• Daniel Foster, Director |

Some employees can’t wait to return to the office. Others are very happy to continue working from home – or from anywhere in the world other than the office. Business leaders have realized that some global teams are just as effective, if not more so, working remotely. There is a groundswell of support for this arrangement to continue, even across borders. If team members don’t need to be in the same office or even the same country, do we need to send so many people on international assignments anymore?

A paradigm shift

The great experiment in home working has been surprisingly successful in most organisations, in an otherwise very difficult time, both personally and economically. But as I reported in my last blog many employees have not only been locked out of the office, but locked out of the country where they should be working. This has created more than the usual tax compliance challenges for Global Mobility departments. It is perhaps ironic that global “non-mobility” has presented one of the greatest risks (and perhaps opportunities) for organisations managing an internationally mobile workforce. Global Mobility professionals have quickly had to shift from managing the implications of employees who are moving, to managing the implications of people who are not moving! A great paradigm shift is now underway again, as remote working / telecommuting becomes normalized and a new framework is developing to manage it on a more permanent basis. We have seen Global Mobility departments, in conjunction with Group Tax, begin to shift their focus from immediate crisis response to strategic planning for this new world of working. My focus, of course, is on the international tax aspects of this new framework, and this article will consider this topic in more detail.

International telecommuting models

The border closures and lockdowns of the last few months have seen two distinct, and mostly unintended, models of telecommuting emerge:

International tax implications

Model A has generally been considered unacceptable from a company policy perspective in “normal” times, except with respect to short business trips. Border closures have forced this scenario on many businesses, however. Model A presents a range of tax compliance challenges, namely:

  • Permanent Establishment: The employee may create a permanent establishment (PE) in country A for the employer in country B, requiring an attribution of profits to a branch in country A and triggering corporate tax compliance obligations. The OECD guidance on home office working states that this is a low risk while it is temporary and exceptional, but not necessarily in the long term.
  • Employer obligations: The employer in country B may have wage tax withholding and social security obligations in country A. Some of these requirements in certain countries may be temporarily relaxed during the crisis, but not permanently.
  • Residency: The employee may change tax residence status, which could have an impact on net pay as well as pension and social security status.
  • Indirect Tax: Employer in country B may have VAT exposure in country A.
  • Substance: If the employee is in senior leadership or a board member, location of decision making may impact corporate residence (place of effective management) and substance of HQ location. This could have knock-on effects for the transfer pricing / value chain model.
  • Immigration: The employee may not have the right to work in country A if they are a foreign national (employer in country B cannot provide a work permit for country A).
  • Labour and industry regulation: The employer in country B is exposed to labour law and other local regulations in country A for which it is not prepared or compliant. This is particularly problematic for highly regulated industries, e.g. financial services.

It is for all of the above reasons that traditional mobility policies have entailed transfer or assignment of employment to the location of physical work. This aligns with current international tax rules which are generally based on employees paying tax where they live and work, which is withheld by an employer in the same country, which claims a tax deduction for their cost against the revenue they have generated. These principles are unlikely to change in the medium term.

Model B has occurred over the past few months where employees have needed to begin roles at foreign affiliates but have been unable to physically move to that location. Many organisations have cancelled or postponed any international transfer or assignment of employment between group entities unless and until borders reopen. Business units have, however, needed these people to begin their roles, wherever they happen to be in the world. Understandably, the business did not care whether they worked from home in country A or country B, provided they got the job done. In some cases, these employees have had their titles, reporting lines and compensation changed, even if their legal employer and location did not.

This model has always existed to a small extent, certainly for specific projects and regional/global roles, and, I suggest, is more likely to survive the current crises than Model A. Indeed it seems likely to become the go-to “work around”.

This model presents far fewer of the tax compliance risks described in Model A. Certainly, there remains a permanent establishment risk, even where the individual is not legally an employee of the foreign affiliate. Should that individual create a permanent establishment for Company B in country A, profit attribution would be required (applying transfer pricing principles).

It also poses a potentially more complex question around transfer pricing, even where no PE is created. Where these arrangements are temporary (as currently under lockdown), Finance and Group Tax may not require the costs to be charged from the employing entity to the affiliate beneficiary of the employee’s services. But in the longer term a transfer pricing position should be taken in such cases if they become permanent:

  • The employing entity may not be able to claim a corporate tax deduction for the employee’s costs if they are not productively contributing to that entity.
  • The employing entity should be compensated, at an arm’s length basis, for the provision of their employee’s services to the foreign affiliate. The appropriate methodology would need to be determined and documented, i.e. cost-plus or other.

If international telecommuting becomes more common post-COVID-19, as we expect, and hundreds of employees wish to live and work in one country for the benefit of a group company in another country, then robust guidelines for implementation to cater for the transfer pricing implications will be essential.

New frameworks

Large organisations typically offer a range of mobility policy options that are appropriate for the particular circumstances, whether it is Permanent Transfer, Long-Term Secondment, Short-Term Secondment, Commuter or Business Traveller. Among other things, these policies provide guardrails to ensure that international moves are undertaken in a tax compliant way, within a defined process for selection, assessment, cost accrual, equity flagging, compensation data collection and distribution to payrolls, etc.

Similarly, “non-mobility” policies will be required to provide appropriate guardrails for international telecommuting. These will likely involve implementation of Model B, above, in a compliant way. Consequently, the main focus will be to ensure corporate tax compliance, rather than employee tax or social security compliance, which would remain largely unchanged for the local employer.

No doubt a variety of frameworks will emerge. I present here the broad outline of two potential options for consideration, to operationalise Model B.

"White List" approach

The aim of this approach is to simplify the corporate tax implications of the arrangements by limiting them to, for example, a defined combination of countries and roles. . This “white list” should have a number of objectives in mind:

  • Eliminate as far as possible the potential of creating permanent establishments. Therefore, roles which involve the habitual exercise of an authority to conclude contracts in the name of the foreign entity should not be eligible for these arrangements. Similarly, non-treaty countries and tax authorities which take an overly broad, vague or aggressive position on PE should be out.
  • Include roles where a cost-plus or similar charge under a standardized Service Level Agreement (SLA) is most appropriate for the service provided by the employing entity to the beneficiary entity by the individual. Conversely, where the individual is providing services as part of a more complex value chain and cost-plus is not appropriate, or substantial adjustment to transfer pricing models would be required, then such roles should be excluded. Of course there may be circumstances where cost-plus and SLA is not needed, however this would entail local advice to confirm.
  • Roles which contribute to the substance of the enterprise, particularly at executive committee level, should be excluded. Similarly key senior leadership roles at functional and divisional level may not be appropriate.
  • Global and regional roles (other than sales and senior leadership) may be appropriate, particularly if not currently handled in a consistent or entirely compliant way.
  • Individuals providing services which are locally regulated should be excluded or referred first to appropriate legal and regulatory compliance counsel.
  • The policy should discourage employees from moving to low tax countries. It should also not encourage behaviour where employees can shop around for roles with high compensation based in countries with low costs of living.

Ultimately, such an approach may substantially narrow the roles and countries where telecommuting arrangements are feasible. However, it would also open the door for such arrangements without allowing a non-compliant and inconsistent “free-for-all”.

Global employment company

Many large organisations already use global employment companies (GECs) to manage international mobile employee populations. Typically the employee to be seconded is hired into the GEC and immediately assigned to a company in the location where they are needed (instead of being seconded by their current employer entity). There is potentially a use for GECs in telecommuting arrangements as well, although, again, perhaps limited to certain circumstances.

Theoretically at least, GECs can isolate the costs and risks in one entity, reducing complexity and compliance costs, and simplifying the SLAs and profit allocations, as compared to having dozens of different entity combinations involved.

GECs could be used to aggregate and distribute services (being individuals and their roles) to the rest of the group, without the traditional relocation of the actual employee. This would be useful where the services provided between entities under telecommuting arrangements reach a critical mass with respect to location/region. In this way the GEC becomes a management company or share service vehicle, which of course presents its own challenges.

A GEC is not a silver bullet, however. Where a GEC based in country A hires an employee working from home in country B and sells their output to an affiliate in country C, it is likely that the business will need to deal with the tax compliance obligations under both Model A and Model B above. So that is not necessarily a simplification.

The “white list” approach could of course be used in conjunction with a GEC to overcome some of these issues.


The home working experiment forced on us by COVID-19 has released a genie that will not be put back in the bottle. Many employees want to continue it, and many employers see that it works well. This is despite the challenges posed by expense policies, data security, IT infrastructure, insurance coverage, and the like. The international aspect of telecommuting has always been complex, as traditional frameworks were not designed to manage the mass uptake of such arrangements. Additional challenges around headcount reporting, compensation benchmarking, remote onboarding and performance management remain. Nevertheless, organisations will need to rise to the challenge and opportunity of the new world of work, and find a way to meet the needs of employees and business, as well as their tax compliance obligations. As a result, we may finally see global mobility and corporate tax professionals spending more than the occasional coffee together!

I do hope that the proposals above assist in moving this conversation along. Many hurdles remain, however. Even in closely aligned Europe, where these arrangements should be easiest, there are significant considerations around the hiring out of workers, and the social security co-ordination regulations. But no doubt such regulations will evolve, just as the international tax system is evolving to capture the digital economy, and soon, perhaps, the digital workforce.

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