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Understanding where employees are working has always been important, but it was simpler when an entirely local workforce was common. That made payroll an accurate capture of expenses for local employees performing services for the local entity. The prevalence of remote and hybrid work, the ease with which many borders can be crossed, and the lack of appropriate tracking mechanisms has upended those conventions.
Ideally, focusing on compliance with the immediate demands of the new tax regulations should give way to a more nuanced consideration phase in which workforce policies, including mobility, take on more significance due to their potential impact on tax outcomes. Together with the human resources team, tax teams should be asking whether employees are performing services for the right entities, given where they sit and the activities they perform. They should also ask if the right substance exists to the employer relationship to not just support Pillar Two compliance but also a logical review of the company’s permanent establishment exposure.
Businesses will need to give close consideration to the movement of intellectual property or changes to supply chains in connection with Pillar Two. Making sure the workforce aligns with any such restructuring will be essential for compliance and should involve engaging a broader range of stakeholders, including human resources, legal, IT, payroll and the workforce itself. Aligning the corporate tax, payroll tax, and individual tax positions taken is vital for businesses. This complexity is heightened by the need to maintain consistency across different jurisdictions while facilitating compliance in the overall tax position.