OECD updates guidance on tax treatment of remote working

The OECD has updated its model double tax convention (the Model Treaty), and in doing so, has amended its guidance on when a home office of a team member can generate a taxable presence of the foreign business for which they work. Businesses with remote workers will want to ascertain whether the relevant tax authorities will change their practices in line with the new guidance and, if so, confirm that their policies on remote working remain appropriate.

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Background

Most countries will look to tax non-residents who have a threshold level of presence in their territory, referred to as a "permanent establishment" (PE), on the profits of that establishment. Many countries define PE in line with the OECD's approach, as set in the Model Treaty. Broadly, this provides for two types of PE (i) a fixed place of business (such as an office), and (ii) a dependent agent that has sufficient authority over the business of the non-resident.

It is necessary to consider both types of PE when putting in place remote working arrangements, but the level of authority necessary for being a dependent agent PE is pretty high, and it is typically straightforward to manage that risk for most individuals. The recent changes in the OECD's guidance on home working (as set out in its commentary on the Model Treaty) relate only to the fixed place of business PE concept.

What's changed?

Prior to the recent changes, the OECD commentary on home offices was limited. As a first stage, it was necessary to determine whether the home office had a sufficient degree of permanence to constitute a "fixed" place of business (something that was likely to be the case if ongoing regular home working was envisaged), and, as a second stage, it was necessary to determine whether it was at the disposal of the non-resident. The determining factor for the second stage appeared to be whether the individual was required by the non-resident to work from their home office.

The new guidance relates to the second stage. It is much more detailed and moves away from the "requirement" concept. The key principles are:

If the individual spends less than 50% of their working time for the non-resident working from their home office (tested over a 12-month period), no fixed place of business PE should arise. This is expressed as a general, rather than absolute, rule – but the OECD appears to consider that it will apply in most cases.
If that 50% threshold is breached, then you look to the particular facts and circumstances to determine whether there is a fixed place of business PE. A prominent consideration here is whether there is a "commercial reason" for the individual to work from the country where the home office is located. In the absence of such a reason, there should be no fixed place of business PE, unless other facts and circumstances indicate otherwise.

What is a "commercial reason"?

A commercial reason will be considered to exist where the physical presence of the individual in the country will itself facilitate the carrying on of the business of the non-resident, such as where there are people or resources in that country to which the non-resident needs access to carry out its business.

Helpfully, the guidance confirms that a commercial reason will not exist (i) just because a non-resident business enables an individual to work from home solely to obtain that person's services, or (ii) where the business permits home working solely to reduce costs.

The guidance sets out several examples of activities that may indicate the presence of a commercial reason if they take place and are facilitated by the individual working from their home in a state. These include meetings between the individual and customers of the business, and performance of services for customers located in that state where such services require the physical presence of personnel of the non-resident's business (e.g. providing training at the customer's own premises).

Comment

The updated guidance provides welcome clarity on the OECD's view as to when home working will give rise to a PE, with the 50% test providing a helpful (if slightly fuzzy) threshold. The "commercial reason" test may, in practice, in many cases give the same answer as the OECD's previous "requirement" test (as a business is unlikely to require an individual to work from home unless there is a commercial reason for doing so) but the overlap is not exact.

A business may, therefore, find that it now has a PE in a state under the new OECD guidance, when previously it did not. This is relevant in two (linked) ways.

Firstly, if the remote worker's home jurisdiction has a fixed place of business PE concept in its domestic law based on that in the Model Treaty, the guidance may impact on the extent to which that jurisdiction seeks initially to tax the non-resident business (i.e. before you get to the stage of considering whether relief under a double tax treaty (DTT) is necessary).

Secondly, even if that jurisdiction does not have a fixed place of business PE concept in its domestic law based on that in the Model Treaty, if its DTTs are based on the Model Treaty, then the guidance may impact on the availability of treaty relief. This is because, under the Model Treaty, a state can only tax the business profits of a non-resident to the extent they derive from a PE in that state.

A key issue in relation to both these points will be whether the remote worker's jurisdiction will change its policy in light of the updated guidance. Potentially affected businesses will want to ascertain this, and, if there is a policy change, review their home working arrangements.

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