With travel restrictions, workplace closures, physical distancing policies and other measures to contain the novel coronavirus disease (COVID-19), many of us are now working from home.
While most us live in the same jurisdiction as our employer, a sizable minority of employees don’t. Some employees had to stay in the host jurisdictions they were in when restrictions were imposed. Others chose to relocate to their jurisdiction of nationality or elsewhere to join their families. Wherever they find themselves, most people will have to remain in place indefinitely until containment measures are relaxed. Many may choose to do so for considerably longer.
These working arrangements are often unexpected and unplanned. They may raise considerable tax compliance risks for the individuals and their employers related to (among others):
- personal tax residency status
- social security obligations
- income tax and payroll requirements
- permanent establishment determinations
- transfer pricing policies
- corporate residency determinations.
These risks may arise any time employees travel for work across borders. While the current situation has multiplied the exposures many times over, it’s also highlighting opportunities to control them through automated global mobility management systems and other leading practices.
How long will exceptional measures apply?
Over 130 jurisdictions have acted to restrict the movement of people. With no global decision-making authority, governments are adopting inconsistent approaches based on different interpretations of risk and scientific advice. Unlike many countries, for example, the UK has not to date closed its borders, does not test travelers arriving in the country, and has not made quarantine for arrivals mandatory. The UK seems likely to change this position as lockdown is lifted, in contrast to other countries.
These discrepancies may continue as countries to start lifting their lockdown measures — and possibly restore them so they can limit a potential second COVID-19 wave. India, France and other jurisdictions have extended their lockdown periods, for example, while others, such as Germany and Denmark are looking at lifting them. We could eventually see similar inconsistencies when jurisdictions begin reopening their borders.
In the near term, we might expect jurisdictions to take a reasonable approach to tax problems potentially created by dislocated employees. For example, the Organisation for Economic Co-operation and Development (OECD) pronounced that the COVID-19 situation would not likely create any changes to a permanent establishment determination or affect residency determinations for individuals under tax treaties, provided the employee’s situation results from government directives and does not become the norm over time.
Some countries, including Australia, Ireland and the United Kingdom, have also announced relaxations to local laws during this period. Many other countries have not yet stated their position particularly as it relates to permanent establishment risk. Risks also arise when there is no treaty protection, or when applicable treaties include non-standard clauses (e.g. the services clause for permanent establishment determination) or require formalities for claiming benefits.
Further, it’s unknown exactly when these short-term policies for exceptional circumstances will stop applying. For example, if these policies end when borders are formally opened, what happens if employees still choose not to travel or their employers encourage them to stay put for now and their behavior becomes habitual or even expected by their employers?
Leading responses to COVID-19 mobility issues
What steps are companies taking to manage the compliance risks created by the current situation and its likely impact on future working patterns? Some of the key responses being adopted by companies we work with are as follows.
- Performing a broad risk analysis and individual case assessments: Your displaced employees most likely do not create an equal amount of risk. Assessing your historical cross-border workers and business travelers as well as your current working-from-home employees will help you to decide where to focus your attention – on those most high risk cases.
For example, this analysis may alert you to an employee creating a permanent establishment risk based on past activities that the OECD’s COVID-19 guidance doesn’t cover. Similarly, you may find that an employee has traveled extensively in the past to the jurisdiction where they are now located, and they may be establishing residency or creating withholding obligations for the company as a result.
- Engaging a broad stakeholder group to manage the company’s global policy approach. As the pandemic emerged, we saw many companies set up COVID-19 working groups or task forces to manage the safe repatriation of employees or monitor their short-term whereabouts. These multifunctional groups often included people from HR, mobility, legal, medical, security and legal functions.
Since we widely expect that the current situation may change the way we work for the long term, this same group of people should be key to setting company policy on working from home now. This group can help ensure all angles are considered when you decide whether it’s possible to apply one global policy or whether regional policies or country-specific guidelines are more appropriate. The group can also help explain the chosen approach to the company’s senior leadership and the board.
- Reviewing the long-term cost of working practices. Your broad risk analysis should help you identify where your company is likely to be exposed to tax compliance costs. Sharing this information with your leadership can allow them to quantify and compare the potential savings in office space and travel expenses that could result if people choose to continue working from home.
Taking these steps now will set you up well to manage your compliance obligations for the workforce of the future, whatever shape that workforce may take.
Many companies with mobile workforces already faced tax compliance risk before COVID-19. Only a relatively low proportion of companies have invested in global systems that can tell them where all of their employees are and what they are doing there at any given point in time. Many global mobility and tax professionals knew about these risks, but they usually related to relatively few employees meaning the risk was broadly accepted. For many companies, the current situation may affect a far higher proportion of employees, pushing these issues to the top of the agenda.
Greater use of technology and data analytics can help your company gain more control over mobile employee risk. Global solutions are available that can help monitor your company’s exposure to tax compliance risks on an ongoing basis. They can also help you identify where your people are at any given point in time, what they are doing in that location, and – most importantly — whether they are safe and well.
5 OECD, OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis (version 3), April 2020.