In recent years international companies have relied on hiring talent from outside their territories of operation to respond to a shortage of skills, increased globalisation and a change in attitude towards work-life balance. This trend has led to the increase of remote work arrangements, prompting potential significant transfer pricing impacts. This article provides an overview of the potential transfer pricing implications of remote working and provides an outline on how international companies can proactively manage this. 

This article was written by Vera Zhuravleva and Shaun Britz. Vera ([email protected]) and Shaun ([email protected]) are part of RSM in the Netherlands Tax Services Practice with a focus on transfer pricing.

The New Norm

Over the last few years, there has been a significant shortage of skilled professionals, making it increasingly difficult for companies to find the right talent locally. Additionally, increased globalization and improved communication infrastructure have enabled employers to hire people from anywhere in the world. Concurrently, the COVID-19 pandemic demonstrated that employees can work from home successfully, leading to a permanent shift in work dynamics. Remote work has become more prevalent than ever with both companies and employees taking advantage of this paradigm shift. 

As a result, it has become common for companies to focus their recruitment strategies to hire individuals who possess the necessary skillset, regardless of their location. Companies have also started allowing existing employees to relocate as they see fit. While this has been done quite successfully from a recruitment perspective, the transfer pricing implications of such remote work are often overlooked. This new working model presents significant transfer pricing challenges, particularly in determining where value is created and how it should be remunerated.

Transfer Pricing Considerations

One of the most critical aspects of transfer pricing is accurately identifying where value is created within a company's value chain. Remote work complicates this as employees may operate from different countries than the company’s core operational locations or in some instances, even where the company might not have a presence. For example, if a CEO is working from Country B while the company is headquartered in Country A, it raises complex questions about where the economic value generated by the CEO's contributions should be attributed.

Another example could be where multiple key executives work from different countries and each provides significant contributions.
As remote work becomes more widespread, tax authorities are paying closer attention to transfer pricing arrangements to ensure they comply with international tax regulations. With the level of data that tax authorities have at hand from a wage tax, personal income tax and social security perspective, identifying potential tax risks from remote work will likely increase in the near future. 

Addressing Transfer Pricing Challenges in a Mobile Talent Landscape

To effectively tackle the transfer pricing challenges arising from remote work, companies must proactively consider and adapt their transfer pricing policies. As always in transfer pricing, each case should be assessed based on its specific facts and circumstances, but companies can apply the following as a framework to get this right:

  1. Understand the Facts and Circumstances: Identify who is performing which roles and from where. Understanding the specific contributions made by remote employees is crucial to determining an appropriate transfer pricing methodology.
  2. Analyze from a Transfer Pricing Perspective: Evaluate the circumstances to establish a suitable methodology (i.e., cost-plus, percentage on sales, residual profit) to remunerate the contributions made. In performing this exercise, it is important to consider the overall transfer pricing model applied across the group, including how each local entity is remunerated.
  3. Other tax implications: Other potential tax implications such as wage tax, personal income tax and corporate income tax through existence of for example permanent establishments are to be considered along with the transfer pricing. 
  4. Draft Intercompany Agreements: Prepare intercompany agreements that clearly outline the contributions and remuneration policy applied.
  5. Implement the Transfer Pricing Methodology: Implement the transfer pricing policy into existing intercompany template calculations of ERP systems accordingly. 
  6. Prepare Transfer Pricing Compliance documentation: Prepare transfer pricing compliance documentation that is compliant with relevant local regulations.

Forward Thinking

Remote work presents new transfer pricing challenges and opportunities. Companies should proactively adapt their transfer pricing policies to accommodate the nuances of remote work in order to be better positioned to maintain compliance with international regulations.

RSM is a thought leader in the field of Transfer Pricing and International Tax Consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of regulatory obligations and practical applications in working with our clients. If you want to know more, please reach out to one of our consultants.