Quarantines around the globe have impacted many families and tax is not at the forefront of anyone’s mind. But “real life” implications are emerging for those who have chosen to remain in one jurisdiction over another.
Over the past nine months many countries have closed their borders and introduced lockdowns. Air travel has fallen to almost non-existent levels. As a result many individuals have found themselves spending long periods in a country that they do not usually live in. Depending on the exact circumstances, this could see individuals accidentally becoming resident for tax purposes in that country for at least the 2020 tax year.
Fundamentally, tax authorities around the world are not seeking to penalise individuals or the companies they work for if someone has innocently been stuck in a country that they do not usually live in because of the pandemic. However, there are clear knock-on implications that should be considered.
As time has passed, we have seen a shift in attitude to this topic: organisations have grown nervous about the difference between someone who is stuck – and thus unlikely to be penalised from a tax perspective – versus those who have chosen to stay in a country because they want to. There have already been reports in the media of global organisations telling staff to “come home,” worried at the risk of creating a permanent establishment for them because a team member has chosen to stay in their holiday home to escape lockdown elsewhere.
We anticipate that this approach will continue as governments seek to recover some of the costs of the pandemic by focussing on accurately collecting taxes where they are due.
The OECD has clearly set out the starting point for understanding the risks faced and the general position. Consequently, if there is no specific information to hand, it is best to turn to the OECD’s guidance, which we have detailed below.
The OECD’s view
Permanent Establishment (PE) due to home office or agent
“To the extent that it does not become the new norm over time, teleworking from home (i.e. the home office) would not create a PE for the business/employer, either because such activity lacks a sufficient degree of permanency or continuity or because, except through that one employee, the enterprise has no access or control over the home office.
“An employee’s or agent’s activity in a state 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”.
Place of effective management
“Temporary change in location of the chief executive officers (CEOs) and other senior executives is an extraordinary and temporary situation due to the COVID-19 crisis and such change of location should not trigger a change in residency, especially once the tie breaker rule contained in tax treaties is applied.
“Where the meetings of the company’s board of directors or equivalent body are usually held; where the CEO and other senior executives’ meetings are usually held; where the CEO and other senior executives carry on their activities; where the senior day-to-day management of the company is carried on...”
So, when we look at the language used by the OECD, it is clearly designed with exceptional and unusual circumstances in mind. Evidently, individual governments will look at those instances where it is felt that the boundaries have been pushed.
From a practical perspective, this is not a theoretical risk. For family offices and trust companies, creating a PE in another jurisdiction, or potentially changing the tax residence of a structure due to an individual’s residence position could have long-term tax implications, as well as potentially high costs.
Tax residence of individuals
Turning to the position of the individual, if we were discussing this in April, there would have been many cases where people were legitimately stuck in a country because of lockdown. However, as time has progressed, borders have been opened (though some closed again) and lockdowns have been lifted, then reinforced, so there has been opportunity for individuals to leave the countries they were stuck in. These cases started within the parameters as outlined by the OECD, but the longer time goes by, the harder it is to argue that this is still the case. This situation creates not only tax issues but potentially future reporting issues for banks, asset managers and other third parties, as well as the individuals themselves.
The flip side is that the pandemic has forced people to think about where they do want to be based longer term, and where they are happy to be “stuck”, meaning that relocation has been a constant theme throughout 2020.
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- Many individuals have spent long periods in countries they do not live in during 2020, with potential tax consequences
- As time goes by, and people have not returned home, this becomes more of an issue.
- However, the pandemic has forced people to consider where they do want to live in the long term.