When talent crosses borders: navigating transfer pricing challenges amid increasing workforce mobility

Over the past decade, there has been a significant and lasting change to working practices, with the widespread adoption of remote and flexible working arrangements that routinely cross international borders. Technological advancements have enabled these to evolve into a structural feature of the modern workforce.

The ‘war for talent’ has pushed businesses to hire senior individuals outside their traditional geographic footprints, while employees increasingly regard flexible and cross-border working arrangements as a key benefit that businesses must offer to attract and retain the best people.

Cross-border working brings significant challenges, resulting in multinational enterprises (MNEs) being brought into the scope of certain tax regimes for the first time, or materially changing their existing tax position in countries where they already operate. For tax directors and in-house counsel, the question is no longer whether remote working creates tax exposure – it is how to identify, quantify, and manage that exposure before it becomes a dispute.

The range of issues that cross-border working raises is broad: immigration, employment law, regulatory considerations, individual income tax and payroll withholding requirements, the EU Posted Workers Directive, and social security obligations all demand attention. This article focuses on the corporate tax dimension. Specifically, whether remote working creates a permanent establishment and how it interacts with, and puts stress upon, existing transfer pricing policies.

In November 2025, against this backdrop, the OECD published updates to the Commentary on Article 5 of the OECD Model Tax Convention on Income and on Capital. This provided very welcome clarity to businesses navigating the permanent establishment risks associated with remote work.

The updated guidance sets out a two-part test when determining whether a fixed place of business permanent establishment has been created in the context of remote working.

The first test considers the time spent remote working: where an employee works from home or a similar place for less than 50% of their working time, this should not, of itself, give rise to a fixed place of business permanent establishment for the employing entity. If the 50% test is failed, a commercial reason test looks at various factors to conclude whether the business has a commercial reason to be operating in the remote location. If it does not, there will be no permanent establishment.

This is a meaningful practical clarification. The 50% threshold gives MNEs a bright line against which to assess their exposure in straightforward cases of remote work. It is clear that the OECD has worked hard to limit or negate there being permanent establishments in situations where only small amounts of profit would be attributed, recognising that this creates increased compliance burdens for MNEs and increased administration burdens for tax authorities.

In the absence of specific guidance from the OECD or individual countries on a date from which to apply the new guidance on remote working (Austria being in the minority, with the local tax authority announcing that the new commentary should be applied from January 1 2026), it is likely to be seen as best practice to consider the duration and business reason tests in relation to existing double tax treaties where they follow the OECD model.

However, the relief is far from a universal safe harbour. Some OECD member countries – such as Chile, the Czech Republic, and Israel – have included reservations to express their disagreement with the changes to the commentary. Non-OECD member countries are not bound by the changes and may not align with them in all cases.

MNEs must also be careful not to overlook the dependent agent permanent establishment definition. Where senior individuals are involved – particularly those with authority to negotiate and conclude contracts or who play a significant role leading to the conclusion of contracts – it is important to note that a dependent agent permanent establishment can be created regardless of the number of days spent in a given location.

The OECD’s engagement with the global mobility challenge has not stopped with the updated Article 5 commentary. In November 2025, the OECD released a public consultation on the global mobility of individuals. This document posed questions encompassing employment tax issues and transfer pricing considerations arising from cross-border working, not just further permanent establishment issues.

This broader framing is important. In practice, a permanent establishment analysis rarely sits in isolation. A conclusion that a permanent establishment exists triggers the next question: what profits are attributable to it? A conclusion that there is no permanent establishment may still leave questions about corporate residence, transfer pricing, payroll, employment taxes, social security, and individual residence. Global mobility is therefore not a single tax issue. It is a governance issue requiring joined-up policies, monitoring, and evidence.

The overarching objective of the consultation, as with the November 2025 commentary, is to simplify the position for MNEs – acknowledging that the current framework, designed in a different era, is ill-suited to the realities of a modern, mobile workforce.

For MNEs, the key question is what comes next. Timing remains uncertain, and although an update from the OECD is expected after the summer, this is expected to be focused on the areas highlighted by the consultation for further work and analysis, rather than providing any answers at this stage.

In many cases, a further dimension of the remote working challenge is the impact on transfer pricing. Where a business has already undertaken a permanent establishment analysis and concluded that no taxable presence arises, it may also need to consider the extent to which the movement of people across borders can undermine the integrity of its transfer pricing policies in several ways.

A single individual working abroad may not result in significant profit being attributed to a potential permanent establishment. But if it emerges that an MNE’s previously routine low-risk, low-reward entity employs a senior individual (or a senior individual spends time in that country for personal reasons), it may be difficult to sustain the ‘routine’ return of the entity. As working patterns evolve, MNEs are increasingly finding that the facts that originally underpinned their transfer pricing analysis and policies may no longer align with the reality of where their employees are.

This is particularly critical where senior individuals are involved. Where employees performing significant people functions (SPFs) or key entrepreneurial risk-taking functions (KERTs) are located outside the country of the legal entity by which they are employed – especially where they live outside the country in which their employing entity is located and are travelling to that country less frequently or have permanently relocated – the pressure on the transfer pricing policy can be significant.

Transfer pricing methodologies that were designed around a stable, physically proximate workforce can break down rapidly when the people performing value-creating functions are dispersed. It is becoming increasingly common for tax authorities to challenge the application of routine cost-plus returns where key senior individuals are physically located outside the country of the entity for which they are working. This trend is consistent with the OECD’s recent efforts to update its guidance on intra-group services and the growing use of service fees that are not purely cost-based (including remuneration models for services linked to sales generated or cost savings realised depending on the nature of the services being provided).

Similarly, where a profit-split approach is implemented that is based on the relative number and seniority of employees, it becomes unreliable as a basis for remuneration where the movement of senior employees fundamentally alters the relative contribution of each entity within the group. Furthermore, where key individuals depart or relocate (or the role is relocated), MNEs should consider whether any exit tax consequences arise because of the transfer of functions, risks, or value-generating activities.

While it is the authors’ experience that MNEs, their advisers, and/or statutory auditors have more typically identified permanent establishment issues to date, such challenges are most commonly identified by tax authorities as part of a broader transfer pricing audit, rather than a standalone permanent establishment enquiry. In many cases, it remains the case that they are ultimately resolved through the pricing of the transfer pricing arrangements.

Against this backdrop, many MNEs continue to struggle with the tracking and monitoring of cross-border working needed to identify potential permanent establishment and transfer pricing exposures. Resources are often limited, HR and mobility functions may not be integrated with tax compliance, and the volume of remote working arrangements – particularly where they arise from individual employee requests rather than business-driven decisions – can make comprehensive oversight difficult to achieve.

In parallel to the tracking and monitoring challenges that MNEs are struggling with, tax authorities are increasingly using digital and AI tools to better equip themselves and make use of the information already collected for other purposes or by other governmental agencies. As a result, in the future, tax authorities may be better placed to identify and challenge potential permanent establishment risk positions – cross-referencing visa data, personal tax returns, social security records, and other data sources to build a picture of where individuals are actually working, and to test that picture against the MNE’s transfer pricing position.

This is not just a theoretical or future risk. Several tax authorities have already demonstrated a willingness to use data-matching and digital tools to identify undisclosed permanent establishments and transfer pricing mismatches arising from the movement of employees. With tax authorities increasingly leveraging advanced data analytics, the focus of enforcement is likely to shift towards a more rigorous examination of remote working arrangements. Businesses that have yet to review their position and potential exposure could find themselves facing audits without the evidence or documentation needed to defend their transfer pricing approach.

Against this backdrop, the imperative for MNEs is clear. The starting point is visibility: businesses need to know where their employees are working, for how long, and in what capacity. Without that foundational data, meaningful permanent establishment or transfer pricing analysis is not possible.

While dedicated technology solutions can play an important role in tracking cross-border working arrangements, organisations can also achieve effective oversight through implementing practical controls. These may include controls to involve the tax function in cross-border recruitment decisions or leveraging existing data sources, such as expense claims and calendar records, to identify the movement of employees.

Where this data highlights changes in the location of senior employees, existing transfer pricing policies should be reviewed to ensure they remain aligned with the actual location of individuals performing SPF/KERT activities. Where the mobility of senior personnel has altered the factual assumptions underpinning those policies, revisions may be required, supported by contemporaneous documentation to substantiate the changes in the event of a tax authority review or audit.

Finally, as the OECD consultation process develops and further guidance emerges in the coming months and years, businesses should be prepared to adapt.

Cross-border remote work is here to stay. Workforce changes have become embedded in employee expectations and how businesses operate.

The OECD’s engagement, through the 2025 commentary updates and consultation, is a welcome step towards a clearer and more workable approach to the tax implications of remote work. But until any output from the consultation process is embedded in domestic law and treaties, businesses must operate under the current rules.

In the meantime, globally, tax authorities are moving towards greater data integration, digitalisation, and the use of AI to identify compliance risks, meaning that MNEs can expect more robust permanent establishment challenges in future.

The message for MNEs is clear: if you have not already done so, establish controls and tools to monitor and review your permanent establishment position and the transfer pricing policy implications thereof, understand where the risk is greatest, and do not wait for controversy to crystallise before acting.

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