COVID-19: Implications on workforce mobility and permanent establishment

Taxation and reporting requirements

The above scenarios can result in requirements such as reporting of employees’ worldwide income, paying tax in additional jurisdictions, payroll requirements for employer and double taxation for the employees in some cases. Also, the fact that employees are now working remotely for their host /home entity may expose the employers in the host/home country towards creating a Permanent Establishment (PE) in the home/host/a third country where the employee is present. Hence, both employers and employees should closely monitor the duration of the employees’ stay and ensure appropriate tax compliances are undertaken in a timely manner.

The extended stay by employees in this case is force majeure and as a result of the pandemic. It is not due to the requirements of their employers/businesses or the employees’ own will. Hence, it is essential for the Revenue authorities to make exceptions in tax laws in this situation. As per the recently published, OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis (the Analysis), “the exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 crisis, such as working from home, should not create new PEs for the employer”. In the Analysis, it has also been noted that it is unlikely that the COVID-19 situation will create any changes to the PE determination.

Basis this, the Organisation for Economic Co-operation and Development (OECD) has recommended tax administrations across the world to provide guidance to address tax issues created by the cross-border employees due to various restrictions imposed currently, and to minimize unduly burdensome compliance requirements for the taxpayers.

The OECD recommendations are only guiding principles and are not binding on member countries. Hence, they have no impact on domestic tax laws. This could, however, encourage countries in making necessary amendments to their domestic tax laws as per their circumstances. Also, for non-member countries, although the recommendations are not applicable, they may act as a useful aid for determining the tax policy on cross-border tax issues arising in this unprecedented situation.

The tax authorities in the US, the UK, Ireland, Australia and India have issued guidelines on relaxation of tax laws for employees impacted by COVID-19. HM Revenue and Customs (HMRC) in the UK has introduced guidelines around exceptional circumstances that are to be considered, to establish if any time spent by individuals in the UK can be ignored for the purposes of the various counts of their presence in the UK for determining their residency. According to the guidelines, the days spent in the UK may be ignored if the individual’s presence in the UK is due to exceptional circumstances beyond their control. This will usually apply to events that occur while an individual is in the UK and which prevent them from leaving the UK.

The US Treasury and Internal Revenue Service announced guidelines stating that under certain circumstances, up to 60 consecutive calendar days of US presence by an individual, presumed to arise from travel disruptions caused by COVID-19 will not be counted for the purposes of determining the individual’s US tax residency. Similarly, US business activity conducted by a non-resident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the foreign corporation has a US PE.

The Central Board of Direct Taxes (CBDT) in India, considering the genuine hardship caused by the lockdown has announced a relaxation in determining the residential status of individuals who have come to India on a visit prior to 22 March 2020. Their presence in India during the specified period (i.e., from 22 March 2020/ date of quarantine till 31 March 2020/ date of departure before 31 March 2020, as the case may be) will not be considered for determining residential status in India for tax year 2019-20. In addition, the Indian Government has also extended the due date for filing India tax return for individuals from 31 July 2020 to 30 November 2020. Further, the Government has reduced the rate of contribution to Provident Fund (PF) of both employer and employee for all establishments covered under the PF regulations from 12% to 10% each for the next three months.

Way forward

Similar guidelines by the governments across the world would be a welcome move to put internationally mobile employees and their employers at ease in these testing times. Until then, it is essential for employers to keep abreast of these developments, track their employees and their stay and remain on top of the various compliances.