Detaching Work From Location
“Work is not a place.”
Work, as a concept, has been fundamentally changed, no longer being singularly attached to one geographical location.
But what has not changed is the geographical boundaries associated with how countries and states raise taxes.
The bottom line: Work is not a place, but taxes most certainly are.
The Permanent Establishment Conundrum
This has never been more clear than when you look at the risks of permanent establishment.
Permanent establishment came up as the number one risk for global mobility leaders during a recent Global Mobility Executive conference in London.
But what is permanent establishment, and how do you define it in a work from anywhere world?
Defining Permanent Establishment
Permanent establishment is a situation when your company triggers a taxable presence in a country.
Triggering such a presence can mean that the country in question can charge corporation tax on your company’s corporation tax profits in that country, amongst other issues, so the consequences of this can be wide-ranging and extremely expensive if not carefully assessed.
What becomes tricky is that not every country has the same definition of permanent establishment, likewise enforcement of permanent establishment can vary in terms of how strict different jurisdictions police it.
Work From Anywhere Permanent Establishment Triggers
While it is true that there can be a degree of variation across different countries, there are some general principles that underpin many permanent establishment risks around the world. The activities below are typically ones which can give rise to permanent establishment.
- Let’s say you have a senior director of the company who wants to work in their holiday home in the south of France. If they are making strategic decisions and taking board meetings in that country, then this may give rise to permanent establishment risk.
- Another trigger is if you are sending sales-generating employees abroad. Let’s say a number of your sales team want to work abroad in the south of France for a few months, this would likely be an extremely high risk for permanent establishment if combined with the first point above.
- If you have agents who conduct business on behalf of the company and/or they have decision-making power to act on behalf of the company (e.g. signing customer or employee contracts), then this is another important trigger. This is especially true if you have contractors. Some companies feel by hiring people as contractors that this negates any tax or legal risks but this could not be further from the truth. Aside from contractor misclassification risks, if those contractors have decision-making authority or can act as agents on behalf of the company, then you can immediately trigger permanent establishment risks.
- If you have a fixed place of business in the country, this can also create a permanent establishment. How a fixed place of business is defined can vary depending on the country, but just because you don’t have an actual official company office in that country doesn’t necessarily mean you don’t have a fixed place of business. If you have remote workers regularly working from one location, say a co-working space, and conducting business there over a long period of time, this may by itself trigger the fixed place of business risk.
- The time side of the equation is also critical here. If a company has an infrequent presence in the country, for example by sending remote workers abroad only a few days a year for a limited time, then this is unlikely to raise significant permanent establishment risks. However, if the company has had a long-term, frequent presence in that country, then the risk will be elevated. From a work from anywhere perspective, sending a few people abroad on remote work trips for less than 30 days are highly unlikely in most countries to trigger a permanent establishment risk. However doing so for 4 months a year on a regular basis would be a different matter altogether.
- Services permanent establishment is another potential trigger. What this means is that a significant presence of back-office employees (e.g. Finance or R&D teams, to name but two), especially when combined with one or more of the above, may be another risk to consider.
- Virtual permanent establishment is another new emerging concept that companies have to contend with. This is where, through digital activities (e.g. anything from ecommerce sales to hosting services and data warehousing) in a country, the company creates a digital presence. If combined with any of the above items, this heightens the risk of permanent establishment.
Mind The Gap – With Permanent Establishment
Unfortunately there is no one size fits all solution or risk framework, it really depends on the country you’re talking about.
But there are common gaps that are worth addressing;
- Many companies hire people as contractors on the incorrect assumption that this is a low risk approach to hiring talent abroad. In many cases nothing could be further from the truth. If they are working full-time for the company, then depending on the nature of the work and the role itself, the local tax authorities may deem them to be an employee and have them taxed accordingly (i.e. contractor misclassification). In that scenario, if they are deemed to be employees, and if they have for example the authority to sign contracts on behalf of the company in that country, then the risk for permanent establishment are heightened.
- Employers of record have sprung up as a hugely popular solution. They have legal entities in those countries to help address the income tax, social security and employment law challenges of hiring abroad. However, it is critical to not forget that while income tax, social security and employment law is a big part of the pie, it is not the whole pie. You’ve got to look at the totality of risks which includes corporation tax. In any case, from a risk quantification perspective, the impact of triggering permanent establishment is likely to be many times greater than the fines you would receive for getting individual taxation risks wrong. With this in mind, it is vital to make sure that you or your local Employer of Record have local tax advisors in place who can assess whether you have permanent establishment risks in that country.
Governments around the world are racing furiously to try to catch up to the digital world we’re living in, and virtual permanent establishment is just one example of this. With the advances in digitalisation of visa, immigration and tax authority databases around the world, the risk of tax authorities picking up permanent establishment risks is elevated.
It is true that there are often tax treaties in place which might reduce the risk, but even so, companies need to be cautious about how they design their geomobility policies.
Allowing your employees to work from anywhere without first considering permanent establishment risks is a recipe for disaster.
The countries you choose to facilitate work from anywhere should be given a not dissimilar weight as to when you decide to expand to a new country. Why? Because the costs of getting this wrong are extremely expensive and have the potential to do serious damage to your work from anywhere programme.
But by being ahead of the curve, you can proactively identify any permanent establishment risks and avoid waking up to a nightmare situation that could have easily been avoided.
Article written by John Lee, Co-Founder of The Work From Anywhere Team