As a result of the COVID-19 pandemic, many businesses and people are unable to undertake their normal business operations or perform their work from the usual locations. For example, cross-border workers are unable to physically perform their duties in their country of employment as they may be required to stay at home.
Where employees are having to perform work from home this can create many tax issues, especially where there are cross-border elements. A simple example is where an individual may be stuck in a country that is not their country of residence which may result in a change of tax residency under existing rules.
Given the multi jurisdiction impact, the OECD has issued guidance on these issues and provided two examples:
- An individual is stranded for a period in a country that is not his country of residence. The OECD’s general view is that, under the bilateral tax treaty an individual’s residence will not change due to such temporary dislocation.
- An individual, who is a cross-border worker, is quarantined in her country of residence and temporarily out of work due to the COVID-19 crisis. As a result of a stimulus package in their adopted country – for her employer, she continues to receive her salary from her employer. The issue here is who has taxing rights on the income. The OECD’s general view is that the income will continue to be taxed as it was prior to the COVID-19 crisis (ie where the individual normally exercised their employment).
The above are two simple examples of where people are in a country with no control over their location and giving rise to potential taxation issues.
Importantly, the limitation of travel can also impact the residence of companies as the management may need to be carried out in another country other than would normally be the case. In these situations, the OECD’s general view is that these special circumstances should not affect the residence status of companies under the international tax treaty rules.
Similarly, issues may arise in respect of the creation of a permanent establishment by virtue of concluding contracts whilst at home or in a different jurisdiction. A similar approach is adopted in these circumstances (ie no PE would be created) under current guidance.
Essentially, the approach proposed by the OECD is to turn a “blind eye” to the technical position and apply a practical approach. Whilst this is clearly advantageous in the current times, caution needs to be exercised when relying on this due to a number of matters including different timing on the lifting of restrictions.
If you’d like further advice and to confirm any tax considerations which would apply to your own personal circumstances in these unprecedented times, please contact your ESV Engagement Partner.