On 21 January 2021 the OECD Secretariat issued updated guidance on the impact of the COVID-19 on tax treaties. The guidance is intended to provide more certainty to taxpayers and help with understanding tax situations of individuals and employers during this exceptional time.
The first OECD guidelines for COVID-19 impact on application of certain tax treaties provisions were issued in April 2020. Since the pandemic restrictions remain in force some new, not indicated in detail in previous guidance, problems appear. OECD noticed that there are some important issues regarding tax situation assessment of employees and employers following which indicate three significant aspects:
- creation of permanent establishments (i.e. home office, dependent agent PE) and the interruption of construction sites;
- changes in residence for entities and individuals and the application of tie-breaker rules to dual residents; and
- income from employment i.e. payments under stimulus packages, stranded workers, cross-border (frontier) workers and teleworking from abroad.
Creation of permanent establishment (i.e. home office, dependent agent)
Organization noted that it may be concerned for some businesses that employees dislocated to countries other than the one in which they regularly work and working from their homes during COVID-19 pandemic, could create “permanent establishment” (PE) in those countries, triggering for those businesses and their employees new filing requirements and tax obligations.
Bearing in mind epidemic situation individuals who stay at home to work remotely are typically doing that as a result of public health measures – it is an extraordinary event, not an enterprise’s requirement. Therefore, OECD states that home office would not create a PE for the business/employer, either because such activity lack a sufficient degree of permanency or continuity or because the home office is not at the disposal of the enterprise.
The OECD commented similar with regard to the dependent agent. According to the OECD, if employees conclude contracts in a home office (or other temporary location not at the disposal of the enterprise) due to public health measures, it is unlikely to be regarded as habitual and rather is an extraordinary event, not an enterprise’s requirement.
Concerns related to a change to the residence status of individuals
The OECD guidance addresses circumstances in which there is a tax residence issue as a result of a temporary displacement of an individual. It may happen that an individual’s temporary presence in another country may result in the becoming dual-resident for tax purposes.
If the person is resident in only one jurisdiction, any problem occurs, but if the individual is a tax resident in more than one country, there is a need of applying tie-breaker rules indicated in a given double tax treaty. The OECD guidance suggests that applying the tiebreaker rules should not create an unforeseen tax residence position, although it recommends considering the facts and circumstances of each case.
The OECD guidance covers two main situations that may take place:
- Persons are temporarily away from their home and get stranded in a holiday or temporary work / other jurisdiction and trigger dual domestic residence in two countries. In this case, the OECD states that the treaty tie-breaker tests should lead to residence in their original location - either under the permanent home (as the other home would be temporary), or under the center of vital interests tests - as any COVID-19 displacement should be discounted as exceptional.
- Persons working in a jurisdiction have acquired residence status there, but temporarily return to a previous home jurisdiction; in this case the individuals may never have lost their status as a resident of their previous home location. The OECD notes that the position may be more difficult to reconcile under the tie-breaker tests, but comments that ultimately days spent due to travel restrictions should not result in a change in habitual abode.
Concerns related to income from employment
There are three fact patterns considered by the OECD regarding employment income:
(i) Wage subsidy and similar income received by cross-border workers that cannot perform their work due to the restrictions
Where a government has stepped into subsidize the keeping of an employee on a company's payroll during the pandemic despite being unable to work, the income that the employee receives from the employer should be attributable to the place where employment used to be exercised. In the case of employees that work in one jurisdiction but commute there from another jurisdiction where there are resident (cross-border workers), this would be the jurisdiction they used to work in.
(ii) Stranded workers
Pandemic may have caused individuals who are resident in one jurisdiction and exercised an employment in another jurisdiction became stranded in that other jurisdiction. In this instance, according to the OECD, the duration of stay and work in the territory of another country due to the pandemic restrictions should not affect the assessment of the scope of tax obligations in that country in respect of the employment income.
(iii) Remote work
A change in the place where the employees exercise their employment may 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. This in turn can make the application of payroll withholding taxes complicated. That is why the OECD calls for an exceptional level of coordination between jurisdictions in relieving compliance and administration costs for the employers. It is worth mentioning that in the last days of November 2020, Poland and Germany concluded an agreement on the principles of taxation of remote work performed by cross-border employees during the COVID-19 pandemic.
The updated guidance is the OECD’s view on the interpretation of various tax treaty provisions. It means that the jurisdictions and their tax authorities may adopt a different view and/or outcomes could be affected by different tax regimes (such as state/provincial taxes). It should also be added that many countries have issued their own guidelines on determining the PE, tax residence or allocation of employment income.
Therefore, employers will need to review carefully any employee displacements and work through any compliance obligations, particularly in light of different local tax authority positions.
If you have any questions on how the pandemic situation and the issued guidance may affect your business, please contact our team.