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Law360 (April 16, 2020, 3:18 PM EDT) --
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| Stefano Simontacchi |
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| Marco Adda |
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| Umberto Lorenzi |
Indeed, the following is pointed out early in the OECD's secretariat paper:
This unprecedented situation is raising many tax issues, especially where there are cross-border elements in the equation; for example, cross-border workers, or individuals who are stranded in a country that is not their country of residence. These issues have an impact on the right to tax between countries, which is currently governed by international tax treaty rules that delineate taxing rights.[1]
The guidelines in the OECD paper are provided precisely to avoid dispute proliferation and to respond to requests from concerned countries on how to deal with the effects of the COVID-19 crisis on selected international tax principles, notably:
- Potential creation of a permanent establishment, or PE;
- Modification of residence status of enterprises and individuals; and
- Other concerns related to cross-border workers.
According to the OECD guidance, the fact that employees are forced to work from home due to the COVID-19 pandemic should not entail any change to the criteria used to assess the existence of a permanent establishment.
The paper goes on to add that a temporary change to senior executives' location also should not entail a change to the criteria to determine the tax residence of enterprises. The OECD paper also provides recommendations on how to prevent individuals from being considered residents for tax purposes in countries where they are forced to stay due to coronavirus constraints.
In addition, in light of the general principle set out under Article 15 of the OECD Model Tax Convention on Income and on Capital[2] (i.e., an employee's salaries and similar remuneration are taxable in the state where the employment is performed), other recommendations are given to mitigate costs for employees and employers linked to potential changes to the place where employees' activities are performed.
Finally, the OECD paper recommends that tax authorities provide guidance to eliminate the potential risks mentioned above (as already done by the tax authorities of Ireland, the United Kingdom and Australia).
This brief article focuses on the analysis of PE in the OECD paper.
Permanent Establishment Status
Governmental responses to the coronavirus pandemic have forced most enterprises to rely on remote working: This means that employees may well be working from home in a country other than where the enterprise, or employer, is resident.
In these circumstances, one may well doubt whether the PE threshold is met. The OECD analysis answers that doubt by clarifying that working from home temporarily does not render the home at the disposal of the enterprise and, hence, no PE exists.
The OECD paper also clarifies that to qualify a home office as a PE, it must be used on a continuous basis for a foreign enterprise's business and the employee must generally have been required to work from home.[3] This clarification is in line with paragraph 18 of the OECD commentary to the OECD model on Article 5, which states the following:
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 automatic 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.
A further issue linked to remote working is whether certain duties that an employee performs trigger qualification as a dependent agent PE of the nonresident enterprise.
This qualification is usually triggered when an employee/agent habitually concludes contracts on behalf of a nonresident enterprise or habitually plays the principal role leading to the conclusion of contracts. Given this, the OECD analysis states the following about employees' and agents' work:
is unlikely to be regarded as habitual if he or she is only working at home in that state for a short period because of force majeure and/or government directives extraordinarily impacting his or her normal routine.[4]
Finally, the OECD paper deals with cases in which a building site, or construction or installation project of an enterprise in another state may constitute a PE (if activities last longer than a certain period, usually 12 months under the OECD Model Tax Convention). The OECD's interpretation is that the duration of a temporary interruption of activities at sites or on projects due to the COVID-19 crisis should be considered in determining the life of a site and, therefore, will affect whether a construction site constitutes a PE.
Reflections on the OECD's Permanent Establishment Analysis
Although the OECD's analysis is published under the secretary general of the OECD's responsibility and the opinions expressed in it do not necessarily reflect the official views of the OECD member countries, it is unusual for this international organization to autonomously provide clarification on the global framework of international tax law principles in the OECD model and its commentary.
Considering the multiple issues created by COVID-19, it is important that this supranational organization continues to take action to help prevent potential disputes deriving from the spread of remote working that is not a consequence of the normal evolution of business models, but a contingency created by the crisis.
In fact, this unprecedented situation cannot be dealt with properly by the customary international tax principles because — with reference to PE – the availability of a space (i.e., a home office) for the foreign enterprise is temporary.
From a different angle, the approach taken in the OECD paper may be the first step towards further reflection on whether the current definition of PE in Article 5 of the OECD model is indeed still aligned with the evolution of current business models.
It is important to bear in mind that even once the worst of the COVID-19 pandemic has passed, there will still be a need — at least for some businesses – to rely on remote working. In light of this, OECD member states should consider how to approach this new reality.
Finally, in the interests of the business community, the OECD should also address the transfer pricing consequences of the COVID-19 crisis, such as:
- How to adjust the results of the tested parties at year-end (e.g., how to approach the benchmark considering the current crisis);
- What the impact might be of renegotiating intercompany agreements;
- Whether the cash needed in this period might justify reconsideration of the strict requirements under Chapter 10 of the OECD guidelines for financial transactions; and
- How to deal with cross-border reorganizations being implemented in response to the effects of the crisis, year-end adjustments and advance pricing agreement renegotiation.
Stefano Simontacchi and Marco Adda are partners, and Umberto Lorenzi is an associate at BonelliErede.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] See para. 2 of the OECD Secretariat Paper.
[2] OECD (2017), Model Tax Convention on Income and on Capital: Condensed Version 2017, OECD Publishing.
[3] Discussed in paras. 8 and 9 of the OECD Secretariat Paper.
[4] See para. 11 of the OECD Secretariat Paper.
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