Setting up a permanent establishment in a state/foreign jurisdiction can be time-consuming and complicated. To fast-track your global hiring needs, a common and more realistic solution is utilizing Employer of Record Services.
Corporate tax professionals are knowledge experts of ‘permanent establishment.’ It is a complex tax area involving both state and foreign jurisdictions' compliance. It is important for HR professionals to understand what permanent establishment (PE) is as it can significantly impact the developing of a global workforce strategy. Often HR is aware of information to help identify where the permanent establishment is a risk and can support mitigation options, as described below. What is a Permanent Establishment (PE)? A permanent establishment is when a company has a presence in a country or state outside of its home location. Presence outside of that home location can create liability for taxes imposed by that jurisdiction. By having a presence in the country or state, the company creates a PE. The host state or country can impose local taxes based on the tax rates in that jurisdiction. Sounds complicated? It is. Typically, corporate tax functions manage the permanent establishment, but they need to know where people are going and what they are doing in order to manage it. Companies meeting certain thresholds of activity in foreign jurisdictions must register to do business in those locations and pay taxes. Failure to understand and act where activities create presence can lead to unpaid tax and legal issues. Foreign countries set thresholds and vary considerably from country to country. Tax Treaties Can Help When there are tax treaties in place, they define what constitutes a Permanent Establishment. Treaties typically relax rules. The goal of tax treaties to prevent the company from double taxation in the two jurisdictions and harmonize definitions of corporate taxable activity. Understanding PE Risk Many corporate Tax strategies work to shield as much corporate income from higher tax countries. Exposing this strategy to unplanned additional tax can have significant risks in a company's after-tax income and valuation. Employees can trigger a PE liability without intentionally trying to. One way could be creating a PE through activities meeting the threshold, including providing services. If meeting the jurisdiction or treaty threshold, the requirement to allocate income, profits, register pay tax, and cover penalties and interest if late. A company’s financial position and reputation can be significantly hurt in the jurisdiction and create a long-lasting negative impact. Fast Track Option – Utilizing Employer of Record Services (EOR) Setting up a permanent establishment in a state/foreign jurisdiction can be time-consuming and complicated. To fast-track your global hiring needs, a common and more realistic solution is utilizing Employer of Record Services. An Employer of Record (EOR) supports a plethora of compliance obligations for your employees that need to get into state/foreign jurisdictions in the company is not yet registered to do business. This can be done in a matter of days as opposed to months. Utilizing an EOR does not interfere with plans to create a Permanent Establishment but can run parallel to it while the company is moving forward with its long-term plans. It can provide an all-important audit trail for the new jurisdiction for taxation and demonstrate how the company’s business and HR activities are in compliance, an important step in setting up a PE.
The Future of Work As companies are increasing their expansion plans both in the U.S. and globally, the use of PEs is a valuable business strategy. For fast-tracking a company’s global footprint, the use of an Employer of Record (EOR) is an important tool to support business growth. Utilizing expertise in setting up a PE and understanding compliance requirements will help business and workforce strategies set more realistic timelines for execution. Our Expertise MSI’s Consulting and Advisory Team supports the design and development of a Permanent Establishment as well as Employer of Record Services that align to Business, HR, Talent, and company business goals. Our focus is helping organizations optimize and develop long range strategies for success.