On October 12, the Organization for Economic Cooperation & Development (OECD) published a draft of proposed changes to Article 5 of the model tax convention.
Article 5 is of great interest, as it defines the treaty concept of permanent establishment, which is mainly used for the purpose of allocating primary taxing rights when an enterprise of one OECD member state derives business profits from another state. The draft changes concern current interpretations and applications related to place of business, use of home offices, and contractor/subcontractor relationships.
The document is open for comments until February 2012 and lengthy discussion is likely. Importantly, the changes proposed include widening the definition of a fixed place of business to include by definition any location where regular and productive work in country is performed including a home offices, which in turn will create permanent establishments of the employing / contracting entity.
Though still early stage, and subject to adoption over time via amendments to individual country treaties, the proposed changes to Article 5 suggest a need to review current “payroll only” structures where employees are regularly working out of their home office locations. This is particularly important if that arrangement has already been in place for a number of years and where the number of local employees has grown to more than two or three local hires in country. If you have any questions about your current setup, please contact your account manager.
We operate all over the world, and as a result we have permanent employees, expats, independent contractors, you name it. The employment rules are complicated, and one can easily make an expensive mistake if you don’t know the ins and outs of these rules in each country. We started working with High Street Partners in 2004 when we asked them initially to help us with our new employees in the U.K. and Japan. Now, they help support our operations in 12 different countries. I like that I can just pick up the phone and know that they will give us knowledgeable advice and make sound recommendations.
High Street Partners