OECD Tackles Tax Complexities of International Remote Work

Five years after the Covid-19 lockdowns, there has been a significant increase in enterprises looking to enable cross-border remote work, partly due to a desire to expand into new markets but predominantly due to increased demand from individuals.

Recognizing the uncertainty this causes under the existing (pre-Covid-19) international tax rules, the OECD published a public consultation document on Nov. 26 to help diagnose the key issues.

This followed the update to the official commentary on the Organization for Economic Cooperation and Development’s model tax treaty, which includes some important modernization in the guidance that applies to the types of cross-border work that we increasingly see in practice.

Multinational groups, responding to these new ways of working, will need to be mindful that these practices do not inadvertently create a taxable presence resulting in additional compliance burden, potential double taxation, and disputes with tax authorities.

Practical Issues

For multinational groups with remote workers outside their home jurisdiction, one of the key challenges is “permanent establishment” or PE risk—the potential for an individual’s work from a specific place in another jurisdiction to give rise to a taxable presence in that jurisdiction.

This creates local reporting requirements and a liability to tax on a proportion of the company’s profits.

The revised OECD guidance allows us to make some bright line distinctions between different scenarios.

Consider a UK-based company that has two internationally mobile workers, Greg and Ed.

• Ed is asked by the UK company to work in Germany for a few years because it has a potential new market there. Because he already owns a house in Germany, he uses that as a home office, averaging about seven out of every 12 months working in Germany with the rest of his time spent at the London office.
• Greg has decided to work from his holiday home in France for the summer months and on average spends four out of every 12 months working there. This is inconvenient for the UK employer, which would much rather that he worked from its London office. The company has no customers or suppliers in France.

If Germany and France apply the new OECD guidance to the PE question, it should be clear that the UK company does have a PE in Germany but not in France.

The technical grounds for this are found in the new OECD commentary on the circumstances in which cross-border remote work can create a fixed place of business PE of an enterprise. There are two key questions:

Is the location of the remote work “fixed”? Does the individual spend more than six months working from a specific place, such as a private residence, in the jurisdiction in any 12-month period? If yes, then their location of work is fixed and may create a fixed place of business PE, subject to the second question.

Is there a commercial reason? Does the individual’s presence facilitate the employer carrying out its business in the relevant jurisdiction? If yes, they can create a fixed place of business PE.

Importantly, the place where the individual is performing their work, often their home, doesn’t need to be used by the employer for any other reason, as long as the individual’s remote work is enabling the company to carry on business there.

Examples of relevant commercial reasons include meetings with customers, setting up a new customer base, identifying suppliers, providing services to customers, and collaborating with businesses.

The mere presence of clients in a jurisdiction where remote work is undertaken isn’t sufficient to constitute commercial reason if there is no other commercial rationale for the business to require an individual to undertake work in that jurisdiction.

Some Uncertainty Remains

The updated commentary doesn’t provide any new guidance on the risk that an individual may create a foreign PE by acting as a dependent agent—where an individual (working in the “wrong” jurisdiction) acts as an agent for a company by signing contracts, taking part in negotiations, and making important decisions.

The dependent agent PE risk means that employers can’t solely rely on the “50% rule” when assessing PE risk, particularly in relation to key or senior individuals, and should continue to monitor the activities of their cross-border remote workers.

The points made above about home offices and remote working are a step forward in updating the international tax rules to catch up with modern work practices.

We advise companies operating internationally to remain alert to the risks and to monitor developments from tax authorities and international bodies such as the OECD, as we expect this is not the last word on cross-border working.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Gregory Price is a partner with Macfarlanes.

Edward Hughes is an associate with Macfarlanes.

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