Travel restrictions and other measures imposed or recommended by governments in response to the COVID-19 pandemic (COVID-related restrictions) have now been in place in the UK and elsewhere for much longer than was perhaps envisaged in early 2020.
For companies with an international footprint, concerns about the impact of these measures on their tax residence (and other taxable presence) are therefore ongoing and arguably more acute than ever, since circumstances giving rise to the concerns (for example, directors being prevented from travelling to board meetings) may have been extant for long periods.
Some comfort may be derived from updated OECD guidance on the impact of the COVID-19 pandemic on tax treaties, which was issued by the OECD Secretariat on 21 January 2021. Helpfully, notwithstanding the time that has elapsed, the guidance is for the most part unchanged from the original (April 2020) guidance:
- Permanent establishment (PE) risk – home office: as in the original guidance, the OECD say that if an employee is required to work in a jurisdiction because of COVID-related restrictions, this should not create a fixed place of business PE for the business/employer. This is on the basis that either there is not the necessary degree of permanence, or (perhaps more pertinently given how long restrictions have been in place) because the home office is not at the disposal of the enterprise.
- PE risk – dependent agent: The concern here is that a senior executive (or an agent) habitually concludes contracts on behalf of the company while working from home in another jurisdiction. The OECD reiterates that an employee is unlikely to be regarded as habitually concluding contracts while working at home if they are only doing so because of COVID-related restrictions. The implication in the April 2020 guidance was that this would only apply if the employee had acted in this way for a "short period" – helpfully, this reference has been removed in the latest guidance.
PE risk – construction sites: There is also a positive change to the guidance on construction sites, in that the OECD now say that jurisdictions may consider excluding periods when construction operations are prevented as a result of COVID-related restrictions from the calculation of time thresholds for construction site PEs.
- Corporate residence risk: again, the OECD's position is effectively unchanged in that an entity's treaty residence is considered unlikely to be impacted by the inability of board members to travel as a result of Covid-related restrictions.
However, while helpful, the OECD guidance is not a panacea. The approach taken by tax authorities (which, of course, administer the rules in practice) will differ in many respects, as shown by the sample guidance issued by various tax authorities quoted in the latest OECD publication. The extent to which it is possible to rely on guidance may also vary. Businesses should therefore monitor the position and take advice in relevant jurisdictions.
Also, in many cases, factual determinations by tax authorities may be required and so evidencing the approach taken, and precisely how Covid-related restrictions have impacted the manner in which the business has operated, will be crucial.
Finally, businesses will need to consider risks associated with extraordinary circumstances persisting beyond the lifting of restrictions. The revised OECD guidance now considers the position where an employee continues to work from home after the cessation of Covid-related restrictions. The outcome will inevitably be fact-dependent, but if (for example) such an employee were to continue to conclude contracts on behalf of the business, then the OECD unsurprisingly regards it as more likely that the employee would be considered be concluding contracts habitually (and therefore to amount to an agency PE).
Again, tax authorities are likely to take different approaches (and jurisdictions will likely lift restrictions at different times), so businesses would be well-advised to monitor the position and obtain advice.