Taxing you at home or at work?

Over 200 countries and territories around the world have been directly impacted by the spread of the COVID-19 coronavirus, with most governments quickly implementing full or partial lockdown measures while announcing emergency measures to protect jobs and assist with cash flow. As the pandemic continues, business leaders have still been required to manage any immediate tax consequences, which may give rise to some potential challenges for those businesses with employees or activities overseas.

There has been restricted global travel and some countries have strict isolation rules. As a result, some cross-border employees are now working from home in a different tax jurisdiction, or may be stranded overseas. There are also large construction projects being paused, with sites being unable to open due to lack of staff or not being deemed an essential service. Such issues can have an impact on the right to tax between jurisdictions, and cause issues for both individuals and corporate tax residency.

The Organisation for Economic Co-operation and Development (‘OECD’), which assists with international tax treaties, has released guidance that provides a framework for jurisdictions to navigate these unusual and potential ‘double taxing’ circumstances.

Remote working has become the new normal over the past two months, with most employees creating home office spaces to complete their duties. Depending on the employee’s job role and permanency of a home office, there are cases where a permanent establishment for corporation tax purposes may arise when the employee is based in a different jurisdiction. Such cases are common where staff live and work near the border. As a result, the company could be required to register for tax in that jurisdiction, complete branch accounts, and allocate profits to the overseas jurisdiction. The new OECD guidance and HMRC agree that the short-term nature of the employee working from home should not create a taxable presence for the company. However, companies should consider whether these new working arrangements could become a permanent fixture of working life in the future, and how this may impact its corporate tax position.

Activities on construction sites are also being temporarily interrupted by the COVID-19 crisis. Generally, a construction site creates a permanent establishment when the contract is longer than 6-12 months, depending on the jurisdiction. The OECD have recommended that COVID-19 interruptions should be included in calculating the length of the contract. Therefore interruptions such as material or labour shortages should still be included in calculating the length of the contract, making it likely that more sites could trigger an overseas permanent establishment and become chargeable to tax in another jurisdiction.

There are many different factors to consider, and companies should seek professional advice to keep them correct and in-line with reporting requirements, during these unusual and volatile times.