This article originally appeared in the October 2018 edition of Mobility Magazine.
2018 marks the beginning of a new era in global talent mobility. It is widely anticipated that Industry 4.0 will create massive growth and productivity, and will change the global flow of goods and services. Along with Industry 4.0 comes our own Mobility 4.0—not only the convergence of technological innovation on the workforce, but also the narrowing and redefinition of immigration talent profiles and integrated tax compliance.
Numerous countries are redefining global talent as a tax revenue source. Starting this year, the way in which multinational enterprises (MNEs) will strategize immigration for its global talent will be refocused through a lens of multiple new tax considerations both at home and abroad.
In Part 1 of “Mobility 4.0,” we focused on immigration changes. In Part 2, we will discuss the impact of integrated tax compliance on talent mobility.
“Given numerous business priorities, global executives appear to be focused on human capital the least. Despite the clear impact Industry 4.0 will have on workforces in every industry and geography, many executives do not express urgency when it comes to tackling the challenges of the future of the workforce. Talent and human resources are at the very bottom of their strategic discussions, and only 22 percent of respondents believe that the uncertain impact of Industry 4.0 on their workforces will have a significant effect on their organizations. Incongruously, the vast majority of executives still believe they are doing all they can to prepare their workforces for Industry 4.0.” — Forbes, “How the World’s Top Executives Are Approaching the Fourth Industrial Revolution,” 22 January 2018
In June 2017, ministers from 67 countries and jurisdictions signed onto, or announced their intention to sign onto, a new precedent in global taxation, the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting, or BEPS, Convention. Developed over the past decade with input from more than 80 countries, BEPS encompasses 15 action plans to equip governments with domestic and international multilateral instruments to address tax avoidance and bring better matching of information found in well over 2,000 bilateral tax treaties.
According to the OECD:
“As the world becomes increasingly globalized and cross-border activities become the norm, tax administrations need to work together to ensure that taxpayers pay the right amount of tax to the right jurisdiction.”
Basically, the overall purpose of BEPS is to increase tax revenue collection by reducing the offshoring of corporate profits and perceived tax asset loopholes, requiring MNEs (when applicable) to report more consistently their assets and revenues, and enabling tax authorities to automatically exchange their country’s tax information with other countries (i.e., a multilateral reporting) to reduce “tax mismatching” between countries where an MNE operates.
Of note, under the Trump administration, the U.S. has opted not to become a signatory to the BEPS Convention. Instead, on 22 December 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act (TCJA), which has some elements of BEPS. For instance, TCJA’s Article 59A, called the “Business Erosion and Anti-Abuse Tax,” or “BEAT,” may directly impact a non-U.S. MNE’s tax liability while doing business or having businesses in the U.S.
Related: Report: U.S. Tax Cuts and Jobs Act Will Lower Charitable Giving
The authors have always advocated for MNEs to engage global immigration suppliers to understand how to balance immigration and enforcement policy with tax experts as part of a sound global mobility strategy. The focus of this article is to identify potential issues that may emerge within the existing transfer of personnel through the lens of BEPS.
Under Action Plans 8–10, immigration and global mobility planning would have its closest connect pursuant to “hard to value transfers of intangibles,” more commonly referred to as “transfer pricing” of intellectual property (IP) and provision of services between home and host jurisdictions.
Depending on how a BEPS participant country’s tax regulators choose to identify and assess value, transfer pricing tax could be applicable based on the type of intracompany services provided, the location of IP development, and the manner in which third-party transactions, such as distributor agreements or sales/services contracts, are treated for revenue recognition purposes. Factors that contribute to how tax regulators assess and assign “value” to transfer pricing may include many various and distinct touch points in the talent mobility sphere outlined below.
Under Action Plan 13, a significant change that BEPS does bring about is the unprecedented way in which BEPS participants have agreed to report certain facts about the operations of a company in a systematic way using a universal template form called a “Country-by-Country” (CbC) report that can be shared with tax regulators in other BEPS participant countries. Basically, this establishes Common Reporting Standards (CRS) for tax regulators around the world to gain insight to an MNE’s overall operations and locally. For HR and global immigration suppliers, it is important to note that CbCs do include a designated field for employee data and blank areas for providing further detail about duties and activities undertaken by employees.
Even though the U.S. is not a signatory to the BEPS Convention, the U.S. Internal Revenue Service will meet CbC reporting requirements by issuing a Form 8975 and Form 8975, Schedule A with the relevant data that is required for a master file for the U.S. headquarters company as well as for other tax jurisdictions where the MNE’s local company will maintain a local file. According to the IRS, “Annual country-by-country reporting is required by certain U.S. persons that are the ultimate parent entity of a U.S. multinational enterprise group with annual revenue for the preceding reporting period of $850 million or more.” (Please note that the rules for MNEs submitting master and local files to the IRS are distinct and separate from those of other BEPS countries.)
Related: Repayments Under U.S. Payback Agreements No Longer Deductible
In reviewing CbC reports, tax regulators in overseas jurisdictions can elect to use information in determining an MNE’s local tax liability by having a comprehensive picture of the company’s assets, number of employees, and income reporting on both a local and global scale. Under BEPS, profits are taxed where profit-generating economic activities are performed and where value is created—a significant departure from past tax regimes in which tax was evaluated primarily on reported corporate profits in a particular territory.
Applying this to global talent mobility, it will be important to understand what composes value insofar as the type of activities performed in the host jurisdiction, how long those activities will be performed, how compensation will be paid, and how assignees will be managed. In addition, conclusion of sales contracts, purchase agreements, and provision of services pursuant to a contract can also come under increased scrutiny by local tax jurisdictions.
Equally important as the tax authorities’ definition of activities that create revenue or value in the host jurisdiction is the digital exchange of tax information within and across national boundaries and the impact of access of multiple data points by home and host regulatory authorities. Compliance is now front and center for all suppliers with an MNE clientele to ensure that their area of focus is integrated with applicable laws and regulations governing their area of expertise.
According to a 9 March 2018 announcement by the OECD:
“The OECD has issued new model disclosure rules that require lawyers, accountants, financial advisers, banks, and other service providers to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the OECD/G20 CRS or prevent the identification of the beneficial owners of entities or trusts.”
As the reporting and automatic exchange on offshore financial accounts pursuant to the CRS becomes a reality in more than 100 jurisdictions this year, many taxpayers that held undeclared financial assets offshore have come clean to their tax authorities in recent years, which has already led to more than $85 billion in additional tax revenue.
It must be stressed that, as of this writing, the BEPS project is a highly evolving convention. It remains to be seen how and when various assignee and business visitor duties will create a tax nexus across multiple countries. Under CbC reporting requirements, the ability for signatory BEPS countries to automatically exchange tax information from multiple jurisdictions will prove to be an interesting development, and it will affect how U.S. companies choose to engage their talent in order to avoid permanent establishment and tax nexus issues.
Read the rest of this article in the October 2018 edition of Mobility Magazine.