Transfer Pricing and the Migrating Workforce – Do You Know Where Your Employees Are?

One consequence of the pandemic has been a realignment of how we work and equally challenging, where we work. Many big-city mayors are facing the issue of partially or empty office buildings. This has a very local ripple effect in that the restaurants, retail stores, and even street vendors are facing a shortage of customers, mass transit systems are missing riders, and taxi and ride-share services are all suffering. So, where is everyone?

As the workforce has adapted to working remotely, businesses have had to adapt to this new environment, but have all of the ripples been accounted for? As an example, let’s assume that a professional can conduct all of their meetings in Teams, or Zoom, or some other online service. Let’s also assume that this person has access to a reliable Internet connection, in concept this person can work from anywhere they choose. And one last assumption, the company is based in a state like New York.

Now our hypothetical employee could go into the office in New York or could work from home and attend meetings from there. For all anyone sees, our person is doing their job. But what does this mean for the company? Should the person working from home in a different state subject the company to withholding and remitting state taxes? Will the company be subject to income tax in the state? And how would that income amount be calculated?

Now let’s look at our employee and the large case of Wander Lust and instead of doing their thing in an adjoining state, this person decides that winter in New York is a bit too much and decides that Panama would be more to their liking, (or for that matter anywhere with an average temperature above 72o F).What does this do to our example?

Every company needs to consider remote work from a tax perspective. The first issue is one of knowledge: Would the company be aware of where the wandering employee is? If the person does their work and shows up for meetings on time, it could be completely transparent to the company. But hidden issues could arise. Income tax or social taxes could be due. Would the presence of the employee establish a de facto branch or permanent establishment in the country?

Would there be any mark-up on the services provided to the company by this unknown branch or PE? As the services are provided from a foreign location where the company may not have any other activity, would the company now be subject to reporting and meeting the new requirements?

I’ve just described a single employee going off the normal path of the company. The final act may be where there are multiple employees pursuing this approach. And to complete the parameters, all of the above issue can arise where the company itself hires talent in a variety of jurisdictions. Before engaging in any activity as described, the company should carefully research and seek guidance of the potential consequences of these actions.