Permanent Establishment Risks in Transfer Pricing
The concept of Permanent Establishment (PE) is pivotal in the realm of transfer pricing, as it determines the tax obligations of multinational enterprises (MNEs) within a particular jurisdiction. The risks associated with PE are becoming increasingly significant due to the global mobility of businesses and their workforce. This article explores the intricacies of PE risks in transfer pricing, linking them to broader global mobility issues.
Understanding PE risks
The definition of PE has evolved, particularly under the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project. Action 7 of the BEPS project has expanded the definition of PE to prevent tax avoidance strategies that circumvent the establishment of a PE through agency or commissionaire arrangements. The expanded definition has large implications, as it can lead to increased tax exposure, compliance costs, and administrative burdens for businesses. Further information on considerations of expanding internationally from a UK perspective, including the PE definition and risks can be found here: Expanding your business internationally | Crowe UK.
Global mobility and its impact on transfer pricing
The global mobility of employees presents complex challenges for transfer pricing. The shift towards remote and hybrid working models has also blurred the lines of PE, making it harder for companies to ascertain their tax liabilities.
For instance, the presence of a significant workforce in a foreign jurisdiction could create a PE, thereby affecting the MNE’s transfer pricing policies. The functions of the employees of the PE should be understood from a transfer pricing perspective to ensure correct attribution of profits. The correct transfer pricing methodology will depend upon many factors, including whether the services performed are high or low-level risk and whether they could be considered routine.
Another example is when the senior leadership of a group is in different jurisdictions where they are not employed by the local entity. This could also lead to a PE risk and may require reassessment of the transfer pricing method used.
Several countries have been proactive in addressing transfer pricing issues related to PE. One way of doing so has been to adopt the Multilateral Instrument (MLI), which has further tightened the PE rules, impacting tax treaties and transfer pricing practices. This has been the case for the UK and its tax authority, HM Revenue and Customs (HMRC). In addition, HMRC has established the Profit Diversion Compliance Facility (PDCF) which encourages MNEs to reassess their transfer pricing policies and disclose any tax arrangements linked to diverted profits or the avoidance of a UK PE.
Conclusion
The intersection of PE risks and global mobility issues presents a dynamic challenge for MNEs in managing their transfer pricing strategies. Tax authorities are adapting to these changes, with a focus on ensuring compliance and preventing profit shifting. As businesses continue to navigate this landscape, staying informed and proactive in transfer pricing practices will be crucial to mitigate risks associated with PE.
What can we help with?
Being part of an MNE can sometimes feel daunting when it comes to compliance requirements in various jurisdictions. We can help you navigate the transfer pricing requirements of different countries using our specialists from our wide Crowe network. Our UK transfer pricing team can support you with setting up robust transfer pricing policies, preparing documentation and ensuring you are compliant with HMRC’s requirements. If you would like further help and assistance for your business, please contact Rafaela Oplopoiou-Chapman or your usual Crowe contact.
