On the 21st of January 2021, the OECD issued a guidance on the impact of the COVID-19 pandemic on tax treaties. This updates the previous guidance issued by the OECD Secretariat on 3 April 2020.
The impact of COVID-19 has been profound. The OECD tackles the issue at global level by expressing the Secretariat’s views on the interpretation of the provisions of tax treaties. The scope of the note is to provide more certainty to taxpayers while eliminating instances of double taxation. The note cannot be relied upon for creating instances of double non-taxation. It purports to provide a general analysis over the matter by showcasing examples of how tax administrations spanning across many jurisdictions have been dealing with the factual reality in addressing tax cases of individuals and employers before them.
OECD’s guidance is relevant only during the period of uncertainty whilst public health measures are in effect (be it travel restrictions, curtailment of business operations and so forth). This period of uncertainty is expected to continue in 2021.
Introduction
While is clarified that the views expressed in the April guidance were published under the responsibility of the OECD’s secretariat and do not necessarily reflect the official views of OECD member countries (who can adopt different interpretations from those in the guidance), it serves as a tool for tackling the ambiguity created over the interpretation of international tax rules in instances where cross-border workers and individuals were stranded in a jurisdiction other than their jurisdiction of residence. The April guidance was issued as an urgent and temporary measure, without knowing how long the restrictions would drag on. In view of the persistence of restrictions on a global scale, the updated guidance considers some additional fact patterns not addressed in detail in April; it examines whether the analysis and conclusions of the April paper continue to apply and contains references to country practice and guidance.
The note outlines the application of the existing rules and the OECD Commentary on concerns related to the following three concerns:
1. Concerns related to the creation of PEs
A concern that the dislocation of employees to jurisdictions other than the place in which they regularly work, or employees working from their homes during the COVID-19 pandemic could create a PE in those jurisdictions, triggering for those businesses new filing requirements and tax obligations.
The exceptional and temporary change of location where employees exercise employment such as working from home and temporary conclusion of contracts in the home of employees or agents due to COVID-19 circumstances should not create new PEs, neither for the employer nor the businesses. A construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted. A “stopping the clock” may be considered by the jurisdictions for the PE threshold purposes.
An array of country guidance samples (on both domestic law and application of treaties) is set out in the note elaborating on whether changes in work practices prompted by the COVID-19 pandemic can result in the creation of a PE.
Home office
Individuals teleworking from home (i.e. the home office) as a public health measure imposed or recommended by a government under the circumstances would not create a fixed place of business PE for the business/employer. This is because the home office lacks a sufficient degree of permanency or continuity, or because it is not at the disposal of the enterprise.
Agency PE
The agent’s activity in a jurisdiction should not be regarded as “habitual” if they exceptionally began working at home in that jurisdiction as a public health measure imposed or recommended by a government. A dependent agent PE would not be created provided that the person does not continue those activities after the public health measures cease to apply.
Construction site PE
A construction site PE would not ordinarily be regarded as ceasing to exist when work is “temporarily” interrupted. However, jurisdictions may consider, following review of all case particulars, that certain periods where operations are prevented as a public health measure, imposed, or recommended by the relevant government where the site is located, constitute a type of interruption that should be excluded from the calculation of time thresholds for construction site PEs.
2. Concerns related to change of residence
A concern over an entity’s place of residence under the tie-breaker provision included in a tax treaty (irrespective whether the treaty contains the pre-2017 or the 2017 OECD Model tie-breaker rule) is unlikely to be impacted by the fact that the individuals participating in the management and decision making of an entity cannot travel due to the public health measures imposed or recommended by a government.
2. Concerns related to a change to the residence status of individuals
The period during which COVID-19 public health measures are applied by a government would not be included by the tax administrations when assessing an individual’s residence status. If an individual’s presence in a jurisdiction results in them becoming dual resident, that person’s place of residence is unlikely to change for the purposes of the tie breaker rules given that the tie breaker rules do take into consideration factors that shall also be assessed in a more normal period. A different approach may be followed in a case where the change in circumstances continues when the health measure restrictions are lifted.
3. Concerns related to income from employment
Article 15 (Income from employment) of the OECD Model governs the taxation of employment income and specifically states 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.
The application of Article 15 is considered based on the following parameters:
a) Wage subsidy and similar income received by cross-border workers that cannot perform their work due to restrictions
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.
b) A worker who is stranded in a jurisdiction where they are not resident but previously exercised an employment
The days of presence test in Article 15(2)(a) is relevant to the extent that it would be reasonable to expect a jurisdiction to disregard the additional days spent by an employee in that jurisdiction, under the circumstances, for the purposes of the 183-day test in Article 15(2)(a) of the OECD Model. Taxpayers are encouraged to contact their local tax authority given that some jurisdictions may have adopted a different approach.
It is important to note that special provisions may apply in some bilateral treaties to deal with the situation of cross-border workers (i.e. neighbouring jurisdictions to which employees frequently commute for work). These special provisions allocate the taxing rights in a different way to Article 15 of the Model Convention (e.g. through the calculation of the maximum permitted number of work days outside the work jurisdiction. Some jurisdictions may consider COVID-19 as force majeure and exclude related teleworking in the home jurisdiction when making the relevant maximum number of days calculation).
c) A worker who works remotely from a jurisdiction for an employer who is resident in another jurisdiction
A change in the place where employment is exercised may give rise to a change in the allocation of taxing rights under the current treaty rules. The circumstances call for jurisdictions to coordinate between them and mitigate the compliance and administrative costs for employees and their employers associated with an involuntary and temporary change of the place where the employment is exercised. MAP should also assist in resolving issues arising in this respect.
New taxing rights may arise over the employee’s income as payroll taxes are often withheld at source and addressing this change will result in an additional burden. Jurisdictions are called to address this problem through guidance and administrative relief.
International taxation never stands still. The impact of the public health measures imposed by governments on the tax treaties is yet another legacy of the COVID-19. Jurisdictions across the globe are called on to contribute to mitigating the effects of the pandemic vis-à-vis the taxpayers through the issuance of detailed guidance and the implementation of measures of relief.