In a guidance published in February 2021, the OECD revisits the guidance issued by the OECD Secretariat in April 2020 on the impact of the COVID-19 pandemic on employees.
During the pandemic period, many enterprises have faced curtailment of their operations, and have been forced to close offices and other business premises forcing those businesses to change how their business is conducted (e.g. working from home). In many jurisdictions, international travel was either suspended or severely restricted for a number of weeks leaving people stranded in jurisdictions where they might not otherwise be. This temporary dislocation of people can have tax consequences for those individuals and the businesses for which they work.
The February 2021 guidance provides commentary on 3 issues namely:
1.The creation of permanent establishments
2.Changes in residence for entities and individuals and the application of tie-breaker rules to dual residents; and
3.Income from employment i.e. payments under stimulus packages, stranded workers, cross-border (frontier) workers and teleworking from abroad.
There is a concern that employees dislocated to jurisdictions other than the one in which they regularly work, and working from their homes during the COVID-19 pandemic, could create a “permanent establishment” (PE) in those jurisdictions. A PE would then trigger new additional filing requirements and tax obligations for the employers.
The OECD guidance explains that the exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 pandemic, such as working from home, should not create new PEs for the employer.
The guidance further provides that a non-resident company cannot establish a PE after only a short period of time. A PE needs a degree of permanency – the PE cannot be of a purely temporary nature.
The Home Office Issue
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.
A home office may be a PE for an enterprise if it is used on a continuous basis for carrying on business of that enterprise and the enterprise generally has required the individual to use that location to carry on the enterprise’s business.
The COVID-19 pandemic is an extraordinary event in that working from home was imposed on employees and businesses because of public health measures imposed or recommended by the Government. This lack of permanency and/or the temporary nature of this home office situation therefore cannot lead to the creation of a PE.
If an individual continues to work from home after the public health measures imposed or recommended by the Government, the home office of that individual may be considered to have a degree of permanence.
However, that change alone will not necessarily result in the home office giving rise to a PE for the business. A further examination of the facts and circumstances will be required to determine whether the home office is now at the disposal of the enterprise following this permanent change to the individual’s working arrangements.
A most important example provided in the February 2021 guidance is that where a cross-border worker performs most of their work from their home situated in one jurisdiction rather than from the office made available to them in the other jurisdiction, one should not consider that the home is at the disposal of the enterprise because the enterprise did not require that the home be used for its business activities.
Change of Residence
There are concerns that the COVID-19 pandemic may have an impact on the “place of effective management” of a company as a result of a relocation, or inability to travel, of board members or other senior executives.
A second issue that might arise is dual residence, which is where a company is considered to be resident in two jurisdictions at the same time.
In the February 2021 guidance, the OECD provides that in situations where there would be a dual residence issue, tax treaties provide tie-breaker rules ensuring that the entity is resident in only one of the jurisdictions.
There are two types of tie-breaker rules:
1. 2017 OECD Model tie-breaker rule
2. Pre-2017 OECD Model tie-breaker rule
In the first scenario, competent authorities would deal with the dual residence issue on a case-by-case basis by mutual agreement. Competent authorities would look over a range of factors.
These factors may include but are not limited to where the meetings of the company’s board of directors or equivalent body are usually held, where the chief executive officer and other senior executives usually carry on their activities, where the senior day-to-day management of the company is carried on and/or where the person’s headquarters are located.
In the second scenario, the place of effective management will be the only criterion used to determine the residence of a dual-resident entity for tax treaty purposes.
In the February 2021 guidance, the OECD highlights that according to paragraph 24 of the Commentary on Article 4 of the 2014 OECD Model, the place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management.
The guidance’s conclusion is that an entity’s place of residence is unlikely to be impacted by the fact that the individuals participating in the management and decision-making of an entity cannot travel as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved.
Change to the residence status of individuals
As provided in the February 2021 guidance, two main situations could be imagined:
1. A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host jurisdiction by reason of the COVID-19 pandemic and attains domestic law residence there.
2. A person is working in a jurisdiction (the “current home jurisdiction”) and has acquired residence status there, but they temporarily return to their “previous home jurisdiction” because of the COVID-19 situation. They may either never have lost their status as resident of their previous home jurisdiction under its domestic legislation, or they may regain residence status on their return.
The guidance provide as follows:
In the first scenario, it is unlikely that the person would acquire residence status in the jurisdiction where the person is temporarily because of extraordinary circumstances. There are, however, rules in domestic legislation causing a person to become a resident if they are present in the jurisdiction for a certain number of days. But even if the person becomes a resident under such rules, if a tax treaty is applicable, the person is unlikely to be a resident of that jurisdiction under the treaty’s tiebreaker rule. Such a temporary dislocation should therefore have no tax implications in the vast majority of cases
In the second scenario, it is again unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home jurisdiction. But even if the person is or becomes a resident under such rules, if a tax treaty is applicable, the person is unlikely to become a resident of that jurisdiction under the tax treaty due to such temporary dislocation if their connections to the current home jurisdiction are stronger than those to the previous home jurisdiction.
In cases where the personal and economic relations in the two jurisdictions are close but the tie-breaker rule was in favor of the current home jurisdiction, the fact that the person moved to the previous home jurisdiction during the COVID-19 pandemic may tip the balance towards the previous home jurisdiction. Then the person may also use the test of “habitual abode”.
According to paragraph 19 of the Commentary on Article 4 of the OECD Model, “Habitual abode” refers to the frequency, duration and regularity of stays that are part of the settled routine of an individual’s life and are therefore more than transient.
Therefore, days spent in a person’s previous home jurisdiction because of travel restrictions imposed as a public health measure by one of the governments of the countries involved should not result in a change to the person’s habitual abode. The determination of habitual abode must cover a sufficient length of time for it to be possible to ascertain the frequency, duration and regularity of stays that are part of the settled routine of the individual’s life.
Income from employment
Article 15 (Income from employment) of the OECD Model governs the taxation of employment income.
Article 15 of the OECD Model provides that “salaries, wages and other similar remuneration” are taxable only in the person’s jurisdiction of residence unless the “employment is exercised” in the other jurisdiction.
Income of cross-border workers that cannot perform their work due to COVID-19 restrictions (e.g. wage subsidies to employers)
The February 2021 guidance provides that where an employee resident in one jurisdiction and who formerly exercised an employment in another jurisdiction receives a COVID-19 related government subsidy from the work jurisdiction to maintain the relationship with the employer, the payment would be attributable to the work jurisdiction under Article 15 of the OECD Model.
Stranded worker: exceeding days of presence threshold due to travel restrictions
The February 2021 guidance provides that where an employee is prevented from travelling because of COVID-19 public health measures of one of the governments involved and remains in a jurisdiction, it would be reasonable for a jurisdiction to disregard the additional days spent in that jurisdiction under such circumstances for the purposes of the 183 day test in Article 15(2)(a) of the OECD Model.
Some jurisdictions may however take a different approach or may have issued specific guidance outlining their approach to such circumstances.
Teleworking from abroad
The February 2021 guidance provides that changes in the jurisdiction where an employee exercises their employment can impact where their employment income is taxed. New taxing rights over the employee’s income may arise in other jurisdictions and those new taxing rights may displace existing taxing rights.
As payroll taxes are often withheld at source, addressing the change will result in compliance and administrative costs for the employer and employee. Some jurisdictions have issued guidance and administrative relief to mitigate the additional burden.
For example, in the UK, the UK HM Revenue & Customs (HMRC) issued guidance noting that there is no change to the employment article and how it applies will depend on the employee’s circumstances.
The HMRC accepts that a non-resident is not liable on employment income relating to employment exercised in the UK during a period of unexpected enforced stay due to the COVID-19.