1. The impact of the coronavirus disease (“COVID-19”) has been profound. The rapid spread of the virus has strained local medical infrastructures, led to restrictions on travel and social contact, and created unprecedented disruptions to the global economy.

2. During the pandemic period, many enterprises have faced curtailment of their operations, and have been forced to close offices and other business premises forcing those businesses to change how their business is conducted (e.g. working from home). In many jurisdictions, international travel was either suspended or severely restricted for a number of weeks leaving people stranded in jurisdictions where they might not otherwise be. This temporary dislocation of people can have tax consequences for those individuals and the businesses for which they work.

3. In light of the exceptional circumstances, on 3 April 2020, the OECD Secretariat issued guidance on the application of international tax treaty rules in circumstances where cross-border workers or individuals were stranded in a jurisdiction that was not their jurisdiction of residence. The guidance was issued as an urgent response to requests from concerned jurisdictions which as a result of the COVID-19 pandemic had taken unprecedented measures that affected the mobility of individuals such as restricting travel and implementing strict quarantine requirements. For that reason, the paper was published under the responsibility of the Secretary-General of the OECD stating that the opinions expressed and the arguments employed therein did not necessarily reflect the official views of OECD member countries.

4. These unprecedented measures imposed or recommended by governments, including travel restrictions and curtailment of business operations, (broadly referred to in this guidance as “public health measures”) have been in effect in most jurisdictions in various forms and stages during most of 2020 and may remain in effect in 2021. This guidance is intended to provide more certainty to taxpayers during this exceptional period when those public health measures were applicable by reflecting the general approach of members and by illustrating how some jurisdictions have addressed the impact of COVID-19 on the tax situations of individuals and employers. This guidance represents the Secretariat’s views on the interpretations on the provisions of tax treaties (i.e., each jurisdiction may adopt different interpretations from those in this guidance)1.

5. Similarly, this revisited guidance applies only to situations arising during the COVID-19 pandemic while relevant public health measures to restrict the spread of COVID-19 are still in effect. It is temporary in nature and seeks to address the exceptional circumstances of the COVID-19 pandemic only. It seeks to avoid instances of double taxation but cannot be relied on to create instances of double non-taxation. Much of the guidance covers circumstances where factual determinations by tax administrations are required and the guidance does not purport to replace the judgement of tax administrations in those cases.

6. The unique and almost unprecedented restrictions arising from government responses to COVID-19 have led to practical challenges for business and for workers. For example, depending on where the employee is located during the COVID-19 restrictions, new taxing rights over the employee’s income may arise in other jurisdictions. Those new taxing rights may displace existing taxing rights and require refunds of some tax withheld at source. Governments have taken practical approaches to the impact of COVID-19 restrictions in these circumstances and have issued guidance outlining how the rules will be enforced. That guidance has been widely welcomed by business.

7. When the OECD Secretariat guidance was first issued (April 2020), it was unclear how long the restrictions would persist and it was expected that many of the situations analysed would be temporary only. Over nine months have passed since the guidance was issued and some of the measures and the restrictions described remain in place. This guidance considers some additional fact patterns not addressed in detail in April; examines whether the analysis and the conclusions outlined in April continue to apply where the circumstances persist for a significant period; and contains references to country practice and guidance during the COVID-19 period.

8. The following sections outline the application of the existing rules and the OECD Commentary on concerns related to:

  • the creation of permanent establishments (i.e. home office, dependent agent PE) and the interruption of construction sites;

  • changes in residence for entities and individuals and the application of tie-breaker rules to dual residents; and

  • income from employment i.e. payments under stimulus packages, stranded workers, cross-border (frontier) workers and teleworking from abroad.

9. Some businesses may be concerned that employees dislocated to jurisdictions other than the one in which they regularly work, and working from their homes during the COVID-19 pandemic, could create a “permanent establishment” (PE) in those jurisdictions, triggering for those businesses new filing requirements and tax obligations.

10. As explained below, the exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 pandemic, such as working from home, should not create new PEs for the employer. Similarly, the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 pandemic should not create PEs for the businesses. Finally, a construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted. But jurisdictions may consider “stopping the clock” for determining whether the PE threshold has been satisfied during certain periods where operations are suspended as a public health measure to prevent the spread of the COVID-19 virus.

11. However, thresholds under domestic law (including state/provincial legislation) that require a business to register for tax purposes may be lower than those applicable under a tax treaty. In addition, not all income taxes are covered by the applicable tax treaty, (e.g. state income taxes in the United States of America).

12. A number of tax authorities have issued guidance on whether changes in work practices prompted by the COVID-19 pandemic can result in the creation of a PE. Business have welcomed the greater certainty provided by the guidance in these unprecedented times. A sample of that guidance is included in Box 1.

13. Jurisdictions are invited to consider adopting a similar approach.

14. Whilst noting that the issue of whether a PE exists is a test based on facts and circumstances, in general, a place must have a certain degree of permanency and be at the disposal of an enterprise in order for that place to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on.

15. Paragraph 18 of the Commentary on Article 5 of the OECD Model 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 should not lead to the conclusion that that location is at the disposal of that enterprise simply because that location is used by an individual (e.g. an employee) who works for the enterprise. The carrying on of intermittent business activities at the home of an employee does not make that home a place at the disposal of the enterprise. A home office may be a PE for an enterprise if it is used on a continuous basis for carrying on business of that enterprise and the enterprise generally has required the individual to use that location to carry on the enterprise’s business.

16. During the COVID-19 pandemic, individuals who stay at home to work remotely are typically doing so as a result of public health measures: it is an extraordinary event not an enterprise’s requirement. Therefore, considering the extraordinary nature of the COVID-19 pandemic, teleworking from home (i.e. the home office) because of an extraordinary event or public health measures imposed or recommended by government would not create a PE for the business/employer, either because such activity lacks a sufficient degree of permanency or continuity or because the home office is not at the disposal of the enterprise. In addition, it still provides an office which in the absence of public health measures is available to the relevant employee. This applies whether the temporary work location is the individual’s home or a temporary dwelling in a jurisdiction that is not their primary place of residence.

17. If an individual continues to work from home after the cessation of the public health measures imposed or recommended by government, the home office may be considered to have certain degree of permanence. However, that change alone will not necessarily result in the home office giving rise to a fixed place of business PE. A further examination of the facts and circumstances will be required to determine whether the home office is now at the disposal of the enterprise following this permanent change to the individual’s working arrangements.

18. Paragraphs 18 and 19 of the Commentary on Article 5 of the OECD Model indicate that whether the individual is required by the enterprise to work from home or not is an important factor in this determination. Paragraph 18 explains that where a home office is used on a continuous basis for carrying on business activities for an enterprise and it is clear from the facts and circumstances that the enterprise has required the individual to use that location (e.g. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), the home office may be considered to be at the disposal of the enterprise. As an example, paragraph 19 notes that where a cross-border worker performs most of their work from their home situated in one jurisdiction rather than from the office made available to them in the other jurisdiction, one should not consider that the home is at the disposal of the enterprise because the enterprise did not require that the home be used for its business activities.

19. In conclusion, individuals teleworking from home (i.e. the home office) as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved to prevent the spread of the COVID-19 virus would not create a fixed place of business PE for the business/employer.

20. The question may also arise whether the activities of an individual temporarily working from home for a non-resident employer could give rise to a dependent agent PE. Under Article 5(5) of the OECD Model, the activities of a dependent agent such as an employee will create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise. Thus, in order to apply Article 5(5) in these circumstances, it will be important to evaluate whether the employee performs these activities in a “habitual” way.

21. An employee’s or agent’s activity in a jurisdiction is unlikely to be regarded as habitual if they are only working at home in that jurisdiction because of an extraordinary event or public health measures imposed or recommended by government. Paragraph 6 of the 2014 Commentary on Article 5 explains that a PE should be considered to exist only where the relevant activities have a certain degree of permanency and are not purely temporary or transitory. Paragraph 33.1 of the Commentary on Article 5 of the 2014 OECD Model provides that the requirement that an agent must “habitually” exercise an authority to conclude contracts means that the presence which an enterprise maintains in a jurisdiction should be more than merely transitory if the enterprise is to be regarded as maintaining a PE, and thus a taxable presence, in that jurisdiction. Similarly, paragraph 98 of the 2017 OECD Commentary on Article 5 explains that the presence which an enterprise maintains in a jurisdiction should be more than merely transitory if the enterprise is to be regarded as maintaining a PE in that jurisdiction under Article 5(5).

22. A different approach may be appropriate, however, if the employee was habitually concluding contracts on behalf of enterprise in their home jurisdiction before the COVID-19 pandemic.

23. Likewise, if the employee continues to work from home for a non-resident employer after the COVID-19 pandemic, on a habitual basis and continues to conclude contracts on behalf of the enterprise, it would be more likely that the employee would be considered to habitually conclude contracts on behalf of the enterprise. As noted in paragraph 98 of the Commentary on Article 5 of the OECD Model, the extent and frequency of activity necessary to treat an agent as acting “habitually” depends on the nature of the contracts and the business of the enterprise. In that respect, the same sort of factors considered in paragraphs 28 to 30 of the Commentary on Article 5 of the OECD Model would be relevant. For example, those paragraphs, among other things, note that whilst the practices followed by member countries have not been consistent in so far as time requirements are concerned, experience has shown that PEs normally have not been considered to exist in situations where a business had been carried on in a country through a place of business that was maintained for less than six months (conversely, practice shows that there were many cases where a PE has been considered to exist where the place of business was maintained for a period longer than six months).

24. In conclusion, the agent’s activity in a jurisdiction should not be regarded as “habitual” if they have exceptionally begun working at home in that jurisdiction as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved to prevent the spread of the COVID-19 virus and, therefore, would not constitute a dependent agent PE provided the person does not continue those activities after the public health measures cease to apply.

25. It appears that many activities on construction sites are being temporarily interrupted by the COVID-19 pandemic. The duration of such an interruption of activities should, however, be included in determining the life of a site and therefore will affect the determination whether a construction site constitutes a PE. 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. Paragraph 55 of the Commentary on Article 5(3) of the OECD Model explains that a site should not be regarded as ceasing to exist when work is temporarily discontinued (temporary interruptions should be included in determining the duration of a site). Examples of temporary interruptions given in the Commentary are interruptions caused by bad weather, a shortage of material or labour difficulties.

26. The Commentary does not include a bright line test on the meaning of “temporary” interruption, thus jurisdictions may have different views of the duration of a “non-temporary” interruption and on other conditions that make the interruption of a different nature than the examples of interruptions in paragraph 55 of the Commentary. Accordingly, some jurisdictions may consider that particular periods of interruption required by domestic COVID-19 restrictions in their jurisdiction should not be included in the calculation of the time thresholds for construction PEs. Such an approach would result in those jurisdictions not asserting the existence of a PE if the duration test would only be satisfied by including days during which operations were prevented on the construction site as a result of COVID-19 restrictions. As noted above, this guidance cannot be relied on to create instances of double non-taxation.

27. In conclusion, a construction site PE would not be regarded as ceasing to exist when work in the site is “temporarily” interrupted, but jurisdictions may consider, in light of the extraordinary circumstances of the COVID-19 pandemic and based on the facts and circumstances, that certain periods where operations are prevented as a public health measure imposed or recommended by the government where the site is located to reduce the spread of the COVID-19 virus constitute a type of interruption that should be excluded from the calculation of time thresholds for construction site PEs.

28. The COVID-19 pandemic may raise concerns about a potential change in the “place of effective management” of a company as a result of a relocation, or inability to travel, of board members or other senior executives. The concern is that such a change may have as a consequence a change in a company’s residence under relevant domestic laws and affect the jurisdiction where a company is regarded as a resident for tax treaty purposes.

29. It is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty. A temporary change in location of board members or other senior executives is an extraordinary and temporary situation due to the COVID-19 pandemic and such change of location should not trigger a change in treaty residence.

30. A number of jurisdictions have issued guidance on whether temporary changes in work and company management practices prompted by the COVID-19 pandemic can result in changes in corporate residence. A sample of that guidance is included in Box 2.

31. This potential change of circumstances may trigger an issue of dual residence (in cases where the change in the place of effective management results in a company being considered a resident of two jurisdictions simultaneously under their domestic laws). However, as recognised by the Commentary on the OECD Model, situations of dual residence of companies are relatively rare.

32. But even in situations where there would be dual residence of an entity, tax treaties provide tie-breaker rules ensuring that the entity is resident in only one of the jurisdictions. If the treaty contains a provision like the 2017 OECD Model tie-breaker rule, competent authorities deal with the dual residence issue on a case-by-case basis by mutual agreement. This determination will take into consideration all of the facts and circumstances over the determination period. No single factor is determinative, rather a range of factors are taken into consideration.

33. In particular, paragraph 24.1 of the OECD Commentary on Article 4 illustrates the range of factors that the competent authorities are expected to take into consideration to make their determination, which includes: where the meetings of the company’s board of directors or equivalent body are usually held; where the chief executive officer and other senior executives usually carry on their activities; where the senior day-to-day management of the company is carried on; where the person’s headquarters are located; etc. It is also possible for competent authorities to agree to more general frameworks for such determinations, for example where particular fact patterns are present, under the authority of Article 25(3).

34. In situations where the treaty contains the pre-2017 OECD Model tie-breaker rule, the place of effective management will be the only criterion used to determine the residence of a dual-resident entity for tax treaty purposes. According to paragraph 24 of the Commentary on Article 4 of the 2014 OECD Model, the place of effective management is the place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. Paragraph 149 of the Commentary on Article 29 of the 2017 OECD Model explains that the concept of “place of effective management” was interpreted by some jurisdictions as being ordinarily the place where the most senior person or group of persons (for example a board of directors) made the key management and commercial decisions necessary for the conduct of the company’s business.

35. Therefore, 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 period such as the COVID-19 pandemic.

36. In conclusion, an entity’s place of residence under the tie-breaker provision included in a tax treaty is unlikely to be impacted by the fact that the individuals participating in the management and decision-making of an entity cannot travel as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved.

37. Despite the complexity of the rules, and their application to a wide range of potentially affected individuals, it is unlikely that the COVID-19 restrictions to travel will affect the treaty residence position.

38. Jurisdictions have already issued useful guidance and administrative relief on the impact of COVID-19 on the domestic and tax treaty determination of the residence status of an individual. A sample of that guidance is included in Box 3 below.

39. Two main situations could be imagined:

  • A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host jurisdiction by reason of the COVID-19 pandemic and attains domestic law residence there.

  • A person is working in a jurisdiction (the “current home jurisdiction”) and has acquired residence status there, but they temporarily return to their “previous home jurisdiction” because of the COVID-19 situation. They may either never have lost their status as resident of their previous home jurisdiction under its domestic legislation, or they may regain residence status on their return.

40. In the first scenario, it is unlikely that the person would acquire residence status in the jurisdiction where the person is temporarily because of extraordinary circumstances. There are, however, rules in domestic legislation causing a person to become a resident if they are present in the jurisdiction for a certain number of days. But even if the person becomes a resident under such rules, if a tax treaty is applicable, the person is unlikely to be a resident of that jurisdiction under the treaty’s tiebreaker rule. Such a temporary dislocation should therefore have no tax implications in the vast majority of cases.

41. In the second scenario, it is again unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home jurisdiction. But even if the person is or becomes a resident under such rules, if a tax treaty is applicable, the person is unlikely to become a resident of that jurisdiction under the tax treaty due to such temporary dislocation if their connections to the current home jurisdiction are stronger than those to the previous home jurisdiction.

42. For the purpose of a tax treaty – which governs the allocation of taxing rights over employment income – an individual can be resident of only one jurisdiction at a time (their “treaty residence”). The rules are set out in Article 4 of the OECD Model. The starting point is domestic law. If the person is resident in only one jurisdiction, that is the end of the matter. If they are resident in both jurisdictions being tested, the tie-breaker rules in Article 4 of the OECD Model are applied. There is a hierarchy of tests, starting with the question in which jurisdiction does the person have a permanent home available to them.

43. In the first case above, it seems likely that the tie-breaker test would mostly award treaty residence to the home jurisdiction. This is because it is probably unlikely that the person would have a “permanent home” available to them in the host jurisdiction. But if they did (and an apartment rented for a sufficiently long period would count), and they had rented out their dwelling in their home jurisdiction, they would be treated as treaty resident of the host jurisdiction. Where the person had a permanent home in both jurisdictions, it seems likely that the other tie-breaker tests (centre of vital interests, place of habitual abode, and nationality) would award residence to the home jurisdiction.

44. In the second case, the same treaty rules apply, but their application produces a more uncertain result because the person’s attachment to the previous home jurisdiction is stronger. In cases where the personal and economic relations in the two jurisdictions are close but the tie-breaker rule was in favour of the current home jurisdiction, the fact that the person moved to the previous home jurisdiction during the COVID-19 pandemic may tip the balance towards the previous home jurisdiction. This would usually be decided using the test of “habitual abode”. According to paragraph 19 of the Commentary on Article 4 of the OECD Model, however, the habitual abode of a person is where the individual lived habitually, in the sense of being customarily or usually present; the test will not be satisfied by simply determining in which of the two contracting jurisdictions the individual has spent more days during that period. “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. Days spent in a person’s previous home jurisdiction because of travel restrictions imposed as a public health measure by one of the governments of the countries involved should not result in a change to the person’s habitual abode. The determination of habitual abode must cover a sufficient length of time for it to be possible to ascertain the frequency, duration and regularity of stays that are part of the settled routine of the individual’s life.

45. In conclusion, because the COVID-19 pandemic is a period of major changes and an exceptional circumstance, tax administrations and competent authorities will have to consider a period where public health measures imposed or recommended by the government do not apply when assessing a person’s residence status. If in the context of and as a result of the COVID-19 pandemic, an individual’s temporary presence in a jurisdiction results in them becoming dual-resident, that person’s place of residence for the purposes of the tie-breaker included in the applicable treaty is unlikely to change, given that the tie-breaker provision requires consideration of factors that shall also be assessed in a more normal period. A dislocation because a person cannot travel back to their home jurisdiction due to a public health measure of one of the governments of the jurisdictions involved should not by itself impact the person’s residence status for purposes of the tax treaty. A different approach may be appropriate however, if the change in circumstances continues when the COVID-19 restrictions are lifted.

46. Article 15 (Income from employment) of the OECD Model governs the taxation of employment income, distributing the right to tax between the employee’s jurisdiction of residence and the place where they perform their employment.

47. The starting point for the rule in Article 15 of the OECD Model is that “salaries, wages and other similar remuneration” are taxable only in the person’s jurisdiction of residence unless the “employment is exercised” in the other jurisdiction. The Commentary on Article 15 explains that this means the place where the employee is “physically present when performing the activities for which the employment income is paid.” But there are conditions attached to the place of exercise test. That other jurisdiction (the source jurisdiction) may exercise a taxing right only if the employee is there for more than 183 days2 or the employer is a resident of the source jurisdiction, or the employer has in the source jurisdiction a permanent establishment that bears the remuneration.

48. The application of Article 15 to the following fact patterns is considered below:

  • Wage subsidy and similar income received by cross-border workers that cannot perform their work due to restrictions

  • A worker who is stranded in a jurisdiction where they are not resident but previously exercised an employment

  • A worker who works remotely from a jurisdiction for an employer who is resident in another jurisdiction

49. Where a government has stepped in to subsidise the keeping of an employee on a company’s payroll during the COVID-19 pandemic despite being unable to work, the income that the employee receives from the employer should be attributable to the place where the employment used to be exercised. In the case of employees that work in one jurisdiction but commute there from another jurisdiction where they are resident (cross-border workers), this would be the jurisdiction they used to work in.

50. Some stimulus packages adopted or proposed by governments (e.g. wage subsidies to employers) are designed to keep workers on the payroll during the COVID-19 pandemic despite restrictions to the exercise of their employment. To the extent these may be the last payments received in respect of the employment, the payments resemble termination payments. These are discussed in paragraph 2.6 of the Commentary on Article 15 of the OECD Model, which explains that they should be attributable to the place where the employee would otherwise have worked. In most circumstances, this will be the place the person used to work before the COVID-19 pandemic. Alternatively the payments may resemble those which are routinely received during paid periods of absence the entitlement to which arises in connection with where the work was performed. Examples of such other routine payments include vacation pay, paid sick leave, or paid furlough, none of which have been known to cause difficulties in international taxation.

51. Where the source jurisdiction has a taxing right, the residence jurisdiction must relieve double taxation under Article 23 of the OECD Model, either by exempting the income or by taxing it and giving a credit for the source jurisdiction tax.

52. In conclusion, where an employee resident in one jurisdiction and who formerly exercised an employment in another jurisdiction receives a COVID-19 related government subsidy from the work jurisdiction to maintain the relationship with the employer, the payment would be attributable to the work jurisdiction under Article 15 of the OECD Model.

53. The COVID-19 pandemic has caused individuals who are resident in one jurisdiction and exercised an employment in another jurisdiction to become stranded in that other jurisdiction. Where an individual resident in one jurisdiction and exercising employment activities in another jurisdiction:

  1. a) is prevented from leaving that other jurisdiction by COVID-19 restrictions, and

  2. b) would otherwise have left that other jurisdiction and qualified for the exemption from source taxation in Article 15(2),

some jurisdictions believe it is appropriate, given the exceptional circumstances, to disregard days to which these conditions apply when asserting a taxing right under the 183-day test (see Box 4).

54. Where a person is resident in one jurisdiction and is exercising an employment in the other jurisdiction (the source jurisdiction), the source jurisdiction may tax the remuneration from the employment in certain circumstances – one of which is where the employee is present in the source jurisdiction for more than 183 days. Paragraph 5 of the Commentary on Article 15 explains that all days of presence count (working days or not) – and provides several examples, one of which is “days of sickness”. But it contains an exception: if those days of sickness “prevent the individual from leaving and he would have otherwise qualified for the exemption”, they do not count towards the days of presence test in Article 15(2)(a).

55. Given the nature of the COVID-19 public health measures of many governments, the exception can be understood to apply where conditions (a) and (b) above are satisfied. This may cover situations where an employee is prevented from travelling because they are in quarantine due to exposure to the COVID-19 virus. In addition, it may cover situations where either government has banned travelling and cases where it is, in practice, impossible to travel due, for example, to cancellation of flights. This may not cover the situation where an individual does not travel based on a mere recommendation by the governments involved to avoid unnecessary travel. Any decision to disregard days spent in a source jurisdiction as a result of COVID-19 restrictions may result in the source jurisdiction not exercising taxing rights allocated to it under the terms of a double tax treaty which it would be entitled to do.

56. In conclusion where an employee is prevented from travelling because of COVID-19 public health measures of one of the governments involved and remains in a jurisdiction, it would be reasonable for a jurisdiction to disregard the additional days spent in that jurisdiction under such circumstances for the purposes of the 183 day test in Article 15(2)(a) of the OECD Model. Some jurisdictions may however take a different approach or may have issued specific guidance outlining their approach to such circumstances.3 Taxpayers in this situation are encouraged to contact their local tax authority.

57. A change of place where cross-border workers exercise their employment may also affect the application of the special provisions in some bilateral treaties that deal with the situation of cross-border workers. These provisions apply special treatment to the employment income (and in some cases replacement income such as short-time work compensation) of cross-border workers and may often contain limits on the number of days that a worker may work outside the jurisdiction they regularly works before triggering a change in their status.

58. Some jurisdictions have agreed special treaty provisions with neighbouring jurisdictions to which employees frequently commute for work. These provisions allocate the taxing rights in a different way to Article 15 of the Model Convention. For example, under some of those provisions employees commuting to a neighbouring jurisdiction are taxable on their employment income only in the home jurisdiction provided any employment activity carried on elsewhere is limited to a maximum stated period (typically ranging from 4 to 6 working weeks). Some of those treaties include provisions according to which teleworking days are considered working days within the work jurisdiction. Some jurisdictions have agreed to treat the COVID-19 pandemic as force majeure or an exceptional circumstance and, accordingly, the time spent by the employee teleworking in their home jurisdiction will not be included in the calculation of the maximum work days outside the work jurisdiction limitation for the purposes of the treaty.4

59. A change in the place where the employment is exercised may give rise to a change in the allocation of taxing rights under the current treaty rules.

60. Accordingly, if the jurisdiction where employment was formerly exercised should lose its taxing right following the application of Article 15, additional compliance difficulties would arise for employers and employees. Employers may have withholding obligations, which are no longer underpinned by a substantive taxing right. These would therefore have to be suspended or a way found to refund the tax to the employee. The employee would also have a new or enhanced liability in their jurisdiction of residence, which would result in new filing obligations.

61. Some examples illustrating changes in allocation of taxing rights over employment income are included below:

  • Before the COVID-19 pandemic, an employee resident in Jurisdiction A normally exercised their employment in Jurisdiction B. The employee began to exercise his employment from Jurisdiction A due the COVID-19 pandemic. According to Article 15:

    • if the employer was resident in Jurisdiction B, Jurisdiction B is entitled to tax the income derived from the period during which the employee was physically present in Jurisdiction B (i.e., a reduction in Jurisdiction B’s taxing right);

    • if the employer was not resident in Jurisdiction B or did not bear the cost of the employee’s remuneration through a PE in that jurisdiction, Jurisdiction B would likely lose its taxing right under a treaty if the employee spent less than 183 days there (i.e., a complete loss of Jurisdiction B’s taxing rights).

  • Before the COVID-19 pandemic an employee was resident in Jurisdiction A, became stranded in Jurisdiction B and began to exercise his employment there. Under Article 15, Jurisdiction B would be permitted to tax the employment income if the employer was also resident in that jurisdiction or bore the cost of the employee’s remuneration through a PE in that jurisdiction. In cases where the employer was resident elsewhere, Jurisdiction B would be entitled to tax the employment income only if the employee exceeds the 183 day threshold.

62. Exceptional circumstances call for an exceptional level of coordination between jurisdictions to mitigate the compliance and administrative costs for employees and employers associated with an involuntary and temporary change of the place where employment is performed. Where relevant, MAP should be applied efficiently and pragmatically to help resolve issues arising out of the COVID-19 pandemic. Jurisdictions have issued useful guidance and administrative relief to mitigate the unplanned tax implications and potential new burdens arising due to effects of the COVID-19 pandemic. A sample of that guidance is included in Box 4.

63. In conclusion, changes in the jurisdiction where an employee exercises their employment can impact where their employment income is taxed: new taxing rights over the employee’s income may arise in other jurisdictions and those new taxing rights may displace existing taxing rights. As payroll taxes are often withheld at source, addressing the change will result in compliance and administrative costs for the employer and employee. Some jurisdictions have issued guidance and administrative relief to mitigate the additional burden.

Notes

← 1. This guidance was discussed in Working Party 1 in its Inclusive Framework configuration, which supports its publication.

← 2. Depending on the treaty, the period could be 183 days in the taxable year concerned or in any twelve-month period commencing or ending in the taxable year concerned.

← 3. Sweden takes a different approach and jurisdictions listed in Box 4 below have issued specific guidance on their approach.

Disclaimer

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