Corporate Tax and Transfer Pricing Implications of Workforce Fragmentation

Corporate Tax and Transfer Pricing Implications of Workforce Fragmentation

Over recent years, the world of work has transformed as a result of globalization, technological innovations, and institutional reforms, creating a more flexible and fragmented labor force and a rise in non-standard forms of employment in many advanced economies.

The concept of workforce fragmentation focuses on workers in non-standard employment arrangements, including temporary employment, part-time work, dependent self-employment, temporary agency work, and other multiparty employment relationships. The Covid-19 pandemic also increased the reliance of the global workforce on digital technologies and has created a system of fragmentation due to social distancing norms and nationwide lockdowns.

This trend comes with several consequences for the corporate tax system, particularly in a post-Covid era where companies face disruptions in business supply chains and operations, resulting in eroding of profit margins. Due to the travel restrictions which prevailed at the peak of the pandemic, it became practically impossible for board members and employees of multinational enterprises to physically create a place of effective management of business operations. This situation has facilitated work-from-home arrangements and has increasingly created fragmented business models, which often trigger changes in tax residency and permanent establishment for corporate taxpayers.

Workforce fragmentation has led to pricing volatility and supply chain disruption, and has upended the precedent and comparability upon which the arm’s-length principle stands.

Workforce Fragmentation in the EU and UK

The EU recognizes the prevalence of workforce fragmentation and has expanded the scope of EU labor regulation beyond the contract of employment to encompass a wide range of employment relationships, including part‐time jobs, temporary agency work, self‐employment, fixed-term contract jobs, casual and seasonal work, and other non-standard forms of employment.

According to research conducted by Eurofound, since 2000, new trends of employment have become increasingly important in the European labor market, including practices of employee-sharing, job-sharing, casual work, ICT-based mobile work, voucher-based work, crowd employment, and collaborative employment. The research identified more than one new employment form in most EU member states, with only Luxembourg, Bulgaria, Poland, and Croatia identifying with just one emergent employment form.

Eurofound further identified new employment forms for both employees and self-employed in several central and northern European countries, including the UK, France, Belgium, Austria, Italy, Sweden, and Hungary. In addition, the research indicates that these new trends of employment deal with formal relationships between employers and employees which differ from the established one-to-one employment relationship in a traditional workplace.

It has also been observed that within the UK and EU countries, the share of part-time employment in total employment (age group 15–64) increased from 15.6% in 2002 to 19.4% in 2017, while the share of temporary employment increased from 12.4% to 14.3% within the same period. In September 2017, the UK Office for National Statistics estimated there were over 900,000 workers on zero-hours contracts—2.9% of the employed workforce.

Regulations Governing Workforce Fragmentation

The EU has widened the scope of EU labor laws and regulations to protect workers engaged in non-standard forms of employment. In 1991, the EU adopted Council Directive 91/383 which supplements the measures to encourage improvement in the safety and health at work of workers with a fixed-duration employment relationship or a temporary employment relationship. The purpose of this Directive is to ensure that workers in fixed-term or temporary employment relationships are afforded the same level of protection as other workers, especially in relation to safety and health at work.

Another Council Directive 97/81 of Dec. 15, 1997, was adopted concerning the Framework Agreement on part-time work concluded by the Union of Industrial and Employers’ Confederations of Europe (UNICE), the European Centre of Enterprises with Public Participation (CEEP) and the European Trade Union Confederation (ETUC). In addition, the EU adopted Council Directive 1999/70 of June 28, 1999 concerning the framework agreement on fixed-term work concluded by ETUC, UNICE and CEEP.

In 2008, Directive 2008/104 of the European Parliament and the Council of Nov. 19, 2008 on temporary agency work was adopted. This Directive established a protective framework for temporary agency workers and contains provisions to foster non-discrimination, transparency, and proportionality, while respecting the diversity of labor markets and industrial relations.

In the UK, several general pieces of legislation regulating the labor force have been enacted, including the Employment Rights Act 1996, National Minimum Wage Act 1998, Employment Relations Act 1999, Maternity and Parental Leave etc. Regulations 1999, Transfer of Undertakings (Protection of Employment) Regulations 2006, and the Equality Act 2010.

Special laws and regulations have been created to regulate workers in non-standard forms of employment, such as the Part-Time Workers (Prevention of Less Favourable Treatment) Regulations 2000, which require employers to treat part-time workers in a similar manner as full-time workers under the same type of employment contract. The Agency Workers Regulations 2010 is another statutory measure that prevents discrimination against agency workers in the workplace and requires employers to provide temporary agency workers with equal treatment on pay, holidays, and working time conditions.

During the Covid-19 pandemic, many enterprises were forced to change their business models and adopt work-at-home arrangements due to the travel restrictions and suspension of physical business operations. As a result of these restrictions, many cross-border workers were unable to physically perform their duties in their country of employment and had to stay at home and telework.

In April 2020, the Organisation for Economic Co-operation and Development published guidance on “Secretariat Analysis of tax treaties and the impact of the Covid-19 crisis” which addressed the creation of permanent establishments, interruption of construction sites, changes in residency status for individuals and MNEs, conclusion of contracts by dislocated employees in a different jurisdiction on behalf of their foreign employers, and new taxing rights over the income of employees in other jurisdictions as a result of labor force fragmentation arising during the pandemic.

The guidance represents the views of the OECD’s Secretariat and the general approach of various jurisdictions on the interpretation of the provisions of tax treaties, which is considered an authority when assessing the tax consequences of cross-border work-from-home arrangements during the Covid-19 pandemic. In particular, HM Revenue and Customs in the UK has published guidance on how Covid-19-related travel restrictions will affect the permanent establishments of corporate taxpayers.

As regards whether a foreign tax resident company may create a permanent establishment in the UK due to the company’s employees being subject to Covid-19-related travel restrictions, the UK stance is similar to that of the OECD Secretariat. According to HMRC, a nonresident company cannot have a permanent establishment in the UK after a short period of time, since a degree of permanence is required. The HMRC guidance further notes that “whilst the habitual conclusion of contracts in the UK would also create a Dependent Agent permanent establishment in the UK, it is a matter of fact and degree as to whether that habitual condition is met.” The HMRC guidance therefore shows that a company will not automatically become a UK tax resident because some decisions are made or a few board meetings are held in the UK over a short period of time.

Corporate Tax and Transfer Pricing Implications

Transfer pricing rules regulate the allocation of costs to proper locations in respect of cross-border work arrangements and in line with the arm’s-length principle. For remote workers, this may require intercompany charges that were not necessary before relocation. The pandemic has made labor markets around the world highly fragmented, creating significant practical challenges for the financial reporting and transfer pricing arrangements of MNEs.

According to the OECD in its guidance, it is unlikely that the pandemic will create any changes to the residence status of an entity under a tax treaty. The change of location of employees is considered a temporary situation that should not create new permanent establishments for the employer. In addition, the OECD clarifies that the temporary conclusion of contracts in the home of employees or agents because of the pandemic should not trigger a change in the residency status of MNEs.

For enterprises now making use of online video conferencing for board meetings, there are concerns that this fragmentation can potentially change the “place of effective management” of an enterprise due to the relocation, or inability to travel, of chief executive officers or other senior executives. Such a change may trigger the issue of double residency, which involves a change in the place of effective management and can affect the residency status of a company under relevant domestic laws.

According to the OECD, work-from-home arrangements should not lead to the conclusion that the home or home office of employees constitutes a place of effective management for the employer, especially if this arrangement is not becoming the new trend over time. The OECD in its guidance explained that “even in situations where there would be double residence of an entity, tax treaties provide tie breaker rules ensuring that the entity is resident in only one of the states.”

Although the OECD’s guidance stresses the temporary nature of working arrangements caused by the pandemic, it fails to offer any suitable solution in respect of more permanent changes that may take place following the pandemic. There is no doubt that an employee may create a taxable presence for corporate income tax purposes depending on the host jurisdiction and the nature of the work carried out. This can therefore trigger an additional corporate income tax liability on the employer in different states and host countries, as well as the risk of potential double taxation. The situation is particularly bad for employers who are found to have tax presence in high-taxed jurisdictions.

As labor force fragmentation is now becoming a trend among MNEs, the implications of these forms of working arrangements for employers, including their residency status and whether they have a permanent establishment in the countries where their employees are located, needs to be assessed, together with the tax consequences for employees. Different jurisdictions would have to rely on tax treaties to mitigate potential double taxation under any cross-border working arrangements.

Future Trends and Planning Tools

Beyond making recommendations in its guidance, the OECD encourages domestic tax administrations to provide guidance to corporate taxpayers on the application of their national law threshold requirements based on the detailed examination of specific facts and circumstances in each case.

Using Ireland as an example, the OECD emphasizes the guidance put in place by the Ireland Revenue which notes that “for Corporation Tax purposes (for a company in relation to which the individual is an employee, director, service provider or agent), the presence of the individual in Ireland or another jurisdiction shall be disregarded where such presence is shown to result from travel restrictions related to Covid-19. However, the individual and the company should maintain a record of the facts and circumstances of the bona fide relevant presence in the State, or outside the State, for production to Revenue if evidence that such presence resulted from Covid-related travel restrictions is requested.”

As regards the risks of permanent establishments arising from workforce fragmentation, immediate risk should not be expected in the future with respect to temporary work-from-home arrangements or travel restrictions of the workforce. However, the “habitual” element of the dependent agent permanent establishment test will need to be applied to MNEs that decide to operate a permanent home office arrangement post Covid.

In line with the updated OECD guidance adopted in January 2021, employees who continue to work from their home jurisdiction after the pandemic would most likely be considered to meet the “habitual” criteria, which means that the presence which an enterprise maintains in a jurisdiction should be more than merely transitory if the enterprise is to be regarded as maintaining a permanent establishment and a taxable presence in that jurisdiction.

To address the numerous transfer pricing consequences of workforce fragmentation arising as a result a combination of the pandemic and technological advances, there is a need for employers and MNEs to consider reviewing their cross-border working arrangements for employees and assess the degree of permanency of these arrangements, especially in respect of home office arrangements of employees.

MNEs will also have to review their transfer pricing models, and when necessary, make amendments to intercompany agreements and engage with local tax authorities to agree on new filing positions. Following the pandemic, foreign tax authorities may no longer find remote employees to be in an extraordinary situation, especially where there is more permanence to the working arrangements of the remote worker.

It is therefore essential for recruiters and employers to incorporate tax planning into policy development in order to ensure that remote working arrangements do not create permanent establishment risks and tax complexities. This is particularly necessary to implement, especially in relation to remote workers who are likely to establish a taxable presence in highly-taxed jurisdictions.

In addition, employers and recruiters need to revamp their work policies on where and how work is to be done, re-evaluate their approach to hiring, and adopt workplace hubs and technology-enabled solutions to address potential tax implications. Employers can use HR technology to track the location of their employees and to ensure they comply with proper tax regulations in host countries and different jurisdictions.


The OECD guidance provides clarification and a degree of tax certainty for employers and employees involved in cross-border working arrangements during the Covid-19 pandemic.

However, there is a need for tax authorities in different jurisdictions to create specific guidance with respect to remote working and the possible implications of corporate residence and permanent establishments. This will be useful in providing MNEs with the clarity and tax certainty needed for long-term planning. Employers also have to review tax compliance requirements and incorporate them into their remote work policies.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

The views expressed herein are personal.

Author Information

Aimée Dushime is a transfer pricing specialist with six years of experience working in Rwanda, Kenya, Nigeria, and the UK. Benita Ngozi Onyebezie is a transfer pricing specialist based in the UK, with more than eight years’ experience as a tax practitioner. She has worked on several transfer pricing audits, gaining extensive experience in engaging with tax authorities.

The authors may be contacted at:;

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