Prepared by Flavia Barone, Carmela Ettorre, Cristina Carmosino and Fabrizio Tenuta
With the document published on 21st January 2021, the OECD Secretariat comes back on criteria and methods of application of DTTs as a result of the pandemic in progress which, for over a year now, is affecting the whole world and involves unprecedented law provisions as regards recipients, contents, terms and methods of support to the largest and most varied number of productive and non-productive categories, directly or indirectly impacted by the adverse economic consequences generated by the health emergency.
In April 2020, when the first guidelines were issued, it was not foreseeable how long the travel restrictions would remain in force. Today, in light of the circumstance that sees various limitations introduced at the beginning of last year still in force either continuously or intermittently, it was necessary to integrate and review the text issued last April, to verify whether the analyses carried out at the time were still valid and consider what is locally established by individual countries.
Moreover, on the basis of the considerations contained in the first guidelines issued in April 2020, in response to a parliamentary question presented to the VI Commission (Finance) in which the Members of the Italian Parliament who have presented the question highlighted the necessity in Italy to acknowledge the clarifications provided by the OECD, on 3rd December 2020 the Italian Government, after having consulted the responsible Offices of the Tax Authorities, officially confirmed that, during the participation to the OECD discussions, Italy expressed to the OECD Secretariat its consent in favor of the publication of the Guidelines by the OECD relating to potential changes in tax residence due to travel restrictions due to COVID-19, also underlining that in the situation under reference the application of tax treaties should be performed applying the general approach recommended by the OECD, in the sense of “neutralizing” as much as possible the impact of the restriction measures due to the pandemic crisis.
Said approach, referred to DTTs, can be considered as valid with reference to both the impacts on the residence of individuals and the potential consequences in terms of permanent establishment and tax residence of legal persons.
The areas to which the new guidelines refer are the same as those referred to on the previous occasion and, in particular:
- the material permanent establishment (case of the so-called “home office”), the agent permanent establishment and the construction site permanent establishment;
- the tax residence of legal persons;
- the tax residence of individuals;
- the income of employees located in different jurisdictions.
The new guidelines summarise the issues raised previously and provide some additional interpretative suggestions.
In its renewed guidelines, the OECD recalls – as it had already done on the previous occasion – that the exceptional and temporary change in the location of the company’s personnel (such as, for example, teleworking or smart working) should not lead to the existence of a permanent establishment. Similar conclusion should be reached in the event that the employee concludes contracts on behalf of the company from his home.
Conversely, the interruption of activities occurred on a construction site due to the limitations to the movement of people should not entail the interruption of the calculation of the terms provided for the existence of a construction permanent establishment, although some Countries may deem it appropriate to “suspend” these terms also in similar and exceptional eventualities.
Several countries have issued their own guidelines on matters covered by the OECD which, in this regard, takes the opportunity to invite all Countries to adopt a similar approach.
In particular, the Financial Administrations of Australia, Austria, Canada, Germany, Greece, Ireland, New Zealand, the United Kingdom and the United States have in various ways provided general indications to be followed in evaluating potential hypotheses of permanent establishment in their respective territories.
Some of these States have issued indications of a general nature (in some cases together with indications relating to specific types of permanent establishment, see below), to be contextualised in relation to the specific case.
- Australia: in its guidelines, the Tax Office has clarified that the effects of the COVID-19 emergency will not per se give rise to the existence of a permanent establishment in Australia provided that i) the non-resident company does not have a permanent establishment in Australia already prior to the health emergency; ii) there have been no changes in the factual circumstances of the company’s operations in Australia; iii) the stay in Australia is the short-term consequence of the restrictions on movements imposed for COVID-19. The Tax Office adds that it will not commit resources in ascertaining the presence of a permanent establishment if i) the non-resident company did not already have a permanent establishment for other reasons prior to the health emergency; ii) the temporary presence of employees in Australia continues solely and exclusively due to the restrictions on movement caused by COVID-19; iii) such employees are relocated outside Australia as soon as practicable; iv) the existence of a permanent establishment in Australia or otherwise the production of income in Australia has not been ascertained due to the tax provisions of other jurisdictions;
- Canada: the Revenue Agency has issued temporary guidelines emphasizing that it will not consider a permanent establishment of a foreign company to exist just because an employee of that company was forced by the emergency provisions to remain in Canadian territory;
- Ireland: the Office of the Revenue Commissioners (Revenue) has issued guidelines aimed at clarifying that the presence of an individual (employee, director, agent or service provider of a foreign company) within the Irish territory (and vice versa, of an Irishman in a foreign territory) due to the restrictions on movements dependent on the COVID-19 emergency, must not assume specific relevance for tax purposes. It is required that both the employee and the company document facts and circumstances aimed at proving that said presence was due to the health emergency;
- New Zealand: in its guidelines, the New Zealand Inland Revenue stressed that the current health emergency will not give rise to the existence of a permanent establishment in New Zealand in the event that the staff has been blocked in the territory of the state. A non-resident company will not be challenged for the presence of a permanent establishment only after a short period of time, considering that this must have a certain degree of permanence and cannot be of a purely temporary nature;
- United Kingdom: the HMRC in its guidelines highlights that the existence of a permanent establishment will not be contested for the mere passing of a short period, given the need for a certain degree of stability for the configuration of a permanent establishment;
- United States: the IRS points out that during the so-called Affected Person’s COVID-19 Emergency Period (which includes a period of 60 consecutive days that began on February 1, 2020 or later, or April 1, 2020 or earlier) the provision of services or other activities carried out by one or more persons temporarily present in the territory of the United States will not be considered for the purposes of determining the existence of a permanent establishment, provided that such activities have been carried out in the territory of the United States by reason of the travel restrictions imposed for the medical emergency.
The OECD, recalling that the analysis regarding the existence of a permanent establishment is based on specific facts and circumstances, once again highlights that the fundamental requirement is that the place of business is fixed, i.e. it has a certain degree of permanence, and is at disposal of the company. Although a home can in principle be considered to be at disposal of the enterprise (see the Commentary on Article 5 of the OECD Model, paragraphs 18 et seq.), this should not be the case where it is only used in an intermittent way. The home could constitute a permanent establishment if used on an ongoing basis for the exercise of the business of the non-resident company and if such use has been requested to the individual by the company itself.
In the context of the current pandemic, teleworking is a consequence of the public health measures adopted by the various Countries. It is clear that this is an emergency situation and not a request from the employer. Therefore, the home office cannot be deemed as a permanent establishment of the non-resident company both because a sufficient degree of stability and continuity is lacking (the measures are temporary), and because the home office is not at disposal of the company, in the meaning of the OECD, as well as because the company itself continues to make available to its employee an office in which carry out its work which, in the absence of the adoption of measures to protect public health, would normally be accessible and usable by the employee.
It goes without saying that in the event that the employee continues to work from his home even after the emergency and the restrictive measures have ceased, the home office could assume the level of stability and permanence required to hypothesize the existence of a permanent establishment.
Some countries have issued their own guidelines containing specific clarifications regarding the case of the home office (Austria and Greece).
Agent permanent establishment
Concerns about the potential existence of a permanent establishment also arise with regard to the agent permanent establishment.
As is known, the case occurs in the event that a person acts in the territory of the State on behalf of a non-resident company and “habitually” concludes contracts or acts for the purpose of concluding contracts. The requirement of habituality should not be configured in the event that an employee is working in another State from his home for a short period due to force majeure, such as the COVID-19 emergency, and concludes contracts on behalf of the company in such – purely transitory – circumstances. The Commentary to Article 5 of the OECD Model specifies that the habitual exercise of the power to conclude contracts requires a presence in the State that is not purely temporary or transitory.
The OECD once again reiterates that different results should be reached where the conclusion of contracts on behalf of the company at home had already occurred before the COVID-19 emergency. Likewise, the exceptionality could not be invoked in the event that such activity was carried out even after the COVID-19 pandemic.
Some countries in their guidelines expressly refer to the agent permanent establishment (Canada, Greece, UK).
The health emergency led to the suspension of activities in various construction sites around the world. The OECD reiterates that, since these are temporary suspension periods, these periods must in any case be taken into account in the calculation of the minimum terms of duration of the construction sites in order to be deemed as permanent establishments in the country in which they are located, since completely temporary interruptions do not involve the termination of the site’s existence. However, it is recognized that some jurisdictions may emphasize the exceptional nature of the moment and, therefore, exclude from the calculation of the duration of a construction site’s interruptions due to measures imposed by the health emergency.
Some countries have explicitly expressed their opinion in this regard, in some cases in accordance with OECD (Austria), in other cases differently (Germany and Greece).
Tax residence of legal persons
The current global health crisis has raised doubts about the location of the place of effective management of companies due to restrictions on the movement of directors or other senior executives.
The OECD reiterates that it is unlikely that the health emergency will give rise to changes in the place of effective management of a company in the context of the DTTs in force, since these are completely extraordinary and temporary circumstances.
Similarly, situations in which cases of double residence could occur are quite rare, and, in any case, would be resolved by determining the residence in only one of the two Countries involved by means of the tie-breaker rules. In particular, in the event that the Treaty between the two countries involved contains a clause similar to that contained in the OECD Model of 2017, the Tax Authorities of the two Countries could reach a solution based on a specific analysis of the case with the stipulation of a mutual agreement, taking into consideration all the relevant facts and circumstances and not a single aspect.
In those cases in which the DTT contains the tie-breaker rules provided by the OECD Model before 2017, the only criterion used for the resolution of cases of potential double residence will be the place of effective management, as the place in which strategic decisions on organizational and commercial aspects of the company are made.
As it can be appreciated, these are facts and circumstances different from exceptional situations such as the current pandemic.
Therefore it is unlikely that the tax residence of legal persons is impacted by measures relating to the protection of public health.
In this regard, some countries have issued specific guidelines (Australia, Canada, Greece, Ireland, New Zealand, UK and US).
As already mentioned, given the numerous nuances in which the interpretation regarding the existence of a permanent establishment and the location of the tax residence of a company can be expressed, and having acknowledged that only a limited number of countries have provided synthetic clarifications in this regard, a specific analysis is even more necessary to assess the risk of the existence of a permanent establishment or of attracting the tax residence of a company in a different State with particular regard on the one hand to the extended clarifications made by the OECD and on the other to the continuation of the pandemic, with the thinning out of clear and defined restrictions on movements, which complicate the management of risks from the point of view of the transnational operations of companies.
Concerns related to a change to the residence status of individuals
As mentioned, the current situation of economic-health crisis caused by the COVID-19 pandemic and the subsequent health restrictions in effect globally, starting from the beginning of 2020, have influenced and, at times, changed the way in which the working activity of the so-called internationally mobile workers.
In this regard, in the renewed guidelines of 21 January, the OECD confirms that, despite the complexity of the rules and despite their application being aimed at a wide range of people, it is unlikely that the emergency situation caused by the COVID-19 pandemic, may affect the determination of tax residence under international tax treaties.
Some countries (Australia, Canada, Finland, France, Greece, India, Ireland, New Zealand, UK and US), starting last April, have provided indications and administrative measures on the impact of the COVID-19 pandemic on the application of international treaties for determining the tax residence of individuals.
On the basis of the guidelines of last April, the OECD traces the possible scenarios that may occur and in particular:
- A person is temporarily away from home (perhaps on holiday, perhaps to work for a few weeks) and gets stuck in the host country due to the COVID-19 pandemic and acquires residence there according to the domestic legislation.
- A person is working in a country (the “current home jurisdiction”) and acquires the status of residence there, but temporarily returns to his “previous home jusrisdiction” due to the COVID-19 emergency. This person may never have lost resident status in the previous country of origin under national law, or may re-acquire residency status upon their return.
For both scenarios, the OECD recalls and confirms that, although the starting point for determining the residence of a natural person is national legislation, the latter can only be exhaustive if the person is resident in only one country, while, in all cases where there is a risk of double residence, reference should be made to the tie-breakers rules, established in article 4 of the OECD Model.
Furthermore, as already suggested in the April recommendations, the OECD reiterates the exceptional nature of the pandemic crisis and argues that in the short term tax administrations and competent authorities will have to consider, for the purposes of assessing residence, a period of time that affected by exceptional events such as the pandemic and the consequent health restrictions, but which is “normal” for the person.
Concerns related to income from employment – Art. 15 OECD Convention
In the document under review, the OECD starts from the analysis of art. 15 of the international conventions, governing the taxation of employment income, already set out in the document issued last April and focuses, analyzing in detail the positions of the so-called cross-border workers.
Specifically, art. 15 establishes that “the salaries that a resident of a State receives as consideration for an employment activity are taxable only in that State, unless the activity is carried out in the other Contracting State”.
Paragraph 2 of art. 15 then introduces the concept of elimination upstream of double taxation, in fact, by way of derogation from the general rule, provides that the remuneration that a resident of a Contracting State receives in consideration for an employee activity carried out in the other State are taxable only in the country. of residence if the following conditions occur at the same time:
- the beneficiary stays in the State where the activity is carried out for less than 183 days a year;
- the remuneration is paid by or on behalf of an employer who does not reside in the country where the work is carried out (economic vs legal employer);
- the burden of remuneration is not borne by a permanent establishment or a fixed base that the employer has in the State where the activity is carried out.
In the event that the State of the source exercises rights under art. 15, the state of residence of the employee must guarantee the elimination of double taxation with the exemption or with the tax credit.
Following the premise on art. 15 of the Model, already highlighted and described in the document of last April, the updated recommendations consider the application of Article 15 to the following cases:
- Wage subsidies and other similar income received by cross-border workers who are unable to do their jobs due to restrictions
- Workers blocked in a jurisdiction in which they are not resident, but in which they have previously exercised a job
- Workers who work remotely from one jurisdiction for an employer residing in another jurisdiction.
Income of cross-border workers that cannot perform their work due to COVID-19 restrictions (e.g. wage subsidies to employers)
In these cases, the OECD believes that the government subsidies received from employers and workers to ensure the continuity of employment positions even during the COVID-19 pandemic, must be attributable and, therefore, taxable, in the place where the work activity to which these subsidies refer. In the case of cross-border workers, therefore, this would be the jurisdiction in which they worked.
The OECD then expresses a suggestion regarding the extraordinary payments related to the loss of work or the interventions of Countries to support income from employment. The opinion is to consider such income in the same way as the benefits paid on the termination of employment relationships and, therefore, to tax in the country where the work to which they refer was provided. In this regard, the OECD, in fact, refers to paragraph 2.6 of its commentary to article 15, which clarifies that they should be attributable to the place where the employee would have worked. In most cases, this is where the person worked before the COVID-19 pandemic.
Alternatively, the payments could be assimilated to those that are normally received during periods of paid absence, the right of which arises in relation to the place where the work was performed. Examples of such other routine payments include vacation benefits, paid leave, sick leave.
Stranded workers: exceeding days of presence threshold due to travel restrictions
As mentioned above, the COVID-19 pandemic has limited the movement of internationally mobile workers, having as its main consequence the fact that individuals residing in one jurisdiction exercising an activity in another jurisdiction have found themselves stuck in that other jurisdiction.
In the document in review, the OECD summarizes the position taken by some countries (Australia, Austria, Canada, Finland, Germany, Greece, Ireland, New Zealand, UK and US) that have considered appropriate to ignore the exceeding of the threshold of days of presence (usually 183 days), given the exceptional situation caused by the COVID-19 pandemic.
From the examination of the guidelines issued by the various countries, it can therefore be seen that the recommendation by the OECD is that of reasonably ignoring, given the exceptional situation caused by the pandemic and the restrictive measures adopted by the individual jurisdictions, the overcoming the threshold of days of presence (e. the 183-day test based on Article 15, paragraph 2, letter a) of the OECD Model).
However, the suggestion remains valid to verify case by case, based on the provisions of individual international treaties as well as any new guidelines that each country may adopt.
Again with reference to exceeding the threshold of days of presence, the OECD in the document in question dedicates a paragraph to the position of the so-called cross-border workers, i.e. cross-border workers who, given the nature of their work, are resident in a given country, but frequently travel to a neighboring country for work.
The OECD clarifies that some jurisdictions have agreed special provisions with neighboring jurisdictions, to which employees frequently travel for work. These provisions assign taxation rights differently from Article 15 of the Model Convention. For example, under some of these provisions, employees traveling to a neighboring jurisdiction are taxable on earnings only in the jurisdiction of the country of origin, provided that any work performed elsewhere is limited to a set maximum period ( generally 4 to 6 working weeks).
Some of these treaties also include provisions under which telework days are considered working days within the jurisdiction where the activity is carried out. Some jurisdictions have agreed to consider the COVID-19 pandemic as a cause of force majeure or exceptional circumstance and, consequently, the time spent by the employee teleworking in their home jurisdiction is not considered for the purposes of calculating the maximum number of days of work allowed outside the place where the activity itself takes place.
Teleworking from abroad, i.e. working remotely from one jurisdiction for an employer of the other jurisdiction
In this paragraph, the OECD addresses the issue of the consequences that may occur, for the employer and the worker, following the change of the place where the work is carried out, in particular, when this change may involve a change in the tax law of one country with respect to another and when consequences may occur that have a tax impact on the employer’s obligations as withholding agent and / or on the employee.
The OECD therefore describes some examples that illustrate the changes in the allocation of taxation rights on employment income and focuses on the possible consequences that would arise in relation to the application of art. 15 of the OECD Model, where the contingent situation would modify the existence of the requisites envisaged by the same art. 15.
This could lead, on the one hand, to the loss of the right to enjoy the exemption guaranteed by art. 15, with consequent tax obligations, on the other hand it could generate any credits following the application of unsuspended withholding taxes in the other State and, in some cases, double taxation with consequent charges related to the cash flow of the worker pending the reimbursement of the tax credit.
The OECD recommends, once again, to maintain a more flexible approach and an exceptional level of coordination between countries to ensure the management of an exceptional event such as the current pandemic.
In our opinion, a separate consideration would deserve the application of Italian legislation in reference to the determination of employee income based on conventional wages.
The Italian legislation on the taxation of income from employees provided abroad with art. 5 of Legislative Decree no. 314/1997 provided for the repeal of art. 3, paragraph 3, of the TUIR which provided for the exemption for employee income provided on an ongoing and exclusive basis abroad.
The art. 36 of Law no. 342/2000 has integrated the provisions for determining the employee income of the subject resident in Italy with the addition of paragraph 8-bis to art. 48 of the TUIR, today article 51.
In particular, it established the taxation of employment income produced abroad on an ongoing and exclusive basis, by a tax resident in Italy, based on conventional values (i.e. retribuzioni convenzionali) defined by the Ministry of Labor by Decree. In order for paragraph 8-bis to be applied, the activity must be provided on an ongoing and exclusive basis abroad and for a period of more than 183 days throughout the year.
For the application of this rule, a specific contract between the parties is required, which provides for the continuous and exclusive performance abroad, therefore this rule is not applicable to workers on business trips.
The tax base considers a conventional remuneration, therefore also the benefits do not fall under any autonomous taxation, because their amount is included in the conventional remuneration.
Therefore, where the contingent situation linked to the emergency would fail one of the requirements of art. 51 paragraph 8 bis, because for example the worker posted abroad finds himself having to work from Italy, then the problem would arise of having to subject the income produced abroad to taxation in Italy, determining the tax base, not more on the basis of conventional wages but even on the basis of actual income.
This would imply a huge burden in terms of taxes and administrative obligations, not to mention that the approach would go against what has been suggested so far by the OECD and by the EU itself in the field of social security and welfare.
In this regard, we point out a parliamentary question with written answer, no. 4/07439, presented by the deputy Simone Billi, in session no. 425 of 10 November 2020, through which it is requested to clarify, through national guidelines, what are the tax impacts deriving from prolonged lockdown periods, for cross-border workers and in particular for those who have been stuck in Italy for periods exceeding 183 days in 2020 and which may therefore have acquired tax residence in our country.
To date, the question is still unanswered. In the absence of national guidelines, we believe it appropriate to follow the recommendations issued by the OECD.
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