Remote Control

One of the aspects of international taxes that I find fascinating is how the issues associated with high-tech, intangible businesses are often just as relevant in the old-school, brick-and-mortar-type industries where you’d figure that things would at least be simpler.

Manufacturers deal with intangibles and complex computer programs just as much as anyone else these days–whether or not they create complex tax transactions has more to do with particular situations than with the overall business model.

One example I like is how one of the most high-profile recent tax controversies involving royalties (which began with a whistleblower complaint in 2009 and ended a year ago with a whimper) was with Caterpillar Inc., the Illinois-based construction equipment manufacturer. Even though the underlying transactions were for machine replacement parts, it all came down to contractual royalty ownership concentrated in a low-tax jurisdiction, just like with a Silicon Valley conglomerate.

Another recent example–the Organization for Economic Cooperation and Development’s new draft language for its model treaty, which could allow countries to tax foreign entities involved in oil, gas, mining and other extractive industries, based on as little as 30 days of activity within their jurisdiction. This is well short of what traditionally would be needed to create a permanent establishment or taxable nexus. The OECD claims that resource-rich countries hoping to capture more income from extraction have already begun using this timeframe, recognizing that “offshore exploration and various service activities connected with offshore exploration or exploitation may be of short duration and may not take place at a geographically fixed place of business.”

Back in December, I wrote that the rise of highly valuable and potentially mobile workers threatened to flummox the new consensus that workforce can be used as a rough proxy for economic substance, and therefore taxable income. I was picturing a software engineer working on complex, valuable codes from the bedroom–but this could well be an energy specialist using state-of-the-art imaging technology to spot a deep pocket of oil or natural gas.

This worker isn’t operating from his or her house, and the mobile nature of the job isn’t a preference but a requirement. (This is relevant because often a key factor is whether the workplace is “at the disposal” of the employer.) Nevertheless, there are some important similarities–the activity can create a great amount of value with a few valuable employees, working in a jurisdiction for a short period of time. Requiring that they stay in the jurisdiction for half a year or longer before the country gets its share of the income generated may be allowing significant profits to go uncaptured.

This comes as the OECD quietly works on a broader remote worker project, which it announced in 2021 and hasn’t updated since. Its tax ultra-rival, the United Nations, is also updating its model tax treaty to deal with remote workers (and “digital nomads”) in some situations. At some point, the language and guidance from these projects may indicate some prevailing themes to apply more broadly.

For now, it’s pretty much anything goes, jurisdiction-by-jurisdiction, for a wide variety of issues.

My main point earlier was how remote workers can skew the anti-abuse rules that estimate taxable income through factors like payroll–including the OECD’s Pillar Two global minimum tax. But there are also the traditional transfer pricing rules that attempt to identify and price actual intangible assets. In many cases, the location of a remote worker can be key in determining where the intangible was produced, which in turn determines how much of the income associated with it belongs in the remote worker’s jurisdiction.

“It can create a lot of complexities and if you're trying to manage an extensive portfolio of IP, this can lead to some very difficult interactions with foreign governments,” said Joshua Odintz of Holland & Knight, during a panel discussion on remote workers and taxation at an American Bar Association tax conference in San Diego last week.

Speaking at the same panel, Elizabeth Stevens of Caplin & Drysdale said that whether employees have decision-making authority could be a key factor in whether they can create IP while working from a remote location, including their home or home-away-from-home. But, not always.

"Even if they're not making calls about what's developed, it's just somebody who's willing to code, you still have a question," Stevens said. "Because, has there been a transfer of know-how? If it's one person, two people, three people, four people--how many is enough for a know-how transfer to that jurisdiction?"

On Monday, the OECD released public comments on its proposed extractive changes, and companies were more or less united in their opposition to the 30-day PE threshold. Aside from being unworkable and administratively burdensome, the rule would likely create many cases of PEs without much in taxable income, they claimed.

According to Deloitte LLP, the proposal would create “a significant number of deemed permanent establishments with minimal profits or losses attributed to them, creating complexity, practical challenges and additional compliance costs.” It also predicted practical issues as companies move “in and out of in and out of scope of tax in a jurisdiction.”

This is also likely to be a key issue in these debates moving forward–not just the presence of a remote worker in a jurisdiction but key questions about the exact nature of his or her movement and relationship to the employer. And how to balance practicality with these increasingly minute and complex distinctions.

DISCLAIMER: These views are the author's own, and do not reflect those of his current employer or any of its clients. Alex Parker is not an attorney or accountant, and none of this should be construed as tax advice.

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LITTLE CAESARS: NEWS BITES FROM THE PAST WEEK

• Another week, another update on the potential bipartisan tax deal. This is becoming a regular Things of Caesar feature. On Friday, the House Ways and Means Committee voted overwhelmingly (40-3) to approve the legislation, which extends some of the Tax Cuts and Jobs Act provisions while also boosting the child tax credits and some other Democratic priorities. The strong bipartisan vote came as a bit of a surprise, given how many rumblings there are of dissatisfaction, especially from the right. (As it happened, all three "no" votes were from Democrats angry that the bill didn't increase the child tax credit enough.) There's still a long way to go, especially as House Republican leadership has yet to sign off. And the Senate's another matter entirely. One interesting international tax note: the deal would only extend immediate full deductibility for domestic R&D costs–R&D outside the U.S. would need to be amortized over a 15-year window. That's a bifurcation that didn't exist until 2022, and is likely to remain for a long time to come.
• The Senate Finance Committee is set to vote again on Marjorie Rollinson, who was nominated by the Biden Administration to be chief counsel to the Internal Revenue Service back in June, but still hasn't been approved by the Senate. The committee voted in favor of the nomination by 16-11 back in November, but she wasn't able to get a floor vote before the end of the first session of this Congress. While there were some questions about Rollinson's background as a Big Four partner (which she addressed with an unprecedented agreement to avoid working with any company with clients that have IRS business for four years after she leaves the agency), most of the opposition to her nomination has to do with unrelated policy issues. This is just how hard getting even an uncontroversial nominee through these days.
• Speaking of Treasury personnel, news broke late last week that Lily Batchelder, assistant Treasury secretary for tax policy, will be leaving the administration and returning to New York University in the spring. Fresh after the news that Michael Plowgian was leaving, this amount of turnover is continuing to raise some eyebrows. But maybe most significantly, this means that the team tasked with carrying out the OECD tax agreement will not comprise anyone involved in negotiating its details.

PUBLIC DOMAIN SUPERHERO OF THE WEEK

Every week, a new character from the Golden Age of Superheroes who's fallen out of use.

Fantomah, appearing first in Jungle Comics #2 in 1940. The "Mystery Woman of the Jungle," through unexplained omnipotent powers she doles out gruesome punishments to those who dare attempt to exploit her natural domain. Her phantomlike disguise and penchant for divine retribution recalls The Spectre, who debuted the same year. In later years she became a more conventional jungle adventuress, known as "Daughter of the Pharaohs."

Contact the author at amparkerdc@gmail.com.