Updated OECD guidance on tax issues arising from COVID-19 travel restrictions for individuals and businesses

The OECD in January issued updated guidance on cross-border tax issues arising from individuals’ remote work because of COVID-19 travel restrictions and lockdowns, including interpretation of tax treaties. The guidance represents the OECD Secretariat’s view – it is not the law of any specific country, but does reflect many countries’ general approach and includes examples of how different countries have addressed these tax questions. The OECD specifically states that the guidance is unique to circumstances arising during the pandemic when public health measures are in effect.

April 2020 guidance

In the immediate aftermath of the shutdowns instituted across the world in March 2020, the OECD issued guidance last April on the application of tax treaties to situations where cross-border workers were stranded in a jurisdiction other than their country of residence. While that guidance represented “an urgent response” to questions from various countries, the more recent guidance reflects the benefit of a year’s experience in navigating work closures and travel restrictions.

The updated guidance

Broadly, the OECD’s updated guidance addresses:

  • The possibility of remote work creating permanent establishments for non-resident employers.
  • Possible changes in tax residence for businesses and individuals arising from the pandemic.
  • Jurisdictional questions over taxation of workers’ income arising from work performed remotely.

Permanent Establishment (PE)

The guidance says that “exceptional and temporary” changes of the location where employees are engaged in their work that are due to the pandemic, and the temporary conclusion of contracts in the home of employees or agents because of the pandemic, should not create PEs for employers or businesses. But it also recognizes that domestic law thresholds requiring businesses to register for tax purposes might be lower than treaty thresholds, and that not all income taxes are covered by treaties (such as US state taxes). As such, the OECD guidance, even if adopted by a country, may not shield a business from all potential tax issues created by employees working remotely.

The OECD paper summarizes specific COVID-19 guidance in this area provided by Australia, Austria, Canada, Germany, Greece, Ireland, New Zealand, the UK and the United States. In Australia, for example, the government has said that a business won’t have a PE because of pandemic-induced work changes, so long as it didn’t have a PE in Australia before the pandemic, there are no other changes in its circumstances that might have created a PE, and the unplanned presence of employees in Australia is a short-term result of travel restrictions or pandemic-induced relocations.

The OECD guidance states that individuals working remotely at home because of public health measures are doing so because of an extraordinary event and not due to an employer’s requirement, and so should not create a PE for the employer. It also applies its guidance to an agent’s conclusion of contracts on behalf of an employer, saying that such activities should not be considered habitual (in which case they may give rise to a PE) if the individuals are only working at home because of public health measures.

Change of business residence

In addition to PE concerns, employees’ remote work has raised questions about whether a business that relies on a jurisdiction’s “effective place of management” test in determining its residence may have undergone a change in residence as a result of travel restrictions imposed on board members or senior executives. The OECD guidance says that it is unlikely that the pandemic will create any changes to an entity’s residence status under a tax treaty, and that all relevant facts and circumstances should be examined to determine the usual and ordinary place of effective management, and not only those relevant to an exceptional period.

Here, too, the OECD summarizes guidance issued by Australia, Canada, Greece, Ireland, New Zealand, the United States, and the UK.

Change of individuals’ residence

The OECD guidance provides that it is unlikely that COVID-19 travel restrictions will affect an individual’s treaty residence position. It says that, although the pandemic is a period of major changes and an exceptional circumstance, if an individual’s temporary presence in a jurisdiction results in them becoming a dual-resident, their place of residence under a treaty tie-breaker rule is unlikely to change given consideration of factors within a normal period.

Mazars’ Insight

The OECD suggestions for how treaty residence and PE rules should be interpreted during the pandemic is helpful to taxpayers, but does not fully solve many individual taxpayer issues. For example, while the OECD guidance summarizes the US guidance issued by the IRS (Rev. Proc. 2020-20) that modifies the substantial presence test for travel-related disruptions resulting from the pandemic, the United States has only been willing to make limited extensions to the general substantial presence rule (excluding only up to 60 consecutive days spent in the country between February and April 2020). Those whose lives were disrupted for a longer period appear to be unable to rely on the loosening of the statutory standard.

In addition, as the OECD’s summary of different countries’ guidance indicates, the relief offered by each jurisdiction varies. There is no single blanket exception to protect against COVID-19 related work changes that may involve tax questions for individuals and businesses involving multiple jurisdictions.

Stimulus payments

Many governments have provided, and many taxpayers have received, various subsidies to compensate for the harms caused by the pandemic. The OECD guidance says that in situations where a government has subsidized keeping employees on payroll during the pandemic, despite the employees being unable to work, the workers’ income should be considered attributable to the place where the employment used to be exercised, looking to the tax treatment of paid leave/leave in lieu or termination payments for analogy.

Stranded Employees and Remote Work

The OECD guidance says that where an employee cannot travel because of public health measures, “it would be reasonable” for a jurisdiction to disregard the additional days spent there for purposes of the 183-day residency test in the OECD model treaty.

It also says that exceptional circumstances call for an exceptional level of coordination between jurisdictions to mitigate the compliance and administrative costs (on both the employee and the employer side) associated with “involuntary and temporary” changes to the place where work is performed. But its’ summary of just a few countries’ guidance issued on this point illustrates the variety of different positions being taken by governments.

Mazars’ Insight

The OECD guidance is helpful for taxpayers as a source of sensible rules to apply when interpreting treaties in circumstances arising from changes to where work is performed as a result of the pandemic. However, it is not definitive and many countries have issued their own guidance that may vary slightly from that provided by the OECD.

Please contact your Mazars professional for additional information.

This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.

Published on March 23, 2021

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