The COVID-19 pandemic has resulted in significant disruption to international travel and business operations, including the location of directors, employees and other individuals.
While travel restrictions and lockdown measures continue, and it’s unclear how long they will persist, these unprecedented times are expected to re-shape human mobility and the way multinationals look at their global workforce. Increasingly companies are considering a “work from anywhere” model, which would result in fewer employee relocations and the ability for employees to choose their home base for jobs that can be performed remotely, and quite a few companies have already announced plans to do so.
From a tax perspective, the current environment has led to several cross-border tax issues coming to light, including permanent establishment (PE) exposures generated by individuals no longer working in their country of employment, and dual corporate tax residence risks. The OECD has attempted to address these issues by providing guidance on how to interpret and apply existing international tax rules to the current circumstances. This report also looked at issues related to income from employment.
An initial set of guidelines was issued back in April 2020, but were subsequently revised in January 2021 when it became clear that governments around the world would be imposing extraordinary measures in response to COVID-19 for longer than initially expected, including those such as travel restrictions. From a corporate income tax perspective, the guidance includes recommendations around the interpretation of the OECD Model Tax Treaty, and related Commentary on topics such as the creation of permanent establishments (i.e. a taxable presence) and determining the tax residence of a company, with the aim of providing much-needed certainty for corporate taxpayers. The updated report also includes examples of how certain jurisdictions addressed the impact of COVID-19 in these two areas. The OECD’s guidance is non-binding, but reflects the general approach of OECD member jurisdictions, and is an attempt to prevent instances of double taxation.
As one may expect, both the OECD recommendations and country guidelines are mainly focused on cases where temporary remote working and the use of home offices were triggered by measures to reduce the spread of COVID-19. However, they also provide useful pointers for the post-COVID “new normal,” where it is likely that remote work will be voluntary and of a more permanent nature.
Permanent establishment exposure triggered by using a home office (fixed placed of business test)
The OECD guidance concludes that employees temporarily working from their home office, due to COVID-19 restrictions, should not create new permanent establishments for their employer under the fixed placed of business test, as this type of activity lacks a sufficient degree of permanency or continuity, and the employer has no control over it. The focus here is on the exceptional and temporary nature of this situation. The report also addresses the case of construction site PEs, which – in line with the OECD’s April position – would not be regarded as ceasing to exist when work is temporarily interrupted. However, where operations are suspended as a result of COVID-related restrictions, jurisdictions may consider “stopping the clock” for the assessment of whether the PE threshold has been satisfied. In practice, this option might lead to conflicting interpretations between the two signatories, as is evident from the examples provided by the OECD: Germany, who has opted for the suspension, and Greece, where the interruption is included in the calculation of time thresholds for construction PEs.
The updated report from January 2021 offers a glimpse into the OECD’s views on the tax treatment applicable once the travel restrictions and public health recommendations are lifted. According to the OECD, if an employee continues to work from home long-term, their home office may be considered to have a certain degree of permanence, but this change is not sufficient in determining whether or not a fixed placed of business exists. The facts and circumstances of each work arrangement would need to be analyzed to determine, not only if the home office is used on a continuous basis, but also if it is at the disposal of the employer. The risk would also vary depending on who decided to implement the remote working structure. The OECD makes reference to an example from their Commentary where a cross-border employee works mostly from their home office in a jurisdiction different than the one in which their employer’s office is located . In this scenario, the individual’s home office in not considered to be at the disposal of their employer, as the latter did not require its use for business activities.
Agency permanent establishment
The OECD guidance reiterates that the “habitual” element of the dependent agent permanent establishment test will need to be considered carefully, specifically in cases where individuals work from a different jurisdiction than their employer and conclude contracts on behalf of the company. Guidance suggests that an employee’s activity is unlikely to be regarded as habitual if they are only working at home due to measures imposed or recommended by the government, unless the employee was habitually concluding contracts on behalf of their employer in their home jurisdiction before the pandemic, in which case a different approach may be more appropriate.
In cases where employees will continue to work from their home jurisdiction after COVID-19, the OECD states that it would be more likely for the individual to be considered to meet the “habitual” criteria. The report further makes reference to the Commentaries, where the OECD recommends that the facts and circumstances of each case should be considered, including the involvement of the individual in contracting activities and the specifics of the contracts concluded.
Dual residence considerations
In the “new normal”, directors and executives may also continue to work from their home offices, and board meetings may permanently move to a virtual environment, potentially making it difficult to track where key decisions are taken. In cross-border situations, this may lead to dual residence risks. Whilst a number of jurisdictions have clarified that temporary changes in work and management practices due to the pandemic will not result affect a company’s residence, the question generally remains unaddressed in the case of long-term changes.
Although the OECD guidelines only deal with cases where there is a temporary inability to travel due to governmental restrictions, their recommendations, which again make reference to the Commentary and reiterate that the facts and circumstances of each case should be examined, can be applied to a post COVID-19 world. Where double tax treaties are in place, any potential dual residence issues should be resolved by applying the relevant tie-breaker rule for determining the treaty residence of dual-resident persons other than individuals. For treaties that include the 2017 OECD Model tie-breaker rule, competent authorities will focus on a broad set of considerations, including, but not limited to, where the meetings of the company’s board of directors are usually held, where senior executives usually carry on their activities, where the senior day-to-day management of the company is carried on, where the company’s headquarters are located, etc. For treaties that feature the pre-2017 OECD Model tie-breaker rule, the ‘place of effective management’ test would be used and may create dual-residency issues where the most senior person or group of persons ordinarily make key management and commercial decisions from their home offices even after the COVID-19 pandemic. This point remains to be clarified.
Clarification issued by the OECD and individual jurisdictions have been helpful in clarifying the possible PE and corporate residence implications of remote working, specifically during periods where travel is restricted due to public health measures introduced by governments. Whilst some of these clarifications, as well as existing international tax rules, may help predict tax authority’s approaches in the “new normal,” specific guidance in this respect would be useful in providing businesses with the clarity and certainty needed for long-term planning.
In the next installment in this series we will explore the results of a survey conducted by KPMG in over 20 European jurisdictions on what the approach may be going forward.
1 OECD Model Tax Convention on Income and on Capital, Model Tax Convention on Income and on Capital 2017, as it read on 21 November 2017, including the Articles, Commentaries, non-member economies’ positions, the Recommendation of the OECD Council, the historical notes and the background reports, is available at Model Tax Convention on Income and on Capital 2017 (Full Version) - en
2 The Report on OECD BEPS Action 7 recommends that Article 5(5) of the OECD Model Tax Convention (MTC) be amended to provide that an enterprise has a PE in another state where a person acts in that jurisdiction on behalf of the enterprise “and, in doing so, habitually concludes contracts, or habitually plays the principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise,” and the contracts are either in the name of the enterprise, or for the transfer of goods or services by the enterprise.
3 Under paragraph 3 of Article 4 (Residence) of the 2017 OECD MTC, where a person other than an individual is a resident of both Contracting States, “the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which such person shall be deemed to be a resident for the purposes of the Convention, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by this Convention except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting States.”
4 Under the previous version of paragraph 3 of article 4 a dual-resident person would be deemed to be a resident only of the state in which its place of effective management is situated.
Raluca Enache, Director, KPMG's EU Tax Centre
Ana Puscas, Manager, KPMG’s EU Tax Centre