How a mobile workforce is shaping Pillar Two compliance

Workforce assumptions no longer adequate

Assumptions underlying tax consideration must withstand the scrutiny of empirical evidence. Businesses frequently infer the location and functions of their workforce, which, if unsubstantiated, can lead to tax controversy. Tax authorities are increasing tax enforcement activities, according to the most recent EY Tax Risk and Controversy survey, rigorously examining employees' physical presence and activities within their jurisdictions. Tax authorities are using more sophisticated data analytics tools and can cross-verify the presence of a company's employees against their stated functions and locations.

This increased scrutiny means organizations should both track and robustly document the roles and responsibilities of their workforce to substantiate their tax positions. Governance measures should be established to confirm adherence to objectives and expectations.

For many businesses, a challenge lies in the disparity between assumed and actual workforce operations. Businesses should adopt a dynamic approach to workforce management, one that reflects an accurate status of their employees' locations, roles and tasks. Failure to do so could lead to unintended tax consequences, including the recharacterization of income and the imposition of penalties.

In response, businesses should confirm they are properly governing and monitoring their cross-border workforce to pre-empt and address potential inquiries. A cross-functional approach, with tax departments collaborating across the organization, is key to navigating these multifaceted challenges.

“Leveraging technology to track and govern employee presence has become increasingly crucial for facilitating compliance,” Filippelli says.

Substantiating what people are doing in what location, for whom and for how long is necessary to manage tax risks related to permanent establishment and the attribution of profits. Outlining broad strategic objectives is no longer sufficient in many jurisdictions; companies must delineate the specific contributions of employees to corporate functions and the resulting profit generation. As global mobility transforms — blending more complex operating models and distributed workforces — tax analysis and governance must evolve in parallel.

How to navigate a complex compliance environment

The interplay between fulfilling business and talent requirements and adhering to tax compliance has never been more complex. The pressure to say “yes” to employee cross-border requests has been at an all-time high, and the tax team is often put in the position of saying “no” against significant opposition. Companies must strike a careful balance when their employees span multiple tax jurisdictions. This balance requires a strategy accommodating operational demands while managing tax liabilities and compliance risks.

When workforce policies must be changed as a result of tax implications, employee sentiment and corporate culture should be considered. Employee understanding of changes is important, as their acceptance and adherence to new roles and locations are key to making changes successful.

This creates a unique opportunity for the tax team to assume a more proactive and strategic role. This requires transparent communication, teaming on policy and technology, and alignment of positions between tax, human resources, IT and payroll functions.

"Pillar Two's compliance complexity demands that businesses not only grapple with more data points from diverse organizational segments but also thoroughly comprehend how the global minimum tax rules impact them to pinpoint necessary stakeholders for foundational compliance. Tax departments must be in tune with the company's commercial trajectories to align their strategies with the evolving directions of the business," Lindroos says.

Successful tax analysis and compliance hinge not only on the technical alignment with tax regulations but also on the strategic engagement of the workforce. A robust tax strategy, therefore, anticipates and incorporates the complexities of employee mobility and engagement from the outset, positioning organizations to capitalize on the strategic benefits of a comprehensive, forward-looking approach to Pillar Two compliance.