Analyzing PE exposure resulting from current travel disruptions and remote work

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September 2020

Overview

The IRS in April provided guidance to businesses and individuals impacted by travel disruptions related to the COVID-19 pandemic (see Insight).  Among various types of relief, the IRS provided a maximum 60-day period to generally exempt foreign persons from being treated as engaged in a US trade or business (USTB) and/or from having a US permanent establishment (PE) to the extent such foreign person’s presence in the United States was deemed to be caused by the pandemic.  

While many employees continue to work remotely in different jurisdictions, whether by choice or due to the COVID-19 pandemic, the US Treasury Department and the IRS have not extended the relief period.  As a result, companies may be risking USTB or PE exposure and inadvertently establishing a taxable presence in the United States.  

In addition to the United States, other countries have issued similar guidance, and the OECD also has developed guidance.  While most of this document is focused on the risk of being treated as engaged in a USTB or creating a US PE, possible PEs in other countries in which US-based multinationals operate likewise are an important issue with similar considerations.  As such, both inbound and outbound companies may want to consider assessing their taxable presence exposure and consider taking additional precautions depending on their facts and circumstances, including:

  • conducting a PE audit and risk assessment
  • establishing guidelines and protocols
  • restructuring business flows
  • conducting/refreshing internal transfer pricing, and 
  • considering potential filing requirements.

The takeaway

In light of the expiration of the maximum 60 days of US presence relief provided by the IRS that may be disregarded for certain purposes, and lack of indications for such relief to be reinstated, companies may want to consider whether there is any potential to reduce their risk of PE exposure, including conducting PE risk assessments and audits, establishing PE guidelines, analyzing the company’s transfer pricing strategy, and potentially restructuring their business operations.  In fact, a PE risk assessment and audit may be prudent regardless of the impact of the pandemic. 

The risk of PE exposure impacts both inbound and outbound companies and can lead to significant tax consequences if not appropriately addressed.

See also

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Doug McHoney

International Tax Services Leader, PwC US

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