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Implications of remote workforce on intangible assets value creation

Event TPS Transfer Pricing Specialists at TP Minds Americas Congress in Miami

TPS attended TPMinds America in Miami, an international congress dedicated to transfer pricing

Representatives from major U.S. and Latin American multinationals attended and had the chance to stay abreast of the latest developments regarding transfer pricing, such as discussing the impact remote workforce on the value creation for intangible assets.

The IT sector has experienced dramatic expansion in recent years, resulting in a high demand for qualified personnel. Given that this sector generates value primarily through intangible assets, transfer pricing considerations must take account of DEMPE functions (Development, Enhancement, Maintenance, Exploitation and Exploitation) described by OECD Guidelines or DAEMPE functions which includes the “A” from Acquisition according to the UN Manual on Transfer Pricing.  The aim of analyzing the D(A)EMPE functions is to ensure that profits are allocated according to the place where the intangible assets’ value is created.

As part of its overall impact, COVID-19 has caused dramatic alterations to labor markets worldwide, leading to significant shifts in how multinational corporations structure their organizations and/or operations. Teleworking became widely prevalent during and post lockdown period; consequently, many decided to change their place of residence.

Particularities such as these were highlighted:

  • Difficulty in finding qualified personnel has led to the need for companies to have a flexible hiring policy in terms of the location of their employees. This raises critical questions: do these employees contribute to creating value of the intangible assets? If so, could their presence create a permanent establishment for the contracting entity in their country of residence? Would economic ownership between entities be shared? Which entity would be entitled to receive part of the returns obtained from the exploitation or transfer of the intangible assets?
  • Inorganic growth through the acquisition of new entities can have a significant impact on a multinational group. Conducting value chain analyses on a regular basis can help identify where and who participates in D(A)EMPE functions to reduce tax risks.
  • Relocating high-level employees who fulfill their roles remotely. In one particular example presented, a team had relocated their residence to a foreign country. One solution suggested was for these employees to work as freelancers and invoice for their services, while another proposed creating a limited liability company from which they could provide the needed services; however, this raised an important question: could this structure create permanent establishment risk?

Overall, this topic provided valuable insight into the challenges presented by employee relocation and its effect on value creation for intangible assets. As discussed, performing a value chain analysis is key to mitigating tax exposure related to the exploitation or transfer of intangible assets. The frequency of this analysis will depend on several factors like the company’s growth strategy (organic vs. inorganic) or hiring policies, including employees or services from other group entities.

Please do not hesitate to contact us if you require further information or to arrange for an appointment:

Article by Rodrigo Stokkeland, TPS Manager.

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