Elizabeth Stevens Spoke to Bloomberg Tax for Transfer Pricing Chat Series

Early pandemic lockdowns quickly had authorities and companies grappling with the tax consequences of employees temporarily logging on from across borders. Now, more than two years later, remote work is likely here to stay—calling into question some of the fundamental concepts of international taxation, like permanent establishment based on physical presence, and the role of the concept of DEMPE—the development, enhancement, maintenance, protection, and exploitation of intangibles.

Bloomberg Tax spoke with Elizabeth Stevens, a Member at Caplin & Drysdale, about how transfer pricing may have to be reimagined in a future of remote work.

Bloomberg Tax: You’ve been writing and speaking on the future of taxation of remote work. Why is this so important?

Stevens: Reflecting on the BEPS project, the whole idea of, ‘we want to tax profit where value is created’ devolved to a significant extent to, ‘let’s tax it where the people are.’ But it’s not just any people—it’s not the guy using the wrench in the factory. It’s the people who are designing things, developing the technology, and making the tough decisions about design and development.

The whole premise of that is we can figure out where those people are, and then we can tax the profit there. But what if those people start moving all over the place? Then DEMPE becomes kind of meaningless. This trend of worker mobility undercuts some of the guidance and consensus achieved in recent years on the taxation of corporate income.

So what are the tax issues?

There are two big buckets: the first being the treaty issues, which is squarely in the OECD’s lane. Things like residency, taxation of employment income, permanent establishment, profit attribution. They’re not novel. Companies have had people travel for a long time, it’s just the scale that’s new.

The second bucket is domestic law issues, which I think may be even more interesting. These are mostly compliance-related, and that’s where it’s really challenging, and these are not just tax issues: income tax withholding, pension scheme contributions, unemployment scheme contributions, VAT registration, business registration, work authorization for the employee.

The biggest tax issue to my mind is exit taxes. This ties into transfer pricing again. If employees move, are they taking intangibles with them? If they are technology developers, what if one person moves? You probably haven’t had a transfer of know-how or workforce-in-place. But what if you have five people, 10? What if the entire development team goes to work in Spain for three months? You could have some very interesting situations and uncertainty about when intangibles are transferred along with the people.

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