COVID-19 travel restrictions mean that many cross-border workers can no longer perform their duties in their country of employment. The Organisation for Economic Co-operation and Development (OECD), an international policy organization, issued tax guidance on 3 April to governments.
To illustrate the OECD’s recommendations, which consist of both corporate and personal tax guidance, we suggest using an example: Ms. X lives in Austria and is a senior cross-border worker for Swiss AG whose headquarters are in Switzerland. Prior to the pandemic, Ms. X worked in neighbouring Switzerland every day, returning home in the evening. However, now Ms. X is quarantined in her country of residence but she continues to work from her home where she has set up a home office in her study using her company computer, two company provided screens and a high-resolution printer.
Corporate tax guidance
1. Does Ms. X’s home office create a taxable permanent establishment (PE) for Swiss AG?
In their guidance, the OECD mentions that it is unlikely that the COVID-19 situation will create any changes to a PE determination due to the exceptional and temporary change of the location where employees exercise their employment. A permanent establishment must have certain degree of permanency and be at the disposal of an enterprise which would not be the case for a temporary home office set-up.
2. If Ms. X concludes and signs contracts from her home office on behalf of Swiss AG, will she create a PE for Swiss AG?
Conducting important business activities such as conclusion of contracts can constitute a permanent establishment. However, the OECD states that normally such an activity does not change the approach, since a permanent establishment would be formed only when an employee performs these kinds of important business activities in a “habitual” way. This is not the case if the employee is only working at home in that State for a short period of time, because of government directives extraordinarily impacting her normal routine. The result would be different if Ms. X was concluding and signing contracts from home prior to the current restrictions.
3. Could the home office change Swiss AG’s residency status?
Even if key management and commercial decisions for Swiss AG are taken from outside of Switzerland during the confinement period, this should not create a change to the company’s residency status given the temporary nature of the home office working due to force majeure restrictions.
Personal tax guidance
1. Will Ms. X become tax liable on her wages in her country of residence?
Many tax treaties contain specific provisions related to cross-border workers. Without referring to any specific bilateral provision, the OECD mentions that “exceptional circumstances call for an exceptional level of coordination between countries to mitigate the compliance and administrative costs for employees and employers associated with involuntary and temporary change of the place where employment is performed”. The OECD has announced that they are currently working with countries to mitigate “the unplanned tax implications and potential new burdens arising due to effects of the COVID-19 crisis”.
2. Could there be any double residency concerns if Ms. X were to be stranded in country other than her country of residence (e.g. due to unfortunate timing of business or personal travel)?
The OECD guidance mentions two examples that due to prolonged travel restrictions, an individual may be stranded in another country for a period of time that may lead to being considered tax resident based on domestic legislation. The OECD mentions that tax treaties already generally provide a solution to this by recognizing residency in the country of a person’s habitual home (or “abode”). Nevertheless, the OECD recognizes that although treaty rules may give unintended results, they ask governments to consider the exceptional circumstances of the COVID-19 crisis and to consider a more normal period of time when assessing a person’s resident status
Much of the OECD’s April 2020 cross-border guidance is nothing more than a reminder that ordinary treaty rules continue to be applicable. It is, however, comforting to know that the OECD has signalled to governments that these rules may still lead to unintended tax consequences. This guidance could be useful in future possible tax disputes related to COVID-19.
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