Extra days workers spend stranded in a foreign jurisdiction because of COVID-19 restrictions should not count toward the presence test under article 15 of the OECD model tax convention, the OECD said in updated guidance.
The guidance, published January 21, follows up on initial recommendations that the OECD secretariat released in April 2020. Those recommendations addressed tax treaty implications for businesses, including those with cross-border workers, after governments introduced extraordinary containment measures in the early days of the coronavirus pandemic.
The OECD created the guidance in response to concerns about short-term dislocations of employees because of public health measures such as travel restrictions, which led to uncertainty about tax consequences for both employers and employees.
“Initially, it was unclear how long confinement and containment measures would persist and it was expected that many of the situations analyzed would only be temporary,” Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, wrote in a January 21 blog post. “Almost a full year has passed since the guidance was issued and some of the measures and the restrictions described remain in place.”
The updated guidance includes examples of what governments have done to mitigate the effects of pandemic-related public health restrictions on the tax-treaty-related circumstances of companies and their employees. It also evaluates whether the original guidance still applies under prolonged conditions and addresses situations that were not included in the original guidance.
The updated guidance examines the implications of article 15 of the OECD model tax convention on the taxation of a stranded employee’s income. That article provides rules for distributing taxing rights between an employee’s residence jurisdiction and the jurisdiction in which the employee carries out work. Specifically, article 15(2)(a) of the OECD model sets out a 183-day presence test. If an employee spends more than 183 days in a jurisdiction, any employment-related remuneration would be taxable.
“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,” the guidance says. Some governments, such as Austria and Canada, “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,” the guidance says.
The OECD secretariat concluded that if an employee is stranded because of travel restrictions, “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.” However, some governments may decide to implement different measures or issue specific guidance to address those situations, the report notes.
The guidance addresses concerns about tiebreaker rules for dual residents, which ensure that an entity is resident in only one jurisdiction. “An entity’s place of residence under the tiebreaker 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,” the OECD said.
The guidance also confirms a recommendation concerning employees who must work remotely, such as in a home office, in a jurisdiction other than the one in which they normally work because of public health measures. Such circumstances would not give rise to a fixed place of business permanent establishment for the employer, it adds.
“The guidance is intended to provide more certainty to taxpayers during this exceptional period and illustrates how some countries have addressed the impact of COVID-19 on the tax situations of individuals and employers,” Saint-Amans wrote.
After governments started implementing emergency containment measures in early 2020, the OECD published an array of tax guidance in response to the coronavirus crisis. In December 2020, the OECD published a much-anticipated guidance note about the transfer pricing challenges arising from the pandemic.