The current COVID-19 crisis has massively disrupted travel plans all around the world.
Some countries have implemented lockdowns for a period of 2-3 weeks whereas in other countries the lockdown could take at least 4-6 weeks, extending international travel bans to even a longer period.
This situation has left many people stranded in a country that is not their normal country of residence. There are many Digital Nomads around the world that have in the past stayed away from their home country for an extended period of time simply to avoid falling back into that tax system.
However, now that many people have been forced to go into lockdown and others were urged by their governments to come back home, this could bring unexpected tax obligations at the end of the financial year.
In this article, we’ll explore the implications of travel restrictions as many workers are unable to physically perform their duties in their country of employment and may have to work remotely from another country.
Until specific countries release guidance on COVID-19 implications, the Organisation for Economic Co-operation and Development (OECD) provided recommendations in early April 2020 on the implications of COVID-19 on cross-border workers and residence status of individuals and companies.
In summary, the OECD recommendations suggest that COVID-19 measures are generally exceptional and should not normally impact a company or individual’s tax status under tax treaties in a particular country.
Given these unique circumstances, countries have been urged to provide an exemption from the day count test during the period of mandatory lockdown and ban on international / domestic travel, as the law itself may not be equipped to handle this unique situation.
Let’s take a closer look into the OECD recommendations.
OECD GUIDELINES FOR INDIVIDUALS
# Tax residence if stranded in a country other than the normal work country
The OECD guidelines make it clear that if a person is stranded in a country that is not the normal country of residence, it is unlikely the current COVID-19 situation will affect the treaty residence position, and a person is likely to remain a resident of their normal residence country.
Two examples were listed:
- a person stranded in a country that is neither their current work country nor their current tax residence country, and
- a person stranded in their previous tax residence country most often referred to their home country (neither their current work country nor their current tax residence country).
In both examples, the residency tie-breaker provisions are likely to favour the normal country of residence due to the transient and unusual nature of the temporary living period in the country in which they are stranded. So, in both cases, it is unlikely that the person would acquire residence status in the country where the person is residing temporarily because of extraordinary circumstances
However, this is only the case where there is a treaty in place between both countries. Should there be no treaty in place, then a simple “days-present” test may well result in residency and it would be a matter for the host country to determine what relief to grant. Only a limited amount of countries have released specific guidance on this matter, namely, Australia, Ireland, UK, and the USA.
# Stimulus packages as a source of income
Quite a few governments have implemented stimulus packages that include subsidizing unpaid salaries. In some cases stranded workers around the globe may receive compensation and/or government subsidies as replacement income while working or not when temporarily residing in a country other than their normal country of employment.
The OECD guidelines treat the payment as a termination payment, which is typically sourced to the location where the employee would have otherwise worked.
# What this means for Digital Nomads, Remote Workers, Location-independent Business Owners
If you are currently stranded in your home country or somewhere else other than your usual place of residency and you are physically performing services of work from there, according to the OECD guidelines, given the extraordinary circumstances, your forced presence within the stranded country, shouldn’t create a tax obligation while you are temporarily stranded there.
However, the OECD guidelines combined with country-specific guidelines coming from the UK, USA, and Australia mainly, make it clear that domestic law will prevail over the OECD guidelines and that countries might decide to still implement a day-counting-test to determine tax residency despite the current unique circumstances.
During the last few weeks, it has become clear that countries’ economies will be struggling after the COVID-19 crisis and that governments will need to collect somehow more money in the future.
This is best demonstrated by the fact that Canada has been talking within the last week about possibly shifting to a Citizenship based taxation system sometime near in the future.
Therefore, it is important to not only consider the OECD guidelines when it comes to issues relating to being stranded in a country but to also and foremost, make sure what the domestic laws look like within the country that you are currently stranded and whether there are any double tax agreements in place with your usual country of tax residence.
OECD GUIDELINES FOR BUSINESSES
# Corporate Tax Residence
The OECD is of the view that the temporary relocation of board members to a different location as a result of COVID-19 should not have an impact on a company’s residence.
In practice, this is dependent on which version of the treaty is in use. The most recent, 2017, version of the model convention settles cases of dual residency by mutual agreement between the authorities.
A range of factors to be considered include where board meetings are usually held, where senior management usually undertake their duties, the location of the company’s headquarters, and where day-to-day management is usually carried on.
The OECD is of the view that in most cases this should lead to no change of conclusion if senior executives are temporarily located abroad.
The pre-2017 model convention requires jurisdictions to look at the company’s place of effective management. All relevant factors must be considered.
The OECD notes that some states interpreted the place of effective management as being ordinarily the place where the senior person or group of persons make management decisions.
While the OECD’s stance is clear, it appears there is scope for some jurisdictions to take a different view.
# Permanent Establishments
The OECD considers it unlikely that employees working from home in a different jurisdiction from that in which they habitually work would create a permanent establishment risk in the new location.
As this situation is temporary and exceptional, it would not generally have the requisite degree of permanency to create a fixed place of business.
Where an employee is only working from home as a result of force majeure or government directives, any activities they undertake should not be regarded as habitual.
SPECIFIC COUNTRY GUIDELINES
The COVID-19 crisis is a completely new circumstance and therefore, it would be useful for tax departments to provide guidance to tax officers (if not a complete exemption) on how to deal with this situation.
The concern becomes real especially if a lockdown is to continue for more than 2-3 months. Meanwhile, companies may take preventive measures such as postponing important meetings unless urgent, nonattendance of directors quarantining or self-isolating in other jurisdictions in board meetings of the foreign companies.
These international tax issues have of course not been on the top of the economic agenda for many countries. However, some countries have been forthcoming in taking note of these issues.
Australia has released various guidelines on circumstances in which a foreign individual should not be taxed on salary income earned while in Australia owing to the pandemic or treated as an Australian tax resident owing to their day count test being fulfilled due to the pandemic.
Foreign residents working remotely in Australia solely as a result of COVID-19 for less than three months will not result in the individual being assessed for Australian tax.
The three months may potentially be extended further under a Double Tax Agreement depending on the country where the individual ordinarily resides.
The key factor being that foreign residents who end up stranded in Australia can demonstrate that they usually live overseas permanently and that they intend to return there as soon as they are able to.
Similarly, the guidance also notes that the Australian tax residency of a foreign company should not be established simply because board meetings are conducted in Australia owing to the presence of directors there due to the pandemic; neither should a Permanent Establishment be established owing to COVID-19 related circumstances.
The UK and Ireland have also issued similar guidance to disregard the presence of directors or employees of a foreign company for tax purposes if such presence is owing to the COVID-19 related travel restrictions.
The USA has provided relief to affected foreign citizens who aren’t US citizens or residents for up to 60 days to be treated as if they were not staying in the country, but only if their travel plans have been delayed or disrupted by the pandemic.
The UK focuses heavily on the number of days an individual spends within the country to determine tax residency.
The tax officials have confirmed that if an individual were to find himself in the following circumstances due to Covid-19, it will be considered as ‘exceptional circumstances’ for the purposes of obtaining relief and those days not being counted when:
- quarantine or advice by a health professional or public health guidance to self-isolate in the UK as a result of the virus
- receipt of official Government advice not to travel from the UK as a result of the virus
- inability to leave the UK as a result of the closure of international borders, or
- a request is made by the individual’s employer for his temporary return to the UK as a result of the virus.
In general, the OECD recommendations suggest that COVID-19 travel restrictions are generally exceptional and should not impact a company or individual’s tax status under tax treaties in a particular jurisdiction.
However, it is important to keep in mind that the OECD guidelines are not specific to any country and do not impact the laws in any country.
Although the guidelines help to clarify common stranded remote worker situations, the OECD encourages countries to work together to alleviate unplanned tax obligations and mitigate potential new tax burdens that arise due to the crisis.
Only one thing is certain for now – each country will react differently. This is why it is important for governments to either provide exceptions or at the minimum, guidance to tax officers on how to deal with these cases.
However, even if countries release more specific guidance on this matter we can certainly expect cases that will blur the distinction of presence due to a COVID-19 lockdown versus an intention to stay, especially where past travel history and trends over the years is being looked at to establish the intention to stay.
This ultimately will be more of a subjective test, driven by facts and circumstances of case-by-case analysis. As is the case with all issues concerning COVID-19, one can only wait and watch to see how the situation unfolds, and whether or not companies will have to adapt and do business differently.
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NOTICE: The content of this article is not to be considered as a legal opinion or tax advice. Wanderers Wealth does not hold itself out as a legal or tax advisor. If you want to receive a legal opinion or tax advice on the matter in this article please contact us directly and we will refer you to a legal practitioner.