The coronavirus pandemic may have temporarily changed the way cross-border employees work, but it is unlikely to lead to permanent establishment and tax residency changes under existing tax treaties, the OECD has advised.
In guidance published April 3, the OECD secretariat analyzed international tax treaty rules to consider their implications for extraordinary measures that governments have had to take in response to the COVID-19 crisis. These include imposing travel restrictions and quarantine requirements on individuals and subsidizing employee salaries to help struggling companies.
The ongoing pandemic raises several tax questions about situations involving cross-border workers. Businesses have expressed concerns about whether new PEs would be created if their employees are stranded in countries other than the one in which they normally work and end up working remotely.
Because home offices in such circumstances lack permanency and aren’t necessarily at the disposal of an enterprise, they would not be considered a fixed place of business according to tax treaty rules, the OECD said. Individuals, after all, are forced to stay in one location and work remotely at the government’s direction, it added.
“It is unlikely that the COVID-19 situation will create any changes to a PE determination,” the guidance says. “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.”
Likewise, if contracts are concluded temporarily at employees’ or agents’ homes because of force majeure or government directives as a result of the crisis, then there is no PE created for the businesses involved, the guidance adds.
The guidance also addresses issues linked to a company’s place of effective management because of the displacement of senior executives, which raises questions about whether the company’s tax residence would change as a result. The pandemic is unlikely to change that residency status under a tax treaty, the OECD said.
Moreover, if a government helps a company retain employees during the crisis and those employees receive government-subsidized salaries as a result, then that income should be attributed for tax purposes to the place where employment was exercised before the crisis, the guidance says.
When it comes to individual tax residency status, the coronavirus pandemic will probably not lead to any changes, again because of extraordinary conditions, the OECD said.
The pandemic requires a high degree of coordination and cooperation between countries, especially on tax issues, to curb “potentially significant compliance and administrative costs for employees and employers,” Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, wrote in an April 3 blog post.
“The OECD encourages countries to work together to alleviate the unplanned tax implications and potential new burdens arising due to effects of the COVID-19 crisis,” Saint-Amans added.
The New Normal?
The crisis has certainly upended business operations and employee locations, so the guidance is helpful, according to Daniel Bunn, vice president of global projects at the Tax Foundation.
“Countries should aim to treat businesses and individual location determinations as if operations continued as normal despite the disruptions of the crisis,” Bunn said.
The secretariat’s analysis provides a way for provisions in tax treaties that have adopted the language of the OECD model tax treaty to be interpreted so that employers and employees can keep their pre-pandemic status, according to John L. Harrington of Dentons.
“Quite helpfully, the OECD secretariat analysis includes not just conclusions but rationales for reaching those conclusions,” Harrington said, adding that countries aren’t likely to adopt a conclusion without them. “However, countries can — and hopefully will — adopt the reasoning in the OECD secretariat analysis to reach their own official conclusions.”
Tax administrations will decide for themselves how to interpret tax treaties amid the pandemic, according to Pam Olson of PwC, who welcomed the guidance. But governments are eager to keep their economies afloat, she said. “Responding positively here is a good way to make sure you continue to have the cross-border trade and investment that is necessary to sustain your economy,” she added.
The secretariat did an accurate tax treaty analysis in the context of the pandemic, but there are some issues that are harder to resolve, according to Mary Bennett of Baker McKenzie. She pointed to article 15 of the OECD model tax convention, under which an employee working in a country for more than 183 days becomes taxable in that country. However, that article lacks an extraordinary circumstances exception, according to Bennett. There are also outstanding questions about how the pandemic might affect transfer pricing and profit attribution issues, she added.
While the guidance is a good first step, it reflects the views of the secretariat, not the OECD member countries or non-OECD countries, according to Jesse Eggert of KPMG. “In some cases, the guidance is based on the application of treaty interpretations that themselves have not been adopted by all OECD members,” he said. “Further, as the OECD release notes, similar issues arise under countries’ domestic laws in the absence of tax treaties.”
Some countries have announced relief regarding the issues addressed in the guidance. But “it would be helpful for more countries to provide guidance specific to their application of domestic law and tax treaties, to make it as clear as possible that necessary safety measures will not result in additional tax or compliance burden,” Eggert added.