The tax implications arising from the paradigm shift to remote working and virtual collaboration this past year in the pharmaceutical and life science sector are complex on different levels.
The Pharmaceutical and Life Science sector have always relied on global collaboration to stimulate innovation and create ground-breaking remedies to the world’s health issues. The whole paradigm change arising from having to adapt to the Covid 19 pandemic has led to a revolution in remote working and virtual collaboration, which together with the international nature of this sector can create tax problems in the form of permanent establishments, where companies are incorporated and resident in one jurisdiction are subject to tax in other jurisdictions through the actions of their employees.
The creation of a permanent establishment (“PE”) by a company in an overseas jurisdiction occurs through the existence of a fixed place of business (a physical site used to carry on the business) or through the activities of a dependent agent (someone habitually exercising authority to carry out the company’s business).
Key principles here are “permanent” and “habitual” and HMRC, along with many other tax authorities following OECD guidance, provide relaxation to the normal rules, as long as the change in working location is due to the pandemic (e.g. stay at home orders, inability to travel to usual locations etc.) and is on a short-term basis. However, having embraced new working practices over the last 12 months, and after evaluating the importance of being near family, we are seeing increasing numbers of companies wanting to make permanent changes for their staff to enable them to work from flexible locations in the UK and overseas.
Corporate tax consequences
Whilst a flexible policy may improve staff retention and attract high-caliber recruits, it can create an unwanted corporate tax headache, with tax registration requirements and taxation of profits attributable to those PE locations. There is some growing concern that employees working full-time from home on a permanent basis may trigger a fixed place of business PE.
The salesforce of companies in the Healthcare, Pharmaceutical, and Life Science sector have always been under scrutiny, especially if they habitually negotiate or conclude contracts in a different location to where the company is resident as this could create a dependent agent PE.
Establishing an overseas PE could lead to double taxation and potential tax leakage where the PE is in a country with a higher tax rate. Whilst a foreign branch exemption election can potentially mitigate double taxation by exempting certain foreign profits and gains from UK tax, there is the increased administration of having additional compliance burdens in numerous territories. Branch exemptions do not exist for all territories, so it is an area to look out for.
Where employees (and directors) are senior enough to manage and control the company, the entire tax residency of a company may be comprised, leading to dual residency which, depending on the relevant double tax treaty, may be resolved on a self-assessment basis (usually a place of effective management tie-breaker test) or increasingly though a mandatory mutual agreement procedure between the two affected tax authorities.
The management of Intellectual Property (“IP”) may pose particular risks in the Healthcare, Pharmaceutical and Life Science sector. The UK R&D regime is unusual in that the legislation does not require IP to be based in or managed from the UK in order for a valid Research & Development (“R&D”) claim to be made. It only requires the activities to be undertaken, and associated costs to be ultimately borne, by the UK entity. However, this is often not the case for other IP regimes around the world and therefore non-UK R&D claims may be comprised if IP is now managed from a different location.
There may also be deemed to be a taxable transfer of IP to another jurisdiction if IP is now managed elsewhere or the residency of the company changes, and there is always the age-old problem of what the right transfer pricing should be.
Employment tax considerations
When an employee works in a country location that is different to where their legal employer is based, this can create additional employment tax and payroll withholding considerations for their employer.
Subject to any COVID19 pandemic relaxations and social security agreement concessions, it is likely that the employer will need to set up payroll in the country the employee is working in order to account for and pay over employee and employer social security contributions on the employee’s earnings. Payroll withholding income taxes may also be due, and this can be the case even if a PE in the country the employee is working in is not established.
Personal tax considerations
The employee may change their place of tax residence and create personal tax filing obligations in the country they are working in. Additionally, if they have any workdays in the country in which their employer is based, the personal tax interactions between the two jurisdictions concerned will need to be addressed.
The employer may be required to set up a pension scheme in the country the employee is working in and ensure that their contract of employment is compliant with the employment law of that country.
Finally, consideration should be given to whether any non-cash benefits and pension still provided to the employee in the country where the employer is based can continue to be provided. The benefits plan and pension scheme administrators may prohibit this, or the coverage may no longer be valid as the employee is not a tax resident in the country where the employer is based. Plus, even if these benefits can be provided, it may result in tax charges for the employee and the employer.
How we can work with you
We have extensive experience in providing:-
- international advice and reviewing existing international tax structures in order to manage PE risk and mitigate any tax leakage; and
- advice on how employers can manage their employment tax, payroll, pension, employment law, and other regulatory compliance obligations, that may arise from their employees working in other locations.
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If you would like to discuss your current and/or future international tax position in more detail, please get in touch using the contact details below:
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