BEPS on multinational enterprises and various workforces
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Canadian tax, customs, and global workforces can be difficult to navigate. What exactly is GST and HST and how do these taxes work alongside BEPS to level the playing field? Why is tracking your employees and proper documentation so key in the global workforce? BDO Tax Practice leaders Brian Morcombe and Debra Moses join Tax Partner Harry Chana to help answer these questions in the final episode of the mini-series.
Harry Chana: Hello everyone, and welcome to our second cross-border tax podcast episode. My name is Harry Chana and I'm the International Tax and Transactions Tax Practice Leader for BDO Canada. In our first episode, we introduced and discussed the impact of base erosion and profit shifting commonly known as BEPS. More specifically, we dug into Action 1, addressing the tax challenges of the digital economy. Within Action 1, we discussed the impact of Pillar One that essentially can assert taxing rights in a jurisdiction based on digital presence without the need for physical presence. Pillar Two introduced a minimum tax that would apply to large global enterprises as part of Action 1. In today's episode, we continue our conversation on the impact of BEPS on multinational enterprises and its effect on indirect, customs and global workforces. With us today is Brian Morcombe, who leads our Indirect Tax Practice and Debra Moses, who leads our Expatriate Tax Practice for BDO Canada. So Brian, can you share some of your thoughts on what multinational enterprises need to know on the indirect tax and customs side?
Indirect Tax / GST and HST
Brian Morcombe: Yeah, Harry, there's actually a lot in the indirect tax mix when it comes to BEPS. There's been a lot of focus on corporate income tax and transfer pricing, but it's interesting, there have been significant initiatives over the past number of years focused on indirect tax. In fact, actually, before we go too deep into that Harry, because we're going to be talking GST and HST, which is a bit of a foreign tax to a number of listeners. Would it be helpful just to give a quick background on how it works, maybe with an example?
Harry Chana: Yeah, I think that makes sense. Let's start with a quick example.
Brian Morcombe: Great. Yeah. Basically, GST/HST, which is goods and services tax, harmonized sales tax, very different than sales and use taxes, much more keen, and frankly is a value-added tax. What does this mean? It means it applies at all levels of the supply chain and in Canada, the rates vary from 5% to 15%, depending on which province the supplies deemed to be made in and basically vendors collect tax from recipients. And that tax gets sent into the government and the recipients claim refunds. We don't use purchase exemption certificates or reseller certificates.
Harry Chana: So Brian, It sounds like GST and HST would apply to most B2B transactions and B2C transactions. When we look at it, I guess, in the terms of BEPS, what measures did Canada introduce and why were they needed?
Brian Morcombe: When we're looking at multinational enterprises, MNEs, and actually in the indirect tax world, we use a vernacular multilocation entities, MLEs. Consider them to be interchangeable for purpose of this discussion. Effectively going back to the nineties, we saw people exploiting gaps, businesses exploiting gaps with different countries tax systems that led to domestic tax base erosion, profit shifting BEPS, and the dollars are significant. They're huge, obviously a $100 to $240 billion in lost revenue. What happened there is around 2016, the OECD adopted the international VAT/GST guidelines, and these were designed to address principles from the OECD/G20 project on BEPS. And they focus in on particularly neutrality and in determining the place of taxation. Why is that relevant in terms of this discussion, what these are married to the Pillar One BEPS initiatives. Particularly, for example, neutrality of VAT and GST in the context of international trade, we're looking at preventing taxing B2B, business to business transactions, they're still being tax transacted, but the tax is not supposed to stick as a hard cost.
We're also looking at ensuring that foreign businesses are not advantaged or disadvantaged by, for example, Canada's tax system. That's a big issue and we're going to get to that in a moment and you know exactly what Canada's done to address that point. Another big consideration, ease of administration, foreign companies doing business in Canada. We don't want it to be complicated. We want it to be straightforward. We want it to be easy. Those are the neutrality considerations. And then we've got the determining of place of taxation, which is otherwise commonly known as the destination principle. With the destination principle, we're concerned about tax based on jurisdiction of consumption. For example, you don't want somebody being taxed outside of Canada, for something that's being consumed in Canada, that would be counter-intuitive possibly, we've got customer identity and usual residence rules.
What happened was within Canada, we've got this great taxing system, that's going to be collecting tax and customers being eligible to claim refunds. But then when it came to non-residents, we had this huge gap and to get to your question, Harry, it's that huge gap that needs to be addressed. And that huge gap is where non-residents historically might not be viewed as carrying on business in Canada. They don't need to be registered for our sales tax. They don't need to report anything to Canada revenue agency, and the result is that consumers in Canada are able to buy these services from these non-residents that aren't registered and don't collect tax.
And then there's no tax actually being collected on these supplies and the consumers aren't self-assessing taxed, they don't necessarily even have an effective mechanism to get that tax into the government. What Canada's done to address these points, as well as the considerations around BEPS and the OECD/G20 project on BEPS that gave us neutrality and destination principle as main considerations is a new set of rules that come into play July 1, 2021, assuming that the Canadian government can maintain its deadline.
These are rules that were proposed as of November 30, 2020, and they are targeting non-residents that are going to be supplying digital property and services predominantly to consumers in Canada and consumers in this situation isn't what most folks would consider it a typical definition of consumer within tax legislation, which generally hones in on an individual. Instead, we're looking at consumers, that's just being anybody who's not registered for GST/HST. It could be a business that's just not registered for GST/HST in Canada. And we're seeing supplies that are made to those consumers of digital property and services could be supplies made over a digital platform by digital platform operators. We're seeing the expansion of these rules to address supplies of short-term accommodation, again, through short term accommodation platform operators. And we're seeing non-residents that use fulfillment warehouses and also sell via their own websites into Canada.
They're going to be caught into these rules. And at the end of the day, we're looking at anybody who has basically making taxable supplies greater than $30,000 a year taking into account the preceding 12 months to consumers to individuals as having to now register for GST/HST effective July 1, 2021. And what's quite good about all of this change is that we will see according to the government's metrics, as much as an increase of $247 million of what was otherwise lost tax revenue that will now be introduced into the Canadian economy. It's also now putting non-residents on the same playing field as Canadian residents that had to collect tax on these supplies. You think about, for example, streaming services of television and movies that we all enjoy these days, a Canadian supplier of that had to collect tax the non-resident didn't have to.
And so that gave the non-resident a competitive advantage over the Canadian company because consumers had to pay tax to use that Canadian company. That's not going to be the case as of July, which is great news. And it also addresses, again, those BEPS considerations. Now we're dealing with neutrality concern where we're not seeing foreign businesses that have an advantage over Canadian businesses.
They're also introducing a simplified framework, that will allow non-residents to very easily register. Mind you, they will not be eligible for refunds of the tax in but tax credits by using that simplified framework that addresses the ease of administration while we should still see because consumers including only non registrants, we shouldn't see an issue with the OECD and G20 concerns around taxing business to business. In a hard way, basically in a way that they can't recover that tax. Lastly, we're seeing that consumers are the ones being taxed based on use in their own jurisdiction, which helps us with our destination principal and obviously honing in on things like the customer identity and then the usual place of residence of those individuals. Again, concerns that are covered by the OECD/G20, VAT/GST international guidelines.
Harry Chana: Thanks for that, Brian. Yeah, I guess it goes back to your concept of ensuring tax neutrality and making sure that everybody's on the same level playing field. Thanks for sharing your insights on just GST/HST, its impact on customs and sales tax.
Brian Morcombe: Thanks for including me.
BEPS and Global Travel
Harry Chana: I want to just switch gears a little bit and bring in Debra Moses leader of our Expatriate Tax Practice. BEPS has impacted global travel. Debra, maybe if you can just enlighten the audience, just how BEPS has impacted global travel and what it means now from a global mobility perspective?
Debra Moses: Sure. Thanks, Harry. Basically a lot of people are thinking that BEPS had no impact on global mobility, but there's a fair amount of impacts that it has. What we've been telling most people is, they have to do is do an assessment of where they are now, like understand where you are today, evaluate all the activities of your globally mobile employees and ensure that their tax strategies to develop a more concrete plan to assess any risk exposure that could be there. There's heightened focus on substance now, thus, the employment and relationships and structures are expected to be examined much more closely by the tax authorities globally because these relationships often drive permanent establishment determination, employee taxability, transfer pricing implications, and indirect tax applicability among others. It's really important maintaining and enhancing adequate substance within the employment relationships and structures is going to be critical to managing any unanticipated outcomes in case of a challenge by any of the tax authorities.
So we always say understand where you are, what you have documented first and then for the next step, we say plan ahead, what's going to happen. Look at an established, any processes and procedures you have that are to track and monitor your globally mobile employees, create the structure needed to address future compliance requirements that you may have and solidify any protocols and procedures to track your mobile employees, including business travelers in order to assess any associated permanent establishment risk and comply with reporting and withholding requirements. Harry, you and I have a lot of discussions on this. When we have the employees going, we have to look at whether or not there's any permanent establishment risk to the company that they may be creating.
Harry Chana: That's right, that's a key consideration as the permanent establishment rules on global mobility.
Debra Moses: Yeah. A lot of this documentation needs to be done. There's data transparency and visibility where the tax authorities are becoming very technologically savvy and exchange of information between authorities is becoming commonplace so that's why we have to be careful and make sure that everything is both sides. Both countries have everything documented properly and knowing where your employees are and what activities that they're performing will be key in managing the detailed country by country requirements and associated compliance there. Once you've figured out what you have, then what you need to do is you have to establish specific rules for your employees, like specific projects that you may have something like that. The country by country specific rules to ensure compliance with the recording requirements in each jurisdiction where a company does business, thereby minimizing the risk exposure in that country. The new country-based reporting requirements can be quite detailed.
Therefore, in order to successfully mobilize the workforce and mitigate risks, teams need to be confident that the organization is using the appropriate method of initiating assignments and adhering to the most up-to-date standards, establishing processes and procedures, not only to support, but to drive compliance because there's a multidisciplinary approach to building these processes as necessary, looking from a tax from mobility, human resource, finance, payroll, and legal perspective. It all needs to be put in there together. Once all of that is decided upon the most important part that comes down is you need to document it. Documented effectively, ensure that there's a robust assignment and intercompany documentation is in place. Have the information needed to respond to increased scrutiny from tax authorities. So as to avoid any of the potential penalties that occur, contemporaneous documentation to support assignments is the first line of defense in an audit situation in order to manage global tax risk, review the immobility documentation for details on assignees activities, roles, responsibilities from the home host entities and alignment with the commercial reality and actual practice.
It's really important that the document clarifies de facto or economic employment of the individual while on assignment, each various countries have different rules around that as well as lay the basis for any cross charge of costs between the entities in line with transfer pricing regulations to manage risks. I know Dan talked on the prior podcast on transfer pricing and we work very closely with him and trying to make sure that all the transfer pricing is in place for this because with the employees, that's all comes down to where are their costs born and what are the costs recharged done? The last piece that we usually talk to clients on this that you need to look out for is to ensure that your transfer pricing is compliant. You need to assess like your cost recharge arrangements relative to globally mobile employees, to ensure that the policies adhere to transfer pricing guidelines, to remain outside any corporate tax requirements in the jurisdictions, in which the companies do business. Institute appropriate, cross charging methodology and ensure that entities are adequately compensated for the value that's created by each entity.
Each we're working with a client right now, trying to determine this, what type of markup that they're going to use. In addition to cross charging of employees compensation, the appropriate allocation for deem transfer of intellectual property that may be seen as being transferred on the secondment of employee. We call secondment of employee, basically the lending of employees between different companies, but there's an actual secondment agreement that usually goes along with that. And that's why they may also be required. There's an added complexity to this part. I'd say most part of it is just the documentation that needs to be done, understanding what your employees are doing in each country. And do you have the right documents in place if the tax authorities come and ask you to confirm where you were, knowing where your employees are is very important as well.
Harry Chana: Yeah. Debra, I was just going to say I think just as you're talking there, couple of things just obviously come to mind here, right? It's documentation obviously is really key in terms of how global employees move from one jurisdiction over to another and making sure that we don't trip up whether it's income tax rules, whether it's other payroll type of requirements, transfer pricing, I think as you said, adds a nice sort of ribbon and bow to this whole transaction, it makes it come together. Transfer pricing is very important, but the one thing I heard you mention a couple of times is documentation. That documentation is really key when we have global mobile workforces. Can you give an example just in terms of how you help clients with their global workforces on documenting these, whether it's policies or procedures?
Debra Moses: There's various types of ways that people have been doing it. We have a tool called QuickTrip, BDO QuickTrip that we find is quite useful because depending on where the person is, it has GPS tracking ability, or they can turn it off and it can go on your cell phone. You can track the people. The reports can go through to the company. The company can set up certain limits that they'll have for alarms will go off, or the person, maybe that person isn't the right person to send them to that country because now they may be tripping up some other rules. We do have software that's done that way and it can be done on the cell phone. It could be done on the computer for the company so they can follow it. There are other methods as well, but we find this one really helps with having the company know exactly where their employees are and it can be done automatically with not a lot of involvement with the people.
Harry Chana: Thank you, Debra for sharing that and your insights just on global mobility and its impact just in the BEPS environment that we're living in. I wanted to just take this opportunity to thank Debra and Brian for sharing their thoughts. Just as we conclude here, there's lots for multinational enterprises to consider whether we're talking about indirect taxes, customs, or just global workforces and deploying them across the world. Certainly if you have any questions on the information or things that you've heard in the podcast today, we'd be happy to help you navigate through those rules, especially as these times are changing in this post BEPS environment. In case you missed our first episode, listen to part one with Rita Trowbridge and Dan McGowan on BEPS. And don't forget to subscribe and tune into our cross-border tax podcast series. Thank you again, have a great day.
The information in this publication is current as of March 24, 2021.
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