PODCAST: Rising tax risks of a mobile workforce

In this edition of Business Law Focus, host Evan Pickworth is joined by Michael Hewson, founder and director of Graphene Economics to discuss the tax risks faced by an increasingly mobile workforce.

For companies with operations in more than one location, there’s often a need to move employees between operations, be it for short business trips or for longer term work arrangements. From a corporate perspective, where employees work remotely in another country, it is important to evaluate whether the individuals give rise to tax exposures for the business, such as permanent establishments, or potential recharacterisation of transactions for transfer pricing purposes. There are also tax risks individuals need to be aware of, including exchange controls.

Listen to the conversation:

The Context

Transfer pricing (TP) relates to the setting of the price for goods and services that are sold between controlled (or related) legal entities within an enterprise, for example a parent company and its subsidiaries. TP principles govern how all transactions are accounted for, and how profit is distributed, depending on the transaction value created by each entity. The first TP-related tax risk that might come to mind relating to the movement of people is the corporate tax risk of creating a permanent establishment (PE).

There are also several personal tax considerations linked to PEs that businesses need to be aware of, including the legal status of employees.

Companies need to abide by the laws of both the country where their employees are working and the country where their head office is located. The compliance requirements may vary significantly from one country to another, leading to increased complexity and potential errors.

International companies moving employees across borders face various compliance issues related to employment taxation, from the need to set up a payroll to effect income tax and social security withholding, to the local or head office tax authorities. This can also extend to the need to register for associated levies and to comply with mandatory reporting, placing an enormous administrative burden on companies.