by Ulrika Lomas, Tax-News.com, Brussels
15 April 2020
The OECD has released guidance for national policymakers on the impact of COVID-19 on the treatment of cross-border workers and the interpretation of international tax treaty rules.
“OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis” is available on the OECD’s website.
The OECD notes in this new guidance that, as a result of restrictions on the movement of workers, who are being asked to work from home where possible, many cross-border workers are unable to physically perform their duties in their country of employment.
“This unprecedented situation is raising many tax issues, especially where there are cross-border elements in the equation; for example, cross-border workers, or individuals who are stranded in a country that is not their country of residence. These issues have an impact on the right to tax between countries, which is currently governed by international tax treaty rules that delineate taxing rights. At the request of concerned countries, the OECD Secretariat has issued this guidance on these issues based on a careful analysis of the international tax treaty rules.”
Further, the OECD noted that some businesses may be concerned that these employees dislocated in a country other than the one in which they regularly work could create a “permanent establishment” (PE) for them in those countries, which would trigger new filing requirements and tax obligations.
General guidance on the creation of PEs
The OECD has advised that “it is unlikely that the COVID-19 situation will create any changes to a PE determination. The exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 crisis, such as working from home, should not create new PEs for the employer. Similarly, the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 crisis should not create PEs for the businesses.”
“A construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted,” it added.
“However, the threshold presence required by domestic law (including state/provincial legislation) to register for tax purposes maybe lower than those applicable under a tax treaty and may therefore trigger corporate income tax registration requirements. In addition, not all income taxes are covered by the applicable double tax treaty, (e.g. state income taxes in the United States of America).”
The OECD has therefore encouraged tax administrations to provide guidance on the application of the domestic law threshold requirements, domestic filing and other guidance to minimize or eliminate unduly burdensome compliance requirements for taxpayers in the context of the COVID-19 crisis.
Ireland has been a first mover in this area, having recently issued guidance to disregard the presence of an individual in Ireland – and where relevant, in another jurisdiction – for corporate income tax purposes for a company in relation to which the individual is an employee, director, service provider, or agent, if such presence is shown to result from travel restrictions related to COVID–19.
PE considerations – home working
On home working, the OECD said: “In general, a PE must have certain degree of permanency and be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. Paragraph 18 of the Commentary on Article 5 of the OECD Model explains that even though part of the business of an enterprise may be carried on at a location such as an individual’s home office, that should not lead to the conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise.”
“The carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. Also, for a home office to be a PE for an enterprise, it must be used on a continuous basis for carrying on business of an enterprise and the enterprise generally has to require the individual to use that location to carry on the enterprise’s business.”
The OECD pointed out that, during the COVID-19 crisis, individuals who stay at home to work remotely are typically doing so as a result of government directives: “it is force majeure not an enterprise’s requirement,” the Guidance highlights.”Therefore, considering the extraordinary nature of the COVID-19 crisis, and to the extent that it does not become the new norm over time, teleworking from home (i.e. the home office) would not create a PE for the business/employer, either because such activity lacks a sufficient degree of permanency or continuity or because, except through that one employee, the enterprise has no access or control over the home office. In addition, it provides an office which in normal circumstances is available to its employees.”
Further, the OECD has advised that, for cross-border workers, “where a government has stepped in to subsidize the keeping of an employee on a company’s payroll during the COVID-19 crisis, the income that the employee receives from the employer should be attributable, based on the OECD Commentary on Article 15, to the place where the employment used to be exercised.” The guidance explains in detail the rationale for this treatment, in paragraphs 22 through 27.
On issues relating to agency PEs, the OECD has acknowledged that questions may arise as to whether the activities of an individual temporarily working from home for a non-resident employer could give rise to a dependent agent PE.
The guidance states: “Under Article 5(5) of the OECD Model, the activities of a dependent agent such as an employee will create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise.”
The OECD has advised national policymakers that, in order to apply Article 5(5) in these circumstances, “it will be important to evaluate whether the employee performs these activities in a ‘habitual’ way.”
The guidance advises that “an employee’s or agent’s activity in a state is unlikely to be regarded as habitual if he or she is only working at home in that state for a short period because of force majeure and/or government directives extraordinarily impacting his or her normal routine. Paragraph 6 of the 2014 Commentary on Article 5 explains that a PE should be considered to exist only where the relevant activities have a certain degree of permanency and are not purely temporary or transitory.”
The OECD added: “Paragraph 33.1 of the Commentary on Article 5 of the 2014 OECD Model provides that the requirement that an agent must ‘habitually’ exercise an authority to conclude contracts means that the presence which an enterprise maintains in a country should be more than merely transitory if the enterprise is to be regarded as maintaining a PE, and thus a taxable presence, in that state. Similarly, paragraph 98 of the 2017 OECD Commentary on Article 5 explains that the presence which an enterprise maintains in a country should be more than merely transitory if the enterprise is to be regarded as maintaining a PE in that state under Article 5(5).12.”
“A different approach may be appropriate, however, if the employee was habitually concluding contracts on behalf of enterprise in his or her home country before the COVID-19 crisis,” the OECD said.
Construction site PEs
On construction site PEs, the OECD has said: “It appears that many activities on construction sites are being temporarily interrupted by the COVID-19 crisis. The duration of such an interruption of activities should however be included in determining the life of a site and therefore will affect the determination [of] whether a construction site constitutes a PE.”
“In general, a construction site will constitute a PE if it lasts more than 12 months under the OECD Model or more than six months under the UN Model. Paragraph 55 of the Commentary on Article 5(3) of the OECD Model explains that a site should not be regarded as ceasing to exist when work is temporarily discontinued (temporary interruptions should be included in determining the duration of a site). Examples of temporary interruptions given in the Commentary are a shortage of material or labour difficulties.”
Place of Effective Management concerns
The guidance acknowledges that some businesses may be concerned about a potential change in the “place of effective management” of their company as a result of a relocation, or inability to travel, of chief executive officers or other senior executives — the concern being that such a change may change the company’s residence under relevant domestic laws and affect the country where a company is regarded as a resident for tax treaty purposes.
The guidance advises that: “It is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty. A temporary change in location of the chief executive officers and other senior executives is an extraordinary and temporary situation due to the COVID-19 crisis and such change of location should not trigger a change in residency, especially once the tiebreaker rule contained in tax treaties is applied.”
Again, Ireland has acted promptly in issuing guidance to disregard the presence of an individual in Ireland – and where relevant, in another jurisdiction – for a company in relation to which the individual is a director, if such presence is shown to result from travel restrictions related to COVID–19.
The OECD advises national policymakers that “all relevant facts and circumstances should be examined to determine the ‘usual’ and ‘ordinary’ place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis.”
Concerns related to a change to the residence status of individuals
The guidance concludes by addressing concerns regarding a potential change to the tax residence status of an individual due to spending time in another territory as a result of being stranded there. The guidance sets out in detail potential examples and concludes in both notable cases that provisions within tax treaties should protect individual taxpayers from adverse tax outcomes. The guidance on this matter is set out in paragraphs 28 through 36 in the guidance and highlights national guidance already released by the UK and Australia in this area.