Many companies now have their management and employees working from a variety of new locations, and possibly new countries. From a tax perspective, it is important to track exactly where activities are being carried out from as new global tax obligations could arise.
If staff have returned to their home country as a result of COVID-19, this could easily give rise to the need to register with the local tax authority for payroll taxes. However, it could also mean a new taxable presence for the company itself, as well as challenges for how the transfer pricing should be determined across multiple locations.
Permanent Establishment
As soon as a business has employees based in a country, there is a need to consider whether to register for and pay corporate taxes. This will always require application of the local laws and relevant tax treaty (if there is one), alongside considering any recent guidance that has been provided by the tax authority.
For instance, in the UK, HMRC do not consider a non-resident company to automatically have a taxable presence after a short period of time in the UK, typically less than 6 months. However, different tax authorities have different thresholds, and companies should carefully review where they have staff working and understand how the local tax rules may be applied to their activities.
Corporate tax residence
Any recent location changes may affect the effective management of a company, for instance if directors are performing board duties and making key decisions from a new country. The corporate tax residence of the company may have changed and with it the possibility that exit taxes and new taxing rights arise.
The OECD view is that temporary changes should not affect the location of the effective management of a company. It is felt that all relevant factors must be considered, and not just the exceptional and temporary position, to determine where a company has its place of tax residence.
Where there have been location changes, groups should seek to identify where the place of management of each company is likely to reside and whether there could have been a change in its tax residence. As always, companies should ensure they maintain a record of the facts for production to a tax authority if required.
Inter-company transactions
It is also important to review how changes to the global business strategies and operations may have affected the transfer pricing opportunities and risks for the business. Groups may need to quantify and adjust transfer pricing policies for exceptional events, and all changes to the following should be reviewed:
- Staff
- Productivity and sales
- Financing transactions
- Delivery and supply chain variations
- Intellectual property valuations
- Head office services,
- Assignment of risk across the group
The tax position in each country should be considered, including expected profit and loss profiles, to identify what charges are now appropriate, and whether actions can be taken to remove inefficiencies.
Different transfer pricing rules apply around the world and exemptions for small or medium-sized enterprises may apply in some countries. Where exemptions don’t apply, documentation will be important for penalty protection. Transfer pricing documentation should always capture the functions, risks and assets employed by each group company and the value that a company brings to the group’s operations. It should be updated at least annually and/or as business models change.
Conclusion
With all the change that is being imposed on business, there is likely to be an increased focus from global tax authorities. Every country will want to protect its tax base and having employees based in their country is an obvious starting point for tax authorities to raise enquiries and challenge transfer pricing policies. Governments are responding in unprecedented ways to support their economies and who knows how things will develop and what actions are taken so that tax revenues are not significantly eroded in the future.
Menzies is a top 20 leading firm of accountants, finance and business advisors that operate out of a network of offices across Surrey, Hampshire and London, providing our clients with easy access and local knowledge. Described as the ‘best performing firm outside of the top 10’ by Accountancy Magazine, Menzies has over 400 employees and an annual turnover of more than £40m.
