Exploring the Employer of Record (EOR) arrangement: benefits, drawbacks, and tax implications

In today’s globalised business environment, organisations often seek flexible and efficient ways to manage their workforce across different jurisdictions. The Employer of Record (EOR) arrangement has emerged as a popular solution, enabling companies to hire employees in regions where they do not have a legal entity. While this model offers several advantages, it also presents unique challenges and potential tax implications, particularly concerning the concept of a taxable presence under Thai domestic law and a permanent establishment (PE) as outlined in the international tax rules.

Keywords: Mazars, Thailand, EOR, employer, legal, tax, payroll

Understanding EOR Arrangements An EOR is a third-party organisation that legally employs individuals on behalf of another company. This arrangement allows the hiring company to delegate various administrative and legal responsibilities associated with employment, such as payroll, tax withholding, and compliance with local labour laws, to the EOR. The EOR essentially acts as the formal legal employer for tax and legal purposes, while the individual works for the client company in a practical sense.

Advantages of EOR Arrangements

Global talent access: EORs enable companies to tap into a global talent pool without setting up a local entity, thereby accelerating the hiring process in new markets.
Compliance and risk management: By outsourcing employment responsibilities to EORs, companies can navigate complex local labour laws and regulations more effectively, reducing the risk of non-compliance
Cost and time savings: Establishing legal entities in multiple countries can be costly and time-consuming. EOR arrangements eliminate these barriers, allowing companies to focus on their core business activities.
Flexibility: EORs offer businesses the flexibility to scale their workforce up or down based on operational needs without the long-term commitments typically associated with direct employment.

Disadvantages of EOR Arrangements

Control and oversight: While EORs handle the legal aspects of employment, companies might find it challenging to maintain the same level of control and oversight as they would with direct employees.
Dependence on third parties: Relying on EORs means entrusting critical aspects of employment to another entity, which can pose risks if the EOR fails to meet its obligations.
Cost considerations: While EORs can save costs related to setting up legal entities, the fees associated with EOR services can be significant and must be factored into the overall cost-benefit analysis.

Permanent Establishment risk and tax implications in Thailand

When considering the risks associated with a Permanent Establishment (PE) in Thailand, it’s essential to analyse both the Thai Revenue Code and the network of double taxation treaties Thailand has entered into with other countries. |

Thai Revenue Code and PE risks

Under the Thai Revenue Code, a foreign entity is considered to have a PE in Thailand if it carries on business in Thailand through a branch, an office, a place of management, or any other place of business in Thailand. This includes situations where a foreign company has employees, agents or go-betweens conducting business activities in Thailand on its behalf, which could potentially create a taxable presence in Thailand.

The definition of PE in Thailand’s domestic law is broad and can encompass various forms of business presence. For instance, the presence of employees or agents in Thailand who have the authority to conclude contracts, or substantial business activities being conducted in Thailand could trigger PE status under the Thai Revenue Code. This would subject the foreign entity to Thai corporate income tax on the profits attributable to the PE.

Double taxation treaties and PE

Thailand has entered into double taxation treaties (DTTs) with numerous countries to prevent double taxation and provide tax certainty for international businesses. These treaties often include a definition of PE that may differ from that in the Thai Revenue Code, generally requiring a more substantial physical presence or activity level to constitute a PE.

For example, many of Thailand’s DTTs follow the OECD model, which typically defines “PE” as a fixed place of business through which the business of an enterprise is wholly or partly carried on. This includes employees or agents with contracting authority and certain activities performed by employees within specific timeframes. However, these treaties often contain specific exemptions for activities deemed preparatory or auxiliary, providing some relief from PE status.

Thai tax authorities may apply a “substance over form” principle, looking beyond the formal EOR arrangement to the actual activities conducted by the foreign company through its employees in Thailand. If the foreign company appears to be responsible for the risks related to the work performed by the employees and has control over the employees’ performance and evaluation, this could lead to a conclusion that the foreign company is an “economic employer” and trigger a risk of creating a PE in Thailand.

Conclusion

While EOR arrangements offer significant advantages for companies looking to expand into Thailand without establishing a local entity, they must be mindful of Thailand’s specific regulations and the risks associated with the arrangement, including the risk of creating a PE in Thailand. To successfully manage the risk of PE in Thailand, it’s crucial to have a deep understanding of both the Thai Revenue Code and the relevant DTTs. If a company is employing EOR arrangements, they should pay close attention to the activities performed by their employees in Thailand, the authority given to them, and legal documents supporting the arrangement. Given the complexity and possible tax consequences, it is advisable to obtain professional guidance to ensure compliance with the regulations and treaty obligations.