Introduction
In these last two years in which the world lived amid the COVID-19 disease, the notion of “working from anywhere” has rapidly moved from concept to practice. Before the pandemic, remote working was a distant concept for many companies in the more traditional sectors. Today, it seems the corporate world is moving towards this new paradigm. Hybrid or flexible work arrangements are continuing to increase while – in some cases – companies are adopting a “work from anywhere” policy to attract talent, reduce costs and increase productivity. Such trend is happening while governments around the world are raising questions on whether the temporary Permanent Establishment (PE) rules that applied through the pandemic should still apply in the present and the near future. These two movements both from companies and governments shall only add complexity in managing PE positions by multinational companies.
This column will cover three of the country practices that occurred in this past year of 2021. The high-level analysis will be focused on three main jurisdictions:
- Canada, that updated its guidance on COVID-19 and PE in April 2021
- Australia, that decided not to extent the period of application after January 2022 for its COVID-19 and PE guidance in view of the reopening of international borders and lifting of travel restrictions, and
- Both Germany and Switzerland that that updated their mutual agreements for cross-border workers to include situations where “working from home” would generally not create a PE for the employer, provided certain requirements are met.
An overview of the OECD response to the pandemic will also be provided in the last section. When running the analysis, more attention will be paid to situations that are typically applicable in companies operating in the tech sector, which include agency PE, service PE and home office.
1 – Canada
On April 2021, the Canadian Tax Authorities updated their guidance on international income tax issues raised by the COVID-19 crisis. Among other items, the guidance clarified the Canadian Authorities’ position regarding the effect of travel restrictions on PE in Canada that entered into effect in March 2020, when the pandemic hit[i].
First, the guidance stated that the relief period (that had applied from 16 March to 30 September 2020) would no longer be applicable to cases when a nonresident employer had a fixed place of business (e.g., home office or other workspace) in Canada; this means that starting September 2020, a nonresident company with a fixed place of business could have PE exposure in Canada under both domestic law and the tax treaties. Despite this change, the same guidance also provided that the application of the relevant tax treaty provisions would not result in the finding of a PE because working remotely from home would generally not be sufficient to meet the PE requirements.
Second, the updated guidance also clarified that the habitual requirement under which a dependent agent with powers to close contracts on behalf of a nonresident constitutes an Agent PE shall not be met whenever an individual has the right to conclude contracts on behalf of the nonresident employer and is doing so from Canada solely because of the travel restrictions. This conclusion shall change if the employees remain in Canada after the lifting of the travel restrictions and continue to exercise the right to conclude contracts in Canada.
Third, the guidance also addresses Service PE. In those cases, each individual needs to examine whether it meets the relevant tests (day test and gross active business revenue test). Most of the employees would not meet these tests if they were not working on projects for Canadian customers.
Finally, the Canadian authorities’ guidance clarified that these conclusions would also be generally applicable with respect to employees that, before the COVID-19 crisis, were employed in a country other than the United States.
2 – Australia
In May 2021, the Australian Tax Authorities updated their guidance on COVID-19 and PEs that was originally published in 2020[ii].
The updated guidance basically mentioned that Australian authorities would not apply their compliance resources to determine if a non-resident company had a permanent establishment in Australia if:
- The company did not otherwise have a permanent establishment in Australia before the effects of COVID-19
- the temporary presence of employees in Australia continued to solely be because of COVID-19 related travel restrictions
- those employees temporarily in Australia would relocate overseas as soon as practicable following the relaxation of international travel restrictions, and
- the company had not recognized those employees as creating a permanent establishment or generating Australian source income in Australia for the purpose of the tax laws of another jurisdiction.
This approach would be applicable until 31 December 2021. From 1 January 2022, this approach ceased to apply[iii].
Multinational companies with presence in Australia are now required to consider whether ongoing arrangements give rise to a permanent establishment in Australia in the same terms as before the COVID-19 pandemic.
3 – Germany and Switzerland
On 27 April 2021, Germany and Switzerland signed an updated mutual agreement[i] on their 1971 tax treaty, after several months of cooperation between officials of the two countries. The mutual agreement mainly revolved around frontier workers, and it had been initially concluded on 11 June 2020 as a response to the COVID pandemic, but it was then updated on 30 November 2020 to extend its application until 31 March 2021.
The last update of the mutual agreement application extended it to 30 June 2021 and added a new section on the application and interpretation of Articles 5(1) and 5(4) of the German-Swiss tax treaty (permanent establishment/fixed place of business) with respect to home office PEs. Accordingly, employees carrying out their activity in their home office in their country of residence solely because of the pandemic would generally not constitute a home office PE for their employers. There has been a last extension to March 2022[ii] and no further extensions are expected.
4 – OECD
In parallel with the countries’ response, the OECD Secretariat also updated in 2021 the guidance[iii] including the illustration of how some jurisdictions have had addressed the impact of COVID-19 pandemic on certain tax use-cases.
This new guidance revisited the guidance published in April 2020 by the OECD Secretariat and provided an analysis of some of the treaty-related issues that were raised due to the COVID-19 pandemic and caused some tax uncertainty to taxpayers. While the guidance represented the OECD Secretariat’s views on the interpretation of the provisions of tax treaties, each member state could adopt its own guidance to provide tax certainty to taxpayers.
The guidance addressed several issues, such as the residency status of companies and cross-border treatment of employment income. Specifically on the PE, the guidance covered some questions related to the home-office PE, agency PE and construction site. We will not focus on the later as it is not so common on multinational tech companies. It is important to note that neither the April 2020 guidance nor the updated guidance specifically addresses the issue of a service PE.
Home office PE
Consistent with the April 2020 guidance, it is confirmed that individuals teleworking from home (i.e., a home office) as a result of a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved would not create a fixed place of business PE for the business/employer. However, the updated guidance further elaborated on the conclusion by noting that individuals who stayed at home to work remotely during the pandemic were typically doing so because of public health measures. Working from home because of public health measures was an extraordinary event and it is not a requirement of the employer. Therefore, considering the extraordinary nature of the COVID-19 pandemic, working from home would not create a PE for the business/employer, either because such activity lacked a sufficient degree of permanency or continuity or because the home office was not at the disposal of the enterprise.
The updated guidance also stated however that if the individual keeps working from home after the public health measures are not applicable anymore, the home office may be considered to have a certain degree of permanence. However, this change alone will not necessarily result in the home office giving rise to a fixed place of business PE. After such a permanent change, a further examination of the facts and circumstances shall be required to determine whether the home office would then be considered to be at the disposal of the enterprise.
Agency PE
Similar to the April 2020 guidance, the updated guidance concluded that an employee’s or agent’s working from home during the pandemic is unlikely to constitute an agency PE if the employee/agent does not habitually conclude contracts on behalf of the enterprise. The employee’s or agent’s activity shall not be regarded as ”habitual” if they have exceptionally begun working from home as a result of a public health measure imposed or recommended by the government and provided the individual does not continue those activities after the public health measures cease to apply. The updated guidance also indicated that a different approach might be appropriate, if the employee was habitually concluding contracts on behalf of the enterprise in their home jurisdiction before the COVID-19 pandemic.
The guidance also provided that if the employee keeps working from home after public measures are not applicable anymore and continues to habitually conclude contracts on behalf of the enterprise, it will be more likely that the employee shall create an agency PE. In that respect, the updated guidance provided that the same factors considered in paragraphs 28 to 30 of the commentary on Article 5 of the OECD Model are relevant for the analysis. These paragraphs note, for example, that experience has shown that PEs normally have not been considered to exist in situations where a business had been carried on in a country through a place of business that was maintained for less than six months. Further, the paragraphs indicate that the recurrent nature of the business operations is important to an assessment of the degree of permanency and also whether the activity is wholly carried on in that country.
Conclusion
Both the OECD response to the COVID-19 and the different countries positions seem to agree that they rely on the temporary nature of the pandemic which has prolonged to the point that is questionable if they should remain applicable to the current environment where the effects in the economy are now less disruptive.
The COVID-19 pandemic resulted in unprecedented operational changes that impacted PE positions of multinational companies. Governments imposed travel restrictions, implemented strict quarantine measures and encouraged teleworking. But the interruption and adjustment that companies had to embrace may now be challenged by tax authorities in different parts of the world and the temporary measures may not be applicable everywhere throughout 2022.
This will require companies and taxpayers to re-adapt back to some patterns of tax normality and audits may be expected to cover this issue.
Rafael Graça
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