The Base Erosion and Profit Shifting (BEPS) Framework describes tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
Since its introduction, the Permanent Establishment (PE) principle has garnered significant attention, extending beyond traditional corporate tax considerations. This is crucial because BEPS not only increases PE exposure but also affects the reporting obligations for all employees involved in cross-border activities.
Enhanced Monitoring and Reporting Requirements
Monitoring and reporting on employees working abroad has become more complex. Tax authorities now demand more granular data than simply tracking days worked abroad. This includes details like the number of visits, the factual nature of activities performed, transfer pricing arrangements, and the allocation of wage costs.
Additionally, under BEPS, a tighter country-by-country reporting obligation has been announced, requiring data based on:
Headcount
Total number of employees working in a given country on a full-time equivalent (FTE) basis.
Time frame
Year-end average employment levels for the year or on any other basis consistently applied across countries and from year to year.
Reference
All constituent entities (including subsidiaries, permanent establishments/representatives, and branches) resident for tax purposes in the relevant tax jurisdiction.
To meet these reporting obligations and mitigate PE risks, we advise you to diligently monitor various factors:
Contract negotiation activity
Sales roles
Decision-making authority
Length of stay
Frequent visits (business travelers)
Fragmentation of activities
Change of work to BEPS-relevant activities.
If an employee's involvement in securing the transaction is deemed "significant" to the contract's conclusion—for instance, by negotiating key terms or influencing the decision to sign—his activities are likely to create a PE. This marks a shift from focusing solely on where the final signature occurs to acknowledging the substantive contributions made to a transaction.
Whenever you encounter these situations, we advise you to collaborate closely with your Corporate Tax department to actively avoid the accidental creation of Permanent Establishments and to support their reporting obligations for compliance.
To understand these obligations and your role in providing BEPS-relevant information, under Elaboration, you will find what BEPS Reporting Means in Practice.