Remote working: considerations from a transfer pricing perspective

Agile working across borders, or "remote working", has long been a matter of debate, but has seen a surge, both in terms of the extent of the phenomenon and its duration, following the Covid-19 crisis. The shortage of highly skilled labour force does further exacerbate the phenomenon. Remote working can have a number of important implications for a company from a tax perspective, such as, for example, the issue of potential per­manent establishment creations or considerations regarding personal tax payments and social security contri­butions of the various subjects involved. Given the potential vastness of the topic and in order to provide some food for thought that is not always considered, this article will focus mainly on transfer pricing aspects around the remote working phenomenon.

 

As a first step, it is necessary to assess when remote working per se may represent an instance relevant from a transfer pricing perspective and in what way. To this end, it may be useful to consider some illustrative example.

Let us consider the case of a person originally employed by a company in Germany who decides to work from Italy at the relevant subsidiary of the same group. In this case, one should determine the entity for whose benefit the individual performs his or her work. If the beneficiary of the individual's activity were to continue to be the German company, a cross-border intercompany transaction (and thus a transaction relevant from a transfer pricing perspective) for the provision of services by the Italian company to the German company which did not exist before and which coincides with the service rendered by the individual who has relocated would need to be established. If, on the other hand, the beneficiary of the activity carried out were to be the Italian company, a transaction such as the one outlined above would not be created, but a transfer of functions may be taking place. This, in turn, would again imply a transaction relevant from a transfer pricing concerning the transfer of the functions, risks and assets. Furthermore, if the transfer of the functions, risks and assets is significant it may result in the modification of the functional profile of the associated entities involved in the transfer, which could, in turn, lead to a change in the transfer pricing set-up of the multinational group as a whole. By way of an absurdity, the transfer of a single key player could result in the roles and functional charac­terizations of the two entities being disrupted and reversed.

 

Notwithstanding the extreme case, it is in any case crucial to consider that entities often "suffer" the "remote work" situation as a condition imposed by the employees. This is particularly evident in the case (on the company side) of "tech companies" and (on the employee side) of individuals who perform those functions referred to in transfer pricing jargon as "DEMPE functions" or who otherwise hold positions with decision-making powers within the entity for which they work.

 

Consequently, a careful assessment must be made of the employee who requires to work from a different country than the one in which the company for whose benefit he or she performs his or her duties is located in order to understand whether the new constellation could result in cross-border transactions relevant from a transfer pricing perspective.

 

Once it is recognised that there is a cross-border intra-group transaction relevant from a transfer pricing per­spective, it is necessary to define its amount in a manner consistent with the arm's length principle. In this area there currently appears to be no one-size-fits-all method. Some of the solutions already considered focus on the application of the profit split method, which is potentially very complex both from the point of view of the calculation of the amount and the subsequent justification with respect to the arm's length principle in the context of possible transfer pricing documentation. As an alternative, some suggest the use of the cost-plus method (commonly applied in the case of the provision of services), which, despite being simpler to apply generically, is more difficult (or even less suitable) in the case of high value-added activities such as those falling under the OECD definition of "DEMPE functions".

 

Some of the alternatives put forward by experts can be traced back to so-called "safe harbours" (which, how­ever, are often unilateral measures and thus entail the risk of not being accepted by all the countries involved in the transaction being analysed), to a 'formulary apportionment' modelled on the OECD's Pillar One proposal (which in turn, however, increases the complexity of determination for the various administrations and does not resolve the issue in cases where the individual is active from a location where the multinational company has no presence), or to apply taxation only at the individual level (which, however, would completely lose the taxable component attributable to the company).

 

In conclusion, no unambiguous solution has been identified at the level of international best practice that is universally applicable and recognised by the various tax administrations as such. Consequently, the aim of this article, in addition to recalling the need to make case-by-case assessments based on the specific situation of the worker and the multinational company for which he performs his duties, is to offer food for thought and possible proposals for dealing with the issue should it be encountered.