period.

That section offered some additional clarity on when a worker’s activities create a permanent establishment.