INSIGHT: Transfer Pricing Considerations for Remote Workforces

April 7, 2020, 7:01 AM

The Covid-19 outbreak has led many countries to implement border controls as a temporary measure to curb infections, and many employers find their employees working from home or in locations outside the jurisdictions where employers typically operate or are located. International travel restrictions affect boards of directors and employees of multinational enterprises, alike, who find themselves marooned in various different locations around the world. Those unexpected remote employment and business activities may trigger a local tax presence for which the employer has not planned. This will in turn give rise to international tax complications, including increased permanent establishment (PE) risks and in some circumstances, a change in corporate tax residency.

Below, we discuss the issues arising from these remote business and employment activities as well as the risks that such remote activities could cause if they continue after the Covid-19 crisis is resolved (where personnel continue to desire or demand to work remotely). There are individual tax implications for employees working remotely abroad that are not discussed in this article but are worth considering together with the tax implications for corporations.


Risks of Creating a Fixed Place of Business (Voluntary vs. Involuntary) in the Jurisdiction of the Remote Workplace

If the remote working location of the employee is in the same jurisdiction as his/her employer, such arrangement should not trigger any international tax implications. (Employment-related tax issues and (in the U.S.) state and local tax issues can still be a problem under such circumstances but are not addressed in this article.) However, where the employee’s home base or location of temporary presence or quarantine is in a different country, the employee’s business activities might trigger PE assertions and potential corporate income taxation in the other country of the profit attributable to such PE. PE issues may also arise within certain countries (e.g., Canada’s provinces/territories generally impose income tax on corporations with a PE in the province/territory).

According to the Organization for Economic Cooperation and Development (OECD) Article 5 (1) of the Model Tax Convention on Income and on Capital 2010 (“MTC 2010”) as well as OECD Art. 5 (1) of the Model Tax Convention on Income and on Capital 2017 (MTC 2017), a PE is any fixed place of business through which the business of an enterprise is wholly or partly carried on. To be characterized as a PE, the place of business needs a certain degree of permanency, i.e., it is not of a purely temporary nature (Model Tax Convention on Income and on Capital: Condensed Version 2010 (OECD Commentary 2010), Art. 5 mn. 6, Model Tax Convention on Income and on Capital: Condensed Version 2017 (OECD Commentary 2017), Art. 5 mn. 28).

A home office of an employee may qualify as a PE in some jurisdictions, if the use thereof is not intermittent or incidental and provided the foreign enterprise requests the employee to use the home office (OECD Commentary 2017, Art. 5 mn. 18). In other jurisdictions (such as Canada), an employee’s home office generally will not constitute a PE. (In Canada, an employee’s home office should generally not constitute a PE of the employer provided that the employer does not bear the cost of or exercise control over or have access to the employee’s home office, and that the employee’s home office is not identified with the employer (e.g., on the employer’s website).) However, in all cases the presence has to be continuous and thus, of a certain permanency.

Generally, the OECD considers six months to be a requisite time period, unless the nature of the business requires less time. Countries, however, have varied interpretations on what is an appropriate time (OECD Commentary 2017, Art. 5 mn. 28, OECD Commentary 2010, Art. 5 mn. 6). It is generally irrelevant whether the fixed place of business was put in place intentionally or whether circumstances led to such location becoming a fixed place of business.

As of now, expectations are that the Covid-19 crisis will be resolved in less than six months. Therefore, personnel should be able to return to their usual operations prior to the lapse of this period. Companies may want to consider adopting guidelines for employees working remotely to minimize PE risk in the future in preparation for a second outbreak or another crisis that creates similar safety conditions.

In addition, many countries are considering legislative measures to clarify that the forced home office of an employee does not create a PE. For example, the Australian Taxation Office (ATO) has set up a Covid-19 frequently asked questions webpage, which addresses, amongst others, the issue of whether the presence of employees in Australia may create a PE in Australia (see https://www.ato.gov.au/Individuals/Dealing-with-disasters/In-detail/Specific-disasters/Covid-19/?anchor=Internationalbusiness#Internationalbusiness). The initial OECD guidance on tax measures that countries should consider taking in response to Covid-19 did not include PE mitigation, however.

According to the ATO, it will not use compliance resources to determine if a foreign company has a PE in Australia if such foreign company did not have a PE in Australia before being impacted by Covid-19, and the presence of employees in Australia is the short-term result of them being temporarily relocated or restricted in their travel. France and Luxembourg have made similar announcements applicable to situations where employees usually travel cross border to their work from neighboring countries (France MOF Explains Work From Home Condition for Cross-Border Workers During Coronavirus Pandemic, Transfer Pricing Rep. (Mar. 24, 2020); Luxembourg MOF Explains Force Majeure Condition for French Cross-Border Workers During Coronavirus Pandemic, Transfer Pricing Rep. (Mar. 24, 2020)). Although helpful, these legislative developments should be closely monitored.

In any event, businesses should revert to their normal business operations as soon as reasonably possible to ensure that temporary work from home arrangements do not become permanent. In particular, businesses should evaluate the extent that they are already running into issues with employees having worked in remote jurisdictions, or the potential desire of employees to continue to work in remote locations after the crisis has passed in order to not slip into unwanted PEs.

Certain treaties contain other PE deeming rules that could be triggered by a remote workforce. For example, the Canada-U.S. tax treaty may deem an enterprise of one state to have a PE in the other state if the enterprise performs services (for example, through employees) in the other state for an aggregate of 183 days or more in any 12-month period with respect to the same or connected projects for customers who are residents of or have a PE in the other state. This deeming rule does not require the services to be performed from a place that has any degree of permanency, or even from the same place. Further, these services have to be performed “for customers,” such that activities performed for the company itself (e.g., stewardship activities) generally should not count for this purpose.

For jurisdictions without comprehensive double-taxation agreements or situations where no double-taxation agreement applies and domestic law controls, the above-mentioned concepts do not govern. Thus, it will be crucial to review the remote workforce arrangements to identify the tax risks associated with domestic laws on PE and to consider the necessary mitigating steps.

For instance, whether remote business activity in the U.S. will trigger a U.S. taxable presence under domestic law depends on factors that can differ from the typical treaty analysis. A foreign corporation is subject to tax under U.S. domestic law only if it is considered to have sufficient nexus (i.e., a “U.S. trade or business”) and derives income effectively connected with such U.S. trade or business (i.e., “ECI”). (Tax Code Section 882(a)(1)) Whether a foreign corporation has a U.S. trade or business is generally a low threshold (i.e., it does not necessarily require a fixed place of business); however, this does not automatically subject a foreign corporation to U.S. tax—it must still earn ECI.

Whether income is ECI depends on how the income is sourced under U.S. domestic law, so sourcing rules under U.S. domestic law become important. There are different rules for income derived from the performance of services, the sale of goods, or from passive investments, which impact the ECI determination.

In general, U.S.-source active business income associated with a U.S. trade or business is considered ECI. (Section 864(c)(3)). “Fixed or periodical” income (such as dividends, interest and royalties) requires an analysis as to whether such income was generated from the U.S. trade or business. Section 864(c)(2).) In contrast, foreign-source active business income is generally not ECI unless such income is attributable to a U.S. “office or other fixed place of business” (and if the company cannot further avail itself of further defenses in case of the sale of inventory). (Section 864(c)(4). See also Section 865(e)(2), which can resource income from the sale of property as U.S., thereby making it U.S. source ECI under the residual force of attraction rule in Section 864(c)(3).

In particular, there are some technical rules that resource foreign source inventory sales income as U.S. source (and thus subject to taxation in the U.S.), where the income is attributable to a U.S. office and there is no “foreign material participation” by an office outside the U.S.. Sections 865(e)(2), 864(c)(3).) Whether there is a fixed place of business depends on the facts and circumstances —including the use of fixed facilities through which a foreign corporation engages in the trade or business, while not having a fixed a place of business where the foreign corporation uses someone else’s office on a relative sporadic on infrequent basis (Treasury Regulations 1.864-7(b)(1), 1.864-7(b)(2)).

Dependent Agent PE (Occasional vs. Routinely Entering Into Contracts via Remote Workforce)

In addition to a remote home office constituting a fixed place of business, employees contracting outside of the home jurisdiction may also constitute a dependent agent PE. According to Art. 5 (5) MTC 2010, a person is a dependent agent if that person acts on behalf of the foreign business and has, and habitually exercises, in a different country an authority to conclude contracts in the name of the foreign business. (In the context of U.S. domestic principles, with respect to the sale of goods, ECI can be found where there is a U.S. office or fixed place of business of another that actively participates in the U.S. in soliciting the order, negotiating the contract, or performing other significant services necessary to the consummation of the sale. Treas. Reg. 1.864-6(b)(2)(iii).)

The MTC 2017 update broadened this definition to include commissionaires and other individuals, who habitually play the principal role leading to the conclusion of contracts in the name of the foreign company that are routinely concluded without material modification. Whether the new definition applies depends on the applicable treaty and the position the respective country took in the Multilateral Instrument (Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, available at https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-BEPS.pdf (visited March 25, 2020)) with respect to the application of the update. Note that the U.S. has not signed the MLI and existing double tax treaties are therefore not impacted.

Under both definitions, the individual has to exercise the authority repeatedly to create a permanent establishment. Occasional and one-off actions should not rise to the level of creating a remote contracting agent. While neither the OECD Commentary 2010 nor the OECD Commentary 2017 mention a specific period of time to create such a PE, the commentaries make reference to the general guidance issued for fixed places of businesses (OECD Commentary 2017, Art. 5 mn. 98, OECD Commentary 2010, Art. 5 mn. 6.3). Therefore, the above-mentioned six-month period, as well as relevant guidance, should be considered.

If the restrictions caused by Covid-19 are lifted prior to the lapse of the six-month period, the risk of a dependent agent PE might be limited. However, businesses are well advised to consider how to move back to their regular business operations as soon as possible as to document the extraordinary nature of the current situation to clearly express that none of these remote measures were expected to occur or expected to be a permanent manner of operation. Although the intent of a company generally does not have a bearing on the PE analysis, such contemporaneous assertions may be helpful in case a tax administration tries to assert that the business operations were not solely caused by the Covid-19 circumstances but had already been contemplated by the foreign enterprise.

Profit Allocation in the Event a PE Found

If a PE was in fact constituted from remote work arrangements, the profits attributable to this PE generally would be taxable in the remote jurisdiction. Typically, where there is a comprehensive double-taxation agreement in place, the profits of the foreign enterprise will be subject to tax where the PE is situated. This inevitably poses a challenge because it requires a company to undertake an exercise to determine profits for a deemed arrangement where the PE is treated as a separate and independent enterprise and is entitled to an arm’s length return.

Guidance on the Authorized OECD Approach (AOA) recommends that the profits to be determined are the profits which the PE is expected to make if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed through the PE and through other parts of the enterprise (OECD 2010 Report on the Attribution of Profits to Permanent Establishments, available at https://www.oecd.org/ctp/transfer-pricing/45689524.pdf).

Under the AOA, this would be equivalent to the profit any independent stand-alone business would have generated had it operated in such jurisdiction. If the activity is a sales activity, presumably the profit would be that profit generated through the sales concluded by the PE. In other situations, the taxable profit might be calculated on the basis of a cost-plus service remuneration. Which method applies depends on the underlying facts and is based on ordinary PE profit allocation determinations.

The domestic laws in some countries, like Canada, prohibit recognition of the types of notional transactions that would be necessary to fully apply the AOA, and it cannot be applied absent a specific agreement between the competent authorities of the respective treaty partners. Such an agreement exists between the competent authorities of Canada and the U.S. so the full AOA applies as between Canada and the U.S.. However, it does not yet apply vis-à-vis any other treaty partners.

In countries that have not adopted the AOA approach (e.g., Malaysia), the PE rules in their respective treaties, which are generally aligned to domestic law, will govern the treatment of the profits arising from the PE. (But note that under U.S. domestic law, ECI treatment is an all or nothing venture—if ECI is found, all the income of the foreign corporation that is considered ECI is subject to U.S. taxation (i.e., there is no profit attribution).)

Even if the Temporary Activities Do Not Appear to Rise to the Level of a PE, Are there Concerns if Employees Continue to Work or Undertake Business Activity in Such Remote Jurisdictions?

As mentioned above, businesses are well advised to monitor their remote operations closely and to return to their historical operations as soon as circumstances reasonably allow. Keeping the current temporary arrangements in place for a period longer than absolutely necessary might give tax authorities the argument to claim that the measures were never meant to be temporary or that a permanent presence has indeed been created. The PE will not start to exist from the time the measures could have been reversed, but from the time the measures were first implemented (OECD Commentary 2017, Art. 5 mn. 34, OECD Commentary 2010, Art. 5 mn. 6).


The Covid-19 outbreak may also result in MNEs having to change the location of their board meetings given substantial travel restrictions.

A company’s board of directors may be composed of individuals resident for tax purposes in various countries. In particular, as a result of acquisitions, an integrated business may have geographically dispersed board members. These board members may regularly meet in one location to conduct their board meetings, usually at the place of incorporation of the company. In a situation like the current Covid-19 crisis, where traveling is restricted but business has to continue, the board of directors is forced to find different ways of meeting and making decisions ideally without impacting the tax residence of the company in question. This might result in decision-making processes taking place in locations other than the place of incorporation, which in turn, might result in unwanted tax consequences.

Many civil law jurisdictions tie the residence taxation to the place of incorporation or the place of effective management. Meeting either criteria usually suffices to trigger residence and therefore, in some cases, worldwide taxation. Common law jurisdictions, such as the U.K., Canada and Australia, tie taxation to the place of incorporation and/or the central management and control of a company, which refers to the highest level of management authority in a business and which is where strategic decisions are taken or supervisory functions are performed (As developed in De Beers Consolidated Mines, limited (1906) AC 455, 5 TC 198, HL).

Most double tax treaties provide for a tie-breaker clause in their Art. 4 (3), which provides that a company being a resident of both contracting states (under domestic law) is deemed to be a resident only of the state in which its place of effective management is situated. It is therefore paramount to keep the place of effective management where the company is resident for tax purposes to avoid the company becoming a tax resident of a different country, thereby potentially triggering exit tax in the country it used to be tax resident and/or limiting access to benefits under the intended treaty. (Derived from the OECD Model Tax Convention prior to 2017; the 2017 version replaced the tie-breaker rule with the requirement for the competent authorities to agree on the tax residency of a taxpayer. The Canada-U.S. tax treaty has a place of incorporation tie-breaker clause, but few other of Canada’s treaties contain such a clause, typically relying on competent authority to decide.)

The term “place of effective management” refers to the top-level management, which is where executives and senior staff make the day-to-day management decisions (Vogel, Double Tax Conventions (1997) Art. 4 mn. 115). Most double tax treaties (including those entered into by common law jurisdictions) follow the historical OECD Model Tax Convention, which means that the concept of central management and control only becomes relevant where there is no treaty in place. The OECD Commentary (OECD Commentary 2010 Art. 4, mn. 24) defines the place of effective management as “the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made.” An entity may have more than one place of management, but it can have only one place of effective management at any one time.

As mentioned above, in ordinary times companies would make sure that the board of directors making critical management decisions would meet in one place. However, what can be done if people are not allowed to travel anymore? What if board members are located in countries that are not the country of incorporation?

Though not addressed by the OECD, countries commonly agree that where board meetings are conducted over telephone in a conference call or through video conferences with people being physically present in different countries, there is not one single place of effective management until a certain number of people in one location has the ultimately decisive vote. Where the voting rights are allocated such that two directors have the decisive vote, and both directors are resident in the same country, which is not the country of incorporation, tax authorities of such country may assert that the place of effective management is effectively located there. In this case, companies might want to temporarily change the voting rights providing for directors resident in the country of incorporation being part of the decisive vote. This should be feasible in countries that require at least one resident director under their local law or vote by proxy.

Where the company does not have a director resident in the country of incorporation, care must be taken that the decisive votes are not concentrated in any one country. Where the bylaws provide for such allocation of the voting rights, a temporary alteration should be implemented, thereby ensuring that directors who are all resident in different countries take the decisive vote. This might not be possible in all countries. For example, in Malaysia, a company will satisfy the tax residency test only if the management and control of a company’s business or affairs is exercised in Malaysia at any time during the year. The Malaysian tax authority will not issue a certificate of residency if board meetings are held virtually instead of physically in Malaysia.

Countries are also addressing this issue on a unilateral basis. The ATO has indicated that it will not apply compliance resources to determine if a company’s central management and control is in Australia, if the only reason for the change to the location of board meetings or where directors attend them from is due to impacts of Covid-19 and there are no other changes to the circumstances of the company. Similar guidance from other countries should be closely monitored.

If all of the above is not possible and the company cannot avoid having the effective place of management in a different country for the duration of the crisis, the company is well advised to keep the decision-making process to a minimum (if and where possible) and return to the previous process as soon as possible. Companies should also put in place documentary evidence showing that the “new” decision-making process is only allowed and in place for the duration of the crisis as an extraordinary measure and only because of existing travel limitations and safety concerns. Such documentation should clearly state that the process will be reversed as soon as restrictions are lifted. Contemporaneous board meeting minutes would serve as useful documentation to explain why such actions were taken.

Keeping critical decisions to a minimum might also support the position at a later point in time that compared to the situation prior to and after the crisis, the scope of day-to-day decisions during the crisis was fairly limited. Therefore, viewed over the span of the entire year, the effective place of management was still in the country of incorporation. Obviously, this might be difficult as the crisis may require an unusual amount of day-to-day management decisions. Also, the effective place of management is generally not tied to a certain duration but can change multiple times throughout a year. It also does not require an intentional decision of the company to shift the management to a different country, but such changes are factually dependent. However, given that this is an unusual situation placing unusual restrictions on companies and individuals, tax authorities might be willing to be more lenient if such arrangements can be supported by written evidence that the shift only took place because of the crisis and was reverted immediately after the crisis ended.


Under OECD guidance, the functional analysis of an MNE and its different affiliates is key for a proper transfer pricing model within the group, as this requires identification of entrepreneurial group companies versus group companies with a more routine function, such as (limited risk) distributors, agents, toll/contract manufacturers, services providers, etc. With respect to intangible property (IP) and the critical drivers for an appropriate allocation of the group’s IP profit, the functions regarding development, enhancement, maintenance, protection and exploitation of IP (the so-called “DEMPE” functions) are important.

Within multinationals and integrated businesses, employees moving up the career ladder and taking on more important group functions are often required to relocate to the countries where the entrepreneurial group companies or companies with the most important functions (such as the DEMPE functions with respect to IP) are located. The most senior international workforce is typically also hired in these locations.

In the weeks and days before the outbreak of Covid-19 and lock-down measures being implemented, certain of these employees and their families may have returned to their home countries from which they continue to work. Given that, under the Covid-19 restrictions, it is unlikely that the relevant employees will integrate into the group companies in their home countries, but rather continue to work as an integrated member of the foreign affiliate, this should in principle not change the functional profile of the group companies. Consequently, in most cases, there should not be a fundamental impact on the group’s transfer pricing model. As a result, in this context, most pressure from a tax perspective can also be expected to be on possible PE recognition and company residence as dealt with above and not with respect to transfer pricing.

For U.S. based MNEs, prolonged, although temporary, remote work of the employees of the U.S. MNE’s subsidiaries in other jurisdictions instead of the employee’s typical place of business can also affect a U.S. company’s ability to comply with its intended positions with regards to Subpart F income. For example, under the foreign base company services income rules, a controlled foreign corporation (CFC) that performs services for or on behalf of a related person is only considered to derive foreign base company services income if the CFC performs services outside its country of organization. (Section 954(e)(1).) Although an employee may typically provide those services in the country of organization, current circumstances may force an employee to provide those services remotely from another jurisdiction. This could cause the CFC to recognize foreign base company services income.

Remote work arrangements can also affect a company’s subpart F position if the foreign employee cannot fully perform the intended activities remotely. This is especially important where the subpart F rules analyze the activities and functions of a CFC. Under the foreign base company sales income (FBCSI) rules, income derived by a CFC “in connection with the sale of personal property manufactured, produced, or constructed by such corporation” (Treas. Reg. 1.954-3(a)(4)(i)) is not FBCSI. A CFC is considered to have manufactured property if it makes “a substantial contribution” to the manufacture of the property through the activities of its own employees (the “Substantial Contribution Test”) (Treas. Reg. 1.954-3(a)(4)(iv)(a)). The regulations provide a non-exhaustive list of activities which may constitute “substantial contribution” under this test, including:

  • oversight and direction of the manufacturing process;
  • performance of physical activities that do not rise to the level of direct and/or physical manufacturing;
  • material selection, vendor selection, or control of raw materials, work-in-process or finished goods;
  • management of manufacturing costs or capacities;
  • control of manufacturing related logistics;
  • quality control; and
  • development or direction of development of intellectual property for the purpose of manufacturing. (Treas. Reg. 1.954-3(a)(4)(iv)(b).)

Employees of the affiliate who are temporarily located in another jurisdiction due to travel restrictions will likely continue to work as integrated members of such foreign affiliate and should be counted toward the activities of the affiliate that demonstrate a substantial contribution to the manufacturing process. However, if such activities are taken over by employees of other foreign affiliates as the crisis continues, and such arrangements remain, the substantial contribution support may be weakened over time, causing the CFC’s sales income to be potentially attacked as FBCSI.


In conclusion, businesses should monitor the issuance of local country guidance on PE, domestic presence, and residence issues, and keep an eye on the six-month period. Any operational change implemented due to Covid-19 should be clearly and contemporaneously documented. It should also be made clear (ideally by circulating internal communications and guidelines, which are retained as documentation) that cross-jurisdictional work from home arrangements and other structural changes are only temporary, and that all operations will revert back to the pre-Covid-19 structure as soon as it is safe to do so.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Géry Bombeke is a partner at Baker McKenzie in Brussels, Stephanie Dewey is a partner in Toronto, Bruno Dominguez is a partner in Barcelona, Imke Gerdes is a partner in New York, Shane Koball is Director of Economics in New York, Ivan Morales is a partner in Palo Alto, Andrew Morreale is an associate in Toronto, Krystal Ng is a partner in Kuala Lumpur, Chris Raybould is Director of Economics in Toronto, and Davinia Rogel is an associate in Barcelona.

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