COVID-19 Crisis on cross border workers, cross border matters and the statutory residence test

Statutory Residence Test (SRT)

HMRC has already confirmed that Covid-19 travel restrictions and quarantine conditions can be regarded as exceptional circumstances (see our article here).

On 9 April, Rishi Sunak also confirmed that the SRT will be amended so that 1 March - 1 June 2020 dates spent in the UK by individuals working on COVID-19 related activities will not count towards the residence tests. This is designed to support those people whose skillsets are currently required.

Full details on eligibility and scope of the above is promised in due course. This will be legislated for in Finance Bill 2020.  

OECD recommendations on cross-border workers and other related cross-border matters

Where workers are confined to a country that is not their usual country of work and they continue to work remotely, there are cross-border tax and social security issues to consider. The cross-border tax implications are largely governed by international tax treaty rules that set out which country has the primary taxing rights. 

OECD guidance

The OECD are encouraging countries to work together to alleviate the unplanned tax implications and reporting requirements that are arising to both employees and employers due to the COVID-19 crisis.

The OECD is urgently also working on other concerns raised by businesses, taxpayers and tax administrations on COVID-19 issues for cross-border workers and individuals impacted by domestic residence rules due to the travel and quarantine restrictions.  
  
Concerns include:

1. Employees creating a permanent establishment (fixed place of business which creates a tax presence) for their employers in the other country. 
   
   The OECD recommendation is that temporarily working from home should not create a permanent establishment even where contracts are signed in the worker’s home. Provided the work pattern of the employee does not change after the pandemic, a home office does not have sufficient degree of permanence nor is it at the disposal of an enterprise to become a fixed place of business. If working from home remotely becomes the norm rather than the exception after the pandemic then the home office could become a fixed place of business. It should be remembered that, during the pandemic, employees are working from home due to government directives rather than as a requirement of an enterprise.
    
2. Individuals temporarily working from home for a non-resident company may give rise to a dependent agent permanent establishment.
   
   An employee’s or agent’s activity in a country is also unlikely to be regarded as habitual if they are only working at home in that country for a short period due to government directives. Therefore a dependent agent permanent establishment is unlikely to arise unless there was a previous history of concluding contracts in the home country. 
    
3. Whether there has been a change in the “place of effective management” of a company as a result of chief executive officers or other senior executives being unable to travel. 
   
   When considering the place of effective management of a company and the tax residence of an individual (see 5 below), it is necessary to consider the treaty tie-breaker clauses that can normally be found in Article 4 of the double taxation treaties. It is unlikely in either scenario that there will be a change in the residence of a company or an individual once these treaty tie breaker clauses have been applied. 
   
   Although the overall taxation position may not change, there may be additional reporting requirements that would need to be fulfilled dependent on the period that the individuals are present in the other country.  Please keep in mind that days in the UK due to COVID-19 are classed as exceptional and some other countries have also published similar guidance relating to their own residence rules.
    
4. It is necessary to consider all facts of the situation to advise fully and it should be remembered that there are some countries where a double taxation treaty is not in force. 
   
   If an employee lives in one country but works in another, where should the income that the employee receives from the employer be attributable where a government has stepped in to subsidise this income? 
   
   In this case, where employees are subsidised by a government but there are work restrictions, the payments made to the employees closely resemble termination payments. Under the OECD Model, these payments would be attributable to the country in which the employee would otherwise have worked. The home country would then either exempt the income or give a credit for foreign tax suffered.
   
   If the country of employment lost its taxing rights (eg the employee was able to work for a substantive period in the other country), there may be withholding obligations for the employer in the other country that the employer is not aware of. The OECD is working with countries to try to mitigate the compliance and administrative costs for employees and employers where there is a temporary change in the location in which duties are performed. 
    
5. The impact of domestic tax legislation in determining tax residence of an individual.
   
   As with 3 above, some Governments are introducing temporary measures to deal with this situation, and a double tax treaty tie breaker clause may provide a resolution.  However, each case will be determined on its facts.

Our views

Although the above guidance by OECD is helpful, it should be remembered that this is only guidance and, in practice, the tax treatment does depend on the views taken by the domestic tax authorities. The OECD are encouraging countries to publish their guidance on how COVID-19 interplays with domestic law threshold requirements and filing obligations. Limited guidance has been issued by HMRC to date relating to exceptional duties (referred to above) and confirming that the tax residence of companies will be fact specific. 

We would therefore recommend that individuals and businesses should maintain a full record of facts and circumstances both before, during and after COVID-19 to show that the changes during the pandemic were unusual and temporary rather than “business as normal”. 

Where employees are now working from home in the UK but were previously in another country, advice should be taken to ascertain if relief under a double taxation treaty can apply especially if time has previously been spent in the UK by that employee. 

Finally, the rules may be different for social security purposes especially where no bilateral agreement is in place.