The globalisation of business and the rapid development of digital technologies have fundamentally transformed the way multinational enterprises deploy and manage their workforce. Employees can now perform highly specialised services across multiple jurisdictions without the need for a permanent corporate presence, while businesses increasingly require flexible employment structures to support international projects and cross-border operations.
These developments have generated significant tax and legal challenges. Where employees perform services outside the jurisdiction of their formal employer, multinational groups must address issues relating not only to employment law and social security but also to corporate taxation, permanent establishments (PEs), and transfer pricing.
These concerns have recently been highlighted by the OECD in its 2025 Public Consultation Document on the Global Mobility of Individuals, which identifies three key areas of corporate tax risk.
Firstly, the physical presence of employees in another jurisdiction may create a taxable presence for the enterprise. Depending on the relevant domestic law and applicable tax treaty, a PE may arise because the employee works from a fixed place of business, habitually concludes contracts on behalf of the enterprise, or performs services in jurisdictions recognising a services PE, such as those following the UN Model Double Taxation Convention. The increasing dispersion of senior executives and management functions may also affect the tax residence of an enterprise where domestic rules or treaty provisions rely on the place of effective management.
Secondly, where a PE is found to exist, the profits attributable to that PE must be determined under the authorised OECD approach (AOA). This requires an assessment of the functions performed, assets used, and risks assumed through the PE, with particular attention to the location of significant people functions and key entrepreneurial decision-making.
Finally, employee mobility creates increasingly complex transfer pricing issues. Employees are often formally hired by one group company while their activities benefit another entity, senior executives may perform strategic functions across several jurisdictions, and highly specialised personnel may be concentrated in one jurisdiction while supporting business operations elsewhere. Such arrangements require a careful delineation of the controlled transactions and an arm’s-length allocation of costs and profits.
Global mobility and transfer pricing challenges
From a transfer pricing perspective, the starting point is to determine the economic substance of the employment arrangement rather than relying exclusively on the formal employment contract. The key issue is identifying which group entity effectively benefits from the employee’s activities, regardless of which entity acts as the legal employer.
A comprehensive functional analysis should therefore be performed to evaluate the functions carried out by the individual, the assets employed, the risks assumed, and the value generated for each group entity. This analysis is essential to identify the economic recipient of the services and to accurately delineate the controlled transaction in accordance with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
In many cases involving internationally mobile employees, the cost-plus method represents the most appropriate transfer pricing methodology. Under this approach, the legal employer is reimbursed for the employment costs incurred together with an arm’s-length mark-up reflecting the routine administrative or coordination services performed. However, this conclusion should not be regarded as automatic.
Particular attention should be paid to the individual’s functional profile. Where employees perform strategic management activities, exercise control over economically significant risks, or contribute to the development, enhancement, maintenance, protection, or exploitation (DEMPE) of valuable intangible assets, a simple cost recharge may no longer reflect the economic reality of the arrangement. Similarly, individuals performing “significant people functions” under the AOA may influence the allocation of profits within the multinational group and the assessment of whether their activities create a PE in the jurisdiction where they operate.
A particularly interesting example of these issues is provided by employer of record (EoR) arrangements. Under an EoR structure, an entity formally employs an individual on behalf of another company and assumes responsibility for payroll administration, employment compliance, and social security obligations. Nevertheless, the operating company generally directs the employee’s day-to-day activities, bears the associated business risks, and is the primary beneficiary of the services performed.
The distinction between the legal employer and the economic employer is therefore central to the tax analysis. Although the EoR remains the contractual employer, the operating company may be regarded as carrying on business through the employee in the jurisdiction where the services are performed, potentially giving rise to a PE. Where the EoR operates within a multinational group, the arrangement also raises transfer pricing questions regarding the appropriate characterisation and remuneration of the services provided. Depending on the facts and circumstances, the transaction may constitute the provision of intra-group services or merely the recharge of employment costs.
In addition to corporate tax issues, EoR arrangements may create employment law and social security concerns, particularly in jurisdictions where labour supply or employee leasing activities are subject to specific regulatory requirements. Consequently, the legal characterisation of the arrangement should always be assessed alongside its economic substance.
Practical implications
These issues are no longer merely theoretical. In recent years, the Italian tax administration has increasingly scrutinised cross-border employment arrangements as part of tax audits, focusing on the identification of the economic employer, the potential existence of permanent establishments, and the arm’s-length remuneration of intra-group services. More recently, the Italian Revenue Agency has also addressed certain aspects of EoR arrangements in its administrative practice (Answer to Ruling No. 54/2026), confirming the growing attention paid to the tax implications of evolving global mobility models.
Businesses should ensure that the contractual allocation of employer responsibilities is consistent with the actual performance of functions and the allocation of risks within the group. Identifying the entity that effectively controls and benefits from the employee’s activities is essential not only for determining the appropriate transfer pricing treatment but also for assessing potential PE exposure and the correct attribution of profits.
As tax authorities increasingly focus on the economic substance of cross-border working arrangements, multinational groups should:
Adopt robust governance procedures;
Maintain comprehensive documentation; and
Periodically reassess their global mobility policies.
Only a holistic approach – integrating transfer pricing, PE, employment law, and social security considerations – can ensure that global mobility strategies remain operationally efficient and compliant with an evolving international tax landscape.
