FD Intelligence

BEPS: don’t forget your people

With the release of the OECD’s conclusions from the three-year Base Erosion and Profit Shifting (BEPS) project, the global tax community is undergoing fundamental change as it focuses on how it will alter the international tax landscape.

It is critical to recognise that the impact of the project extends beyond corporation tax. The location of the workforce, including business travellers and home workers, could now have far wider tax, cost and risk implications for the business.

Communication and collaboration between the various parts of your business is more important than ever. Below we have outlined five key issues that should be considered across the HR, global mobility, finance and tax teams to manage global tax compliance obligations arising out of the new BEPS regime.

Permanent establishments

What your Finance Director should be aware of

The definition of permanent establishment (PE) will be widened to include a new definition.

Where staff "habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise" in a territory, then a PE may also now exist in a different place from where the contract is signed.

What your HR Director should be aware of

The actual conduct of the employee will be key to whether a PE exists. It may no longer be sufficient for employee contracts to state that sales staff do not have authority to conclude contracts to avoid a PE. 

Where staff, especially those working remotely from home, work in a country different to where they are employed, there is an increased risk that a PE may be created. This will result in employer reporting obligations and liabilities in that country.

What your business should be doing now

Assess the location and role of sales staff together with the significant activities in the sales process before the conclusion of contracts.

Educate the business to identify PE risks and implement processes to review and manage any PE risk that could be created by globally mobile employees, home workers, or business travellers.

Country by country reporting (CbCR)

What your Finance Director should be aware of

Any group with turnover of more than €750 million will be required to complete a CbCR.  This will give tax authorities a global snap shot of key data including turnover, taxable profits and number of employees by territory.

What your HR Director should be aware of

CbCR will provide greater transparency on the number of employees in each location. This information will be based on whether employees are economically employed rather than where they are legally employed. Tax authorities will have access to more information which may result in a review of employer obligations if these have been implemented purely based upon legal employer.

What the business should be doing now

Put in place robust processes so you know where your key employees and senior executives are located and working at any one time.

Business travellers

What your Finance Director should be aware of

Consider the length of time and activities carried out by employees when they are working outside their 'home' jurisdiction as this may result in an unexpected PE which can result in direct tax filing requirements. Penalties may apply if missed.

What your HR Director should be aware of

Business travellers may not incur income tax liabilities in a country under the provisions of a Double Taxation Treaty between the home and host country. Even where treaty exemption applies, there may still be reporting obligations required in that country (in the UK this is via a Short Term Business Visitors Agreement – STBVA).

Time spent in a particular country and where employment costs are borne are key for treaty exemption to apply (economic employer in some countries can also be relevant). As BEPS may now change how PEs are created and where employment costs are borne, treaty exemption may now not apply. Reporting obligations along with tax and social security liabilities may arise as a result.  

What the business should be doing now

Review the processes you have in place to track groups of employees, such as business travellers including how long they are spending in each country and what they are doing.  Also consider whether there will be any direct or indirect charges for the business travellers to the location they are visiting as this may impact the business traveller tax reporting obligations in the location visited.

Seconding employees

What your Finance Director should be aware of

Consider who is ultimately bearing the cost for the secondment. If costs are recharged between entities, a mark-up on the costs may be necessary to account for additional value in the transfer.

What your HR Director should be aware of

The time spent in a particular country along with where employment costs are borne (as well as any economic employer considerations) will typically determine the local payroll obligations and any withholding tax liabilities. The European Economic Area (EEA) social security position may also change upon the UK’s exit from the EU.

What the business should be doing now

Review your transfer pricing arrangements as it applies to your globally mobile employees, particularly for key individuals who may be considered to have added value to the business.

Ensure inter-company secondment agreements properly reflect the services performed and remunerate each entity accordingly.

Substance over form

What your Finance Director should be aware of

Where it can be established that profit levels achieved by group entities are not commensurate with the activities within a jurisdiction, tax authorities may challenge such structures. In particular, the location of significant people functions who can and do make strategic decisions will be important.

What your HR Director should be aware of

Where an overseas entity now requires substance, consideration needs to be given to the workforce that will be deployed there in relation to local employment laws, immigration and the correct operation of payroll for both local hires and expatriates, whether that be formal assignments or secondments, home workers, or in relation to business travellers.

What the business should be doing now

Review your operating models, in particular any locations which have material profits compared to few or no employees, and consider whether employees working on that business should also be located in the same jurisdiction. Consider the impact this will have on both your domestic and globally mobile workforce.

More information

Should you have any queries or would like to discuss any aspect of this article in further detail, please contact us using the contact details below:

Claire Avery-Smart

t. 0118 955 9124  

e. claire.avery-smart@uk.gt.com    

Thomas Jepson

t. 0207 728 2768  

e. thomas.jepson@uk.gt.com