30 July 2020

What is permanent establishment – and how can your company avoid paying for it?

As a company director, there are many regulations your business must comply with to trade legally – and these rules become more complex if your workforce travels internationally. Frequent travel to particular areas can lead to your organisation qualifying for permanent establishment (PE), potentially increasing your tax liability.

To help you understand what permanent establishment entails, and why effective business travel tracking is important to minimise your tax liability, Voyage Manager has put together this introductory overview to PE…

Enhance your knowledge of permanent establishment

International business travel has tax implications; but whether you are liable for permanent establishment will depend on how often employees take overseas business trips, where they travel to, and the nature of their work.

According to the Organisation for Economic Co-operation and Development (OECD), permanent establishment is when companies trade or carry out operations through a fixed place of business – however, this is just a general definition. In reality, PE is defined by each individual country’s international treaties or domestic tax laws, which means liabilities can vary from region to region.

Many companies mistakenly believe that, so long as you don’t set up an entity and hire employees in a country, you aren’t subject to local tax requirements. However, this isn’t true. Business can fall under permanent establishment regulations if you have a taxable presence within a country – and this could be triggered by either your organisational set-up, or the type of work you carry out.

Understand the ins and outs of PE legislation

To give you an example, if your team regularly works from a fixed location (including co-working spaces) during overseas business trips, you could qualify for PE. Even if the location does not affect permanent establish regulations, the type of work you are conducting still could; for instance, meeting with local business contacts, or seconding staff to work within an overseas organisation.

The length and frequency of staff travel can also impact PE requirements, depending on each country’s regulations. And, if your company fails to keep track of staff travel movements, the resulting compliance breach could mean employees are prohibited entry to that country in future – an embarrassing result that affects your reputation, adds to your tax bill, and impacts international business opportunities.

Tackle tax liability by tracking corporate travel

When it comes to staying abreast of permanent establishment, the biggest challenge to overcome is that most companies aren’t accurately tracking the frequency, length and purpose of staff travel. This makes it incredibly difficult to understand the tax and compliance implications of building global business relationships.

According to Deloitte, 76% of employees believe their company could be doing more to track business travel compliance - and with 69% of companies not using any form of technology to track employee travel, there is certainly room for more organisations to embrace digital travel tracking tools.

Voyage Manager is helping companies to get a better handle on tax, compliance and immigration requirements through our corporate travel tracking software, which includes permanent establishment reporting services.

Our PE tools provide a detailed breakdown of which travellers have been in each country or state over a specified time period, with a summary of the total presence across your business. Data can even be shown in calendar format, breaking down your company's presence in each region globally per day.

This makes it easy to see at-a-glance where people are conducting business, which can be synchronised with financial data to determine tax liability. It can also help your company to stay under PE thresholds, limiting your risk of having to make tax and social security payments in both your employees’ home country, and the countries to which they have travelled.

Avoid the cost and embarrassment of non-compliance

International travel regulations are constantly evolving, and companies must stay up to date with the latest legislation in every region to which your teams take business trips.

To avoid the cost and embarrassment of non-compliance, it’s important that you carefully track business travel, and correlate this data with regional regulations and tax requirements to ensure you’re not exceeding local limits.

Voyage Manager’s in-built PE reporting tools can help you keep a close eye on the tax and compliance implications of work-related travel, and develop strategies to limit your liability.

To discover how our tax and compliance features can improve the way your business manages company travel, book a free Voyage Manager demo.