Because of the COVID-19 pandemic, several cross-border workers find themselves unable to physically perform their duties in their country of employment. Some or most of these workers have to stay at home due to travel restrictions, whilst governments in many countries are wasting no time in putting together stimulus packages to support employment in their jurisdiction.

On April 3, 2020, the Organisation for Economic Cooperation and Development (OECD) Secretariat released an analysis of the COVID-19 crisis impact on various tax treaty provisions. At the request of member countries, the OECD analyzed four concerns based on its interpretation of international tax treaty rules.

Permanent Establishment (PE) Issues

Under tax treaties, a PE may be created in another country under three scenarios: (1) fixed place of business; (2) agency PE; and (3) construction site PE. Having a PE triggers filing requirements and tax obligations in the country where the PE is located.

In a nutshell, the OECD proposes that the exceptional and temporary change of location where employees exercise their employment due to the COVID-19 situation (such as working from home) should not create new PEs for the employer. The same is true for the temporary conclusion of contracts in the home of the employees or agents (agency PE). Finally, the construction site PE would not be regarded as ceasing to exist due to the temporary interruption of work.

For a PE to be created as a fixed place of business, some degree of permanence is required and the PE must be at the disposal of an enterprise. The Commentary on the OECD Model (Commentary) explains that even though part of the business of an enterprise may be carried on at a location, such as an individual’s home office, that in itself should not lead to the conclusion that that location is at the disposal of that enterprise. A home office would be regarded as a PE only if it is used on a continuous basis for carrying on the business of an enterprise, as required by such enterprise. Individuals who stay at home during the pandemic are doing so due to government directives—not because they are required by the enterprise, but rather it is force majeure.

Under the OECD Model, the activities of a dependent agent (e.g., an employee) will create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise. The conclusion of contracts at home because of stay-at-home work orders is force majeure, as stated above, and would not be likely to be treated as habitual. Commentary also states that the activities should have a degree of permanency and are not purely temporary or transitory. A different approach would clearly be necessary if the employee was habitually concluding contracts in his home country prior to the COVID-19 crisis.

With respect to construction sites, in general, a construction site will constitute a PE if it lasts more than 12 months under the OECD Model or more than six months under the UN Model. The Commentary explains that a site should not be regarded as ceasing to exist when work is temporarily discontinued. The OECD submits that temporary interruptions should be included in determining the duration of a site and, therefore, the COVID-19 situation would not result in the construction site ceasing to exist.

The OECD, however, provides some caveats on the above PE analysis. It advises that threshold presence required by domestic law may be different than those applicable under a tax treaty or some income taxes may not be covered by tax treaties like state income taxes in the United States. The OECD encourages tax administrations to provide relevant guidance to minimize potential tax burdens. An example provided is Ireland’s guidance to disregard the presence of an individual in that country for corporate income tax purposes if such presence was a result of the COVID-19 situation.

Issues Related to Residence Status of a Company

There is a concern that a senior executive’s relocation or inability to travel would result in a change in that company’s residence or double residency under domestic laws or tax treaties. In this regard, Ireland has published guidance to disregard the presence of a director of an enterprise in Ireland for tax purposes if the presence is a result of travel restrictions due to COVID-19.

The OECD notes that triggering a double residency is relatively rare. However, even in those cases, tax treaties provide tiebreaker rules (which is a “facts and circumstances” determination) to ensure that an entity is resident only in one country. Two of the significant factors used in the determination are the “usual” (e.g., where senior executives usually carry on their activities) and “ordinary” (e.g., where the most senior person or group of persons, such as the board of directors ordinarily made the key management and commercial decisions) place of effective management. All relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period like the COVID-19 pandemic.

Issues Related to Cross-Border Workers

The pandemic has forced many governments to enact stimulus packages to take on the burden of unpaid salaries on behalf of numerous companies that have and are suffering economically. The OECD submits that in a case like this, where a government subsidizes the keeping of an employee on a company’s payroll, the income should be attributable to the place where the employment used to be exercised, per the Commentary. For cross-border workers, this would be the state in which they used to work.

In general, the OECD Model states that compensation of an individual is taxable only in that person’s state of residence unless employment is exercised in another state, i.e., the place where the employee is physically present when performing the activities for which the employment income is paid (source state). This is subject to some caveats (e.g., 183-day rule or employer is a resident in the source state). Taxing jurisdiction is then distributed between the state of residence and the source state. If the source state has the taxing right, the residence country must either exempt the income or tax it, but give a credit for the source country tax and vice versa.

The OECD advises that wage subsidies during the COVID-19 pandemic resemble termination payments, which, under the Commentary, are attributable to the place where the employee would otherwise have worked. In most instances, this will be the place the person used to work before the COVID-19 crisis. The issue, however, arises when the limits on the number of days as noted above would trigger a change in the individual’s status, resulting in a country losing its taxing right and leading to additional compliance difficulties for employers and employees. Employers may have withholding obligations, which are no longer supported by a substantive taxing right. This necessitates an extraordinary level of coordination between countries to mitigate the costs and burdens, and OECD is coordinating with its member countries to address this issue.

Issues Related to Residence Status of Individuals

Issues related to an individual’s residence status could arise from two situations:

1. A person is temporarily away from his or her home country (either on vacation or to work for a few weeks) and gets stranded in the host country by reason of the COVID-19 crisis and attains domestic law residence there; and
2. A person is working in a country (the “current home country”) and has acquired residence status there but had to temporarily return to his or her “previous home country” because of the COVID-19 situation. The individual may either never have lost their status as resident in the previous home country under its domestic legislation, or may regain residence status upon their return.

The OECD suggests in both scenarios it is unlikely that the individual would acquire residence status in his or her temporary location for exceptional circumstances. Although there are domestic laws that deem a person as a resident based on number of days of stay, residency would not result from the temporary dislocation if a tax treaty is applicable, more particularly, under the treaty’s tiebreaker rules.

Under the tiebreaker rules, residence would be regarded as follows:

1. In the first scenario, treaty residence would be given to the home country, because it is more likely that the permanent home would be in the home country, and even if another home is located in the host country, the other tiebreaker tests (center of vital interests, place of habitual abode, and nationality) would yield a result favorable to the home country.
2. In the second scenario, the result may not be as clear, because if the individual’s personal and economic relations in the two countries are close and the tiebreaker rule was in favor of the current home state, there is a risk that moving to a previous home country during the pandemic would favor such previous home country. In this case, the OECD suggests that the test of habitual abode should be used. Habitual abode refers to the frequency, duration and regularity of stays that are part of the settled routine of an individual’s life and are therefore more than transient. The OECD proposes that tax administrations consider a more normal period of time when assessing a person’s resident status.

Some countries have already issued useful guidance on the residence status of an individual. The U.K. has provided guidance on whether days spent in the U.K. can be disregarded for purposes of determining residency due to exceptional circumstances. Australia has also published guidance stating that where a person that is not an Australian resident for tax purposes is in Australia temporarily for some weeks or months because of COVID-19, they will not become an Australian resident for tax purposes. Ireland’s guidance provides for force majeure circumstances where an individual is prevented from leaving Ireland on his or her intended day of departure because of extraordinary natural occurrences.

At the time of this publication, the United States, which is not an OECD member country, has not released guidance on the foregoing matters. We will provide an update once Treasury issues such guidance.