Multinationals Beware: LinkedIn Can Prove a Taxable Presence

When you think about the risks of over-sharing on social media, you probably think of Facebook pictures of raucous parties and insensitive Tweets. Now, you can add LinkedIn job descriptions to that list.

 

This summer, an appellate tax tribunal in India ruled that job descriptions posted on LinkedIn by GE employees could be admitted as evidence that the corporation had triggered a permanent establishment there. The question of whether there is in fact any presence is vexatious, as is what profit should be attributed to that “presence.” And the case hasn’t been decided, but the admission is a noteworthy precedent.

 

This isn’t the first time LinkedIn’s played a role in a taxable presence dispute, though. Last year, Reuters cited the use of the profiles of Google and Amazon employees in London to help make the case that the businesses may not be fully reporting profits generated by activities in the UK. Tax authorities there have caught on and have begun citing LinkedIn profiles in their tax disputes with multinationals.

 

These cases are a sign that authorities are using all tools available as governments across the world become more proactive about closing loopholes, coordinating policy, and collecting tax from multinationals. Many tax authorities are also introducing harsher and harsher penalty regimes for non-compliance to maximize their financial return from tax audits.

 

Most of the firms that get caught up in disputes about how much tax they owe, and where, are doing what’s natural: trying to avoid paying unnecessary tax. The problem is that most countries’ rules were written long ago in a different, simpler age and they just have not kept pace with the truly global nature of modern business structures, practices and routes to market. Most countries try to capture tax in their jurisdiction through transfer pricing rules, but there is no truly global standard on transfer pricing, and most countries’ rules and resources are just not fit for purpose — adding to the confusion.

 

 

Whilst it is the big famous names that are making headlines, things may not change that much for them, at least until governments figure out a more consistent, global approach to taxing multinationals. The largest corporations also have the resources to figure out and execute complicated tax strategies while ensuring technical compliance. 

 

Instead, it’s SMEs who will feel the pinch harder. They’re easier targets for authorities because they are smaller (but still have tax exposure that comes from any international expansion and presence), they are less likely to have met the basic compliance requirements in this area, and they have fewer resources to fight a challenge. As such, small and medium-sized businesses are more likely to do a deal and pay some extra tax (probably with interest and penalties) just to make the issue go away.  There is also the hidden cost of time spent by senior people in the business defending the company’s position from attack by the Tax Authorities. 

 

While businesses may be tempted to respond to this budding trend with stricter social media policies, that’s missing the point. If not through LinkedIn profiles, increasingly determined tax authorities will find other ways to sniff out potential non-compliance. The best response is to ensure you’re complying (and staying up to date) with permanent establishment and transfer pricing rules across the jurisdictions where you operate. It’s not a fun task, but it’s become increasingly important.