The media sector is among many making the uphill climb back to "normal." Demand for content is mounting, and productions have been picking back up—albeit with new restrictions. Yet with remote work and hybrid offices increasingly expected to remain well past the pandemic's eventual end, some media companies will likely face personal and corporate tax complexities that they may not have encountered before the crisis.
For instance, in light of the pandemic's disruptions, the 2021 Federal Budget proposes to temporarily extend by 12 months certain timelines for the Canadian Film or Video Production Tax Credit (CPTC) and the Film or Video Production Services Tax Credit (PSTC). These measures would be available on productions for which eligible expenditures were incurred by taxpayers in 2020 or 2021. The budget also proposes to provide temporary immediate expensing on certain property acquired by a Canadian-Controlled Private Corporation (CCPC). This would be limited to $1.5 million per taxation year, and only for the year in which the property becomes available for use.
To better understand the tax planning measures that media companies will need to consider, I spoke with Mirella Spanó, a Partner with KPMG's Canadian Corporate Tax practice in Toronto. Here are the highlights of our conversation.
Lesley Luk: What are the main tax issues media companies need to be thinking about during these times?
Mirella Spanó: As in many industries, media companies have seen a bulk of their employees shift to remote work, and it's already clear that not everyone is coming back to the office. In fact, a recent KPMG in Canada survey of Canadian workers shows that over three in four workers (77 per cent) like the idea of a hybrid office, while 71 per cent believe hybrid workplaces should be the standard.
It's also clear that working from home isn't possible for all roles in media. However, companies that manage remote workers will have to contend with tax considerations they may not have contemplated in the past. Specifically, some employees may choose to set up their remote office in an entirely different province or country altogether. When that happens, this may trigger a new permanent establishment (PE) or taxable corporate presence in that location, which becomes subject to tax laws specific to that new jurisdiction. Moving forward, employers will then be dealing with tax issues as they pertain mainly to payroll taxes, transfer pricing, and corporate tax.
LL: What are the main tax implications of the shift to "work from home," "work from anywhere," or a hybrid model?
MS: Well, the work-from-home revolution, including a hybrid which we are starting to see companies implement, has opened them up to new and complex tax considerations for employees who have moved away from the company's main jurisdiction and are now operating in a new location with its own tax laws. Granted, there may be some employees who are exempt from tax obligations in their host province or country, but employers may still need to undergo a filing requirement to ensure they don't have any remittance obligations.
There are also corporate tax obligations to consider with remote work arrangements. Any time an employee sets up a remote office outside their home location, they may be seen as creating a PE or taxable corporate presence in that location. The risk here is that foreign filing obligations may arise and profits attributable to the work performed by this individual could be considered taxable income for the company in the host country. Therefore, program managers should seek to confirm whether a cross-border remote work situation could create a taxable presence and PE for the company that is based in the home location.
Another important implication of the work-from-anywhere shift is transfer pricing. Pre-pandemic transfer pricing may not make sense anymore given the movement of employees and resources between a company's operations, whether that's throughout Canada or between international offices. Here again, companies will need to re-examine their allocation of resources during and following the pandemic. Intra-group pricing and arrangements should also be revisited to ensure positions are defensible when it comes time to pay tax.
It's important to note that there are tax treaties between countries, and there may be some leniency in some jurisdictions as companies adjust to hybrid workforces and post-pandemic conditions. That doesn't guarantee that remote individuals will automatically qualify for treaty exemptions, though. So, media companies will need to take stock of where their employees are setting up their "office" and what that means for their payroll and the company's tax exposure.
LL: Media companies often need to work in cross-border jurisdictions. What do they need to know about transfer pricing and other issues related to working outside one's home country?
MS: In the cross-border context, the same considerations apply. Again, payroll tax, corporate PE issues, income tax, and transfer pricing are some of the areas that could have a significant impact.
Since a cross-border remote worker may be subject to more than one jurisdiction's laws, it is essential to determine their tax liability in each jurisdiction. Even while an employee remains employed with the company in his home country, remote work arrangements may trigger host country payroll obligations for their employer.
Say a U.S. production company sets up a Canadian subsidiary to produce Canadian content on behalf of the U.S. In this case, the U.S. benefits from the Canadian services and proper transfer pricing would be required. To take it a step further, if the U.S. company sends its employees to Canada to assist with a production, Canadian payroll considerations may be triggered, in addition to Canadian PE issues for the U.S. entity.
On the flip side, if a Canadian production company establishes a U.S. subsidiary to enter into U.S. contracts and subcontracts the production to the Canadian parent, appropriate transfer pricing would be required.
LL: How is payroll being affected by the current situation?
MS: It's certainly becoming more complex for some, especially employers who are now managing teams that are working outside of the company's host province or country. So, employers must now also ensure these jurisdictional considerations are being set up and followed when it comes time to pay. And because of this, we're seeing some employers establish split payrolls, or "shadow payrolls," to ensure all employee tax considerations are being tracked.
LL: Finally, while the pandemic continues to drive certain expectations and behaviours, it will eventually come to an end. How should media companies be planning, from a tax perspective, for when that happens and the years ahead?
MS: Top of mind for CEOs is tax risk management. There have been and will continue to be significant changes in tax systems globally and, as a result, tax is becoming a top priority. The tax function should provide insights into the business so that tax considerations are addressed in real-time as business strategies are developed and executed.
In short: Be proactive. As the business contemplates new initiatives, expansions, or global partnerships, seek tax advice to ensure you don't inadvertently trigger consequences that may impede your recovery.