Temporary Work Locations in a Permanent Establishment World

April 7, 2020

The incredible disruptions that the current pandemic has caused has led to a variety of tax questions. While much of the fiscal conversation has focused on tax relief and tax deferrals, another significant angle needs to be explored. That is the question of nexus. If a business has employees all over the world and some of those employees are stuck working in different locations because of the crisis, does that mean that the business will have to pay income taxes in different jurisdictions? Will the employees become tax residents of a different country?

Key business functions are usually carried out in a particular jurisdiction, but what happens if travel precautions mean that the employees who would normally be working in the UK are homebound in France?

Governments have begun to provide some guidance on this, and the answer so far is that businesses and workers should be taxed in the location they would be working if not for the crisis.

On Friday, the OECD issued guidance on how to interpret tax treaty provisions that define when a business or individual has taxable presence in a country. The OECD model tax treaty is relied on by many countries around the world as the baseline for bilateral tax treaties, so the guidance can be seen as helpful advice for companies operating in countries with similar treaty provisions.

The general message from the OECD is that tax authorities should focus on the ordinary location of operations rather than the temporary location during the crisis. For the employee who would otherwise be working in the UK, but who is currently in France due to government-imposed restrictions on travel, both France and the UK could treat current activities as if they were continued in the UK.

This logic could apply both for corporate income (on sales or services attributed to that employee’s work) or personal income (salary earned by the employee).

The OECD guidance is not law, so it is valuable for individual countries to communicate whether they agree with the OECD’s general interpretation of treaty language in this crisis period.

The UK has let businesses know that temporary presence in the UK will not make a business a resident for tax purposes. HMRC points to existing guidance that the government “will take a holistic view of the facts and circumstances of each case.” The guidance highlights that temporary presence in the UK due to the crisis does not necessarily fit with definitions of a “fixed place of business.”

Australia and Ireland have released similar guidance. India is reviewing the OECD guidance and will provide additional clarifications.

Other countries have provided flexibility for telecommuters in regions where many workers live in one jurisdiction but work in another. France, Luxembourg, Belgium, Switzerland, and Germany have all eased these restrictions. In normal times, the treaties between these countries place a limit on the number of work-from-home days before an employee would trigger tax liability in their home country. Those limits have been lifted temporarily.

While the countries that are taking action are generally providing helpful and flexible guidance, there are many nations that have not yet taken that step. In the current crisis, governments should work to provide appropriate flexibility and guidance that reflects the challenges faced by many employees and businesses around the work.

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