Travel restrictions and other measures imposed or recommended by governments in response to the COVID-19 pandemic (COVID-related restrictions) have been in place in the UK and elsewhere for much longer than perhaps early 2020.
Therefore, for companies with an international presence, concerns about the impact of these measures on their tax residence (and other taxable presence) are persistent and arguably more acute than ever as the circumstances give cause for concern (e.g., that directors will be prevented from traveling to board meetings) may have existed for long periods of time.
Some consolation can be gleaned from the updated OECD guidance on the impact of the COVID-19 pandemic on tax treaties, issued by the OECD Secretariat on January 21, 2021. Despite the passage of time, the guidelines are largely unchanged from the original guidelines (April 2020):
- Permanent establishment (PE) risk – Home Office: As in the original guidelines, the OECD states that an employee who is forced to work in a jurisdiction due to COVID-related restrictions should not create a permanent place of business for the company / employer. This is because either there is not the required level of persistence or (possibly more relevant given the long-standing restrictions) because the home office is not available to the company.
- PE risk-dependent active ingredient: The concern here is that an executive (or agent) will usually enter into contracts on behalf of the company while working from home in another jurisdiction. The OECD reiterates that it is unlikely that an employee would usually enter into contracts while at work at home if only because of COVID-related restrictions. The April 2020 guidelines implied that this would only apply if the employee had acted in this way for a “short period of time” – it helps that this reference has been removed in the latest guidelines.
PE risk – construction sites: There is also a positive change to the guidelines for construction sites as the OECD now says that jurisdictions could consider excluding periods of time when construction work is prevented due to COVID-related restrictions on the calculation of time thresholds for construction site PEs.
- Corporate Residence Risk: Again, the OECD’s position remains unchanged that a company’s residency is unlikely to be compromised due to the inability of board members to travel due to Covid restrictions.
The OECD guidelines are helpful, but not a panacea. The approach of the tax authorities (who, of course, manage the rules in practice) will differ in many ways, as can be seen from the model guidelines of different tax authorities cited in the recent OECD publication. The extent to which it is possible to rely on guidelines can also vary. Companies should therefore monitor the position and seek advice in the relevant jurisdictions.
In many cases, factual findings by the tax authorities may also be required to substantiate the approach chosen and the precise impact of Covid restrictions on the way the business is operated.
Finally, companies must consider risks associated with exceptional circumstances beyond the removal of restrictions. The revised OECD guidelines now take into account the position in which an employee continues to work from home after the Covid-related restrictions have ended. The outcome will inevitably be factual, but if (for example) such an employee continues to sign contracts on behalf of the company, unsurprisingly, the OECD sees it as more likely that the employee will be viewed as an ordinary contract signing (and therefore an agency PE).
Again, tax authorities are likely to take different approaches (and jurisdictions are likely to lift restrictions at different times) so companies would be wise to monitor the position and seek advice.