The changes proposed in BEPS Action 7 could impact the taxation of employees working abroad. It is, therefore, important that the human resources department is also updated on the changes proposed in the BEPS project.
The implications of the final BEBS reports presented on 5 October 2015 primarily focus on corporate taxation of multinational enterprises. However, BEPS may also impact the taxation of multinational enterprises’ employees working abroad. In this blog we outline the impact of BEPS Action 7 – Preventing the Artificial Avoidance of Permanent Establishment Status – on multinational enterprises and their employees.
Proposed change of definition of permanent establishment may impact the 183-day rule
The term ”having a permanent establishment” implies that a company may need to pay tax in the country in which the permanent establishment is located. The term is also central in terms of the taxation of employees sent out from Sweden to work abroad. The employees can often work in another country up to 183 days during a 12 months period without triggering income tax in that other country, p rovided, amongst other things, that the Swedish employer does not have a permanent establishment in the country in question.
As previously addressed in Tax matters, 30 October 2015, (Sv: ”BEPS – Nya förslag gällande definitionen av fast driftställe"), there is a proposal for a wider definition of the term ”permanent establishment” in the OECD Model Tax Convention, on which the Swedish tax treaties normally are based. Amongst other things, Article 7 in the Convention regarding permanent establishments is proposed to be changed so that the exemption of activities of a preparatory and auxiliary nature will be limited to those situations in which it can be shown that the activities are definitively purely preparatory or auxiliary. As a consequence, functions risking, in the future, not being exempt are, amongst others, purchasing functions and places for storing goods and merchandise.
The companies currently claiming the exemptions in Article 7 will, now, in terms of tax agreements – provided the agreements are changed – need to analyse the new situation and respond accordingly. Employees who are working temporarily abroad will perhaps no longer be exempt from taxation in that country and may be taxed already from the first day.
Increased risk that the employees will create a permanent establishment
Currently, if an individual works on behalf of a Swedish company in another country and has a proxy which is regularly used to enter into agreements on behalf of the Swedish company, a permanent establishment is seen to be created in that country.
Action 7 proposes a change in the so-called agent rule implying that a permanent establishment will also be seen to be created when an individual, working on behalf of a Swedish company outside Sweden, regularly assumes a leading role whereby agreements are entered into on a regular basis on behalf of the Swedish company. In other words, this is proposed to apply even if the employee does not have a formal proxy to act on behalf of the Swedish company.
Consequently, it is important that the companies operating in foreign markets review the mandates given to their employees, for example, as regards business negotiations, so that the company is not, without intending to do so, seen to have created a permanent establishment in that other country. In addition to establishing an adjusted business model for the sales operations, the companies concerned can, for example, respond to the new situation by updating the employees’ job descriptions and ensuring that the employees understand the change in their role/duties.
Increased risk that sub-contractors will create a permanent establishment
In addition, Action 7 includes a formulation implying that a person who has, to date, been seen to be an independent agent but who, in practice, exclusively or almost exclusively, acts on behalf of one or more companies to which it is closely related, shall no longer be seen to be independent. This will, then, result in the existence of a permanent establishment for the company or companies for whom the person works.
This proposed change is important to be aware of for the companies having representatives abroad. Also, the change risks placing a focus on circumstances which, already today, can be questioned, that is, the contracting of sub-contractors in sole proprietorships where there is a limited number of principals. In these cases, the Principal risks that it will be seen as employer for tax purposes, which can lead to the requirement to deduct taxes, pay employers’ contributions, etc. on the compensation paid to the sub-contractor.
Author: Fredrik Flyrén, former employee at PwC.
Johanna Glimmerbeck och Hanna Ekelund arbetar på PwCs: kontor i Örebro respektive Stockholm med individbeskattning och frågor i internationell kontext och är särskilt specialiserade kring arbetsgivarfrågor vid gränsöverskridande personal.
Johanna: 072-353 02 92, email@example.com
Hanna: 070-929 44 45, firstname.lastname@example.org