OECD publishes updated Model Tax Convention

PE Assertions

13 KPMG member firms were aware of their tax administration asserting that the presence of a foreign company’s employee in the jurisdiction constituted a fixed place of business.

They were then asked how frequently they saw an undisclosed fixed place of business PE asserted by their jurisdiction’s tax administration on the basis of employees working remotely. Only three jurisdictions — Norway, Poland, and Sweden — considered such assertions frequent.

Member firms were also asked if they expected the updated OECD Commentary on remote working to be applied by their tax administration when examining fixed place PE issues under an applicable treaty. The OECD Secretariat’s view is that these updates should be used to interpret existing treaties which contain the relevant language from Article 5 of the OECD MTC, as the changes in the Commentary to Article 5 of the MTC were clarificatory. 16 of the jurisdictions, including the UK, expected the updated OECD Commentary to be applied to interpret existing treaties. India doesn’t expect the guidance to be applied, based on India’s reservations to the Commentary. The remaining five jurisdictions indicated they were uncertain, as their local tax administrations hadn‘t yet published a formal position.

What conclusions should be drawn from these questions? The risk of a tax administration asserting an undisclosed PE varies across jurisdictions, but particular care is needed in Norway, Poland and Sweden.

Some tax administrations have formal or informal policies to rely primarily on transfer pricing to resolve disputes, rather than to explore the PE route. This may offer an easier route to resolving disputes where they arise when a group has a local entity in a jurisdiction, but isn’t feasible when a group doesn’t have a local entity.

For remote working specifically, the updates to the Commentary to the OECD MTC are helpful and will be even more helpful when reflected more broadly in domestic guidance.

Senior Executives

Transfer pricing and PE profit attribution rules both place significant emphasis on decision making functions which relate to significant business risks and how key business assets are developed and exploited. Increased mobility of senior executives can raise difficult questions about which entity or entities those executives are working for when they perform their duties and what impact this has on allocation and attribution of a multinational group’s profits and losses. We asked member firms whether they had seen their tax administration asserting that executives in senior or global roles, although employed by a local operating entity, were in substance employed by a foreign entity and constituted a PE of that entity. Seven jurisdictions had experience of their tax administration examining ‘economic employer’ issues. This reinforces the need to carefully weigh up the risks and opportunities associated with remote working arrangements for senior talent and how such arrangements are structured.

On transfer pricing methods, 16 jurisdictions had seen their tax administration challenging the use of a basic cost-plus return to remunerate the local entity employing senior executives. Where cost plus had been challenged, member firms were asked what alternative returns tax administrations had argued for (multiple options could be chosen). 13 jurisdictions reported arguments for a higher cost-plus return, 10 for a share of residual profit (higher than we might have anticipated), and seven for a revenue share.

Six member firms were aware of their tax administrations agreeing, through advance tax rulings or advance pricing agreements (APAs), concluded since 2020, to cost-plus remuneration for dispersed global management functions. This doesn’t necessarily indicate that other tax administrations would reject such APAs; it may instead suggest that businesses consider the risk of challenge, and therefore the benefit of seeking an APA, to be low.

Exit taxes on relocation of decision making functions

Eight European jurisdictions had seen their tax administrations asserting that an arm’s-length compensation payment, linked to future profits, would be due when a limited number of senior individuals with decision making authority relocated or ceased to be employed by a local entity.

It isn’t surprising to see Germany on this list given its transfer-of-functions regulations that go far beyond the business restructuring guidance in Chapter IX of the OECD Transfer Pricing Guidelines. More striking is that similar arguments are becoming more widespread in Europe.

Concluding remarks

This survey shows there are genuine risks of tax administrations challenging arrangements that don’t adequately account for geographically mobile workers or the dispersal of senior management. However, it also shows that tax administrations’ concerns vary, opening up the potential for more flexible mobility policies for jurisdictions where the risk of local challenge is lower. We would expect tax administration attitudes and approaches to remote working to continue to evolve and, with important work ongoing at the OECD, it will be vital for multinationals to actively monitor these developments and actively participate to ensure the business perspective is well understood.

If you would like to discuss your company’s remote working arrangements in light of the updated OECD Commentary and evolving tax administration practices, please contact one of the authors or your usual KPMG contact.

For further information please contact:

• Phil Roper
• Mike Lavan