How do continued COVID-19 border restrictions impact tax? 

By Robyn Walker and Mila Robertson
 

The OECD, as part of their overall compilation of COVID-19 policy responses, have released “updated guidance on tax treaties and the impact of the COVID-19 pandemic” (the previous version released in April 2020 is available here). The guidance provides an overview of some of the tax implications arising from COVID-19 and provides useful summaries of the varying responses that different jurisdictions have taken, both under domestic law and with reference to the application of their tax treaties. In particular, the guidance provides an overview of the tax treaty articles relating to the creation of permanent establishments (“PE”), tax residence of companies and individuals, and the right to tax income from employment.

While many New Zealand businesses are back operating ‘normally’ to a large degree, many businesses with international connections will be impacted due to the continued COVID-19 restrictions in other jurisdictions and the continued lack of mobility of employees and directors. It will be important for businesses to continue to assess restrictions (and relaxation of restrictions) and how business operations adapt in order to avoid any adverse tax impacts arising. For example, an ordinarily New Zealand based employee who is working remotely in a foreign jurisdiction, deciding to voluntarily continue doing so because the arrangement worked well and is more convenient for the parties, may result in the need to reassess company and individual tax issues.

Inland Revenue’s guidance on how these issues are interpreted in New Zealand is available here. This guidance is based on the April 2020 OECD positions; our expectation is that Inland Revenue would continue to follow the approaches endorsed by the OECD.
 

Permanent establishments

The nature of COVID-19 means that employees may be stranded in locations where they would usually not perform their employment related duties. The guidance is clear that temporary dislocation of employees due to COVID-19 should not create a PE for employers. This is regardless of whether the risk of PE stems from the conclusion of contracts in a jurisdiction, or a home office appearing to give rise to a permanent place of business.

With reference to home offices, the guidance refers to article 5 of the OECD’s Model Tax Convention and the relevant commentary. Determining whether a fixed place of business PE exists is a question of fact. Almost all jurisdictions referenced in the guidance acknowledge that an employee’s temporary home office (which exists as a result of having to work from home due to public health measures/travel restrictions) does not constitute a fixed place of business (a PE) for an employer. Many jurisdiction’s tax authorities have made public announcements to the same effect, although the reasons underlying this common position vary. However, the guidance notes that if employees continue to work from home after they become able to return to their normal work patterns, there may be a certain degree of permanence attributed to the home office. Consideration of the facts is still required to determine whether this is sufficient to create a PE.

The guidance provides that a similar approach should be taken in considering whether a PE exists due to contracts being concluded in countries where they are not normally concluded. Under Article 5(5) of the OECD’s Model Tax Convention, the activities of a dependent agent will create a PE where that employee “habitually” concludes contacts on behalf of their employer. The guidance concludes that an employee’s activity concluding contracts in a foreign jurisdiction would not likely be habitual in nature if they are working from home due to public health measures/travel restrictions. However, if agents continue to conclude contracts in a jurisdiction after COVID-19 related travel restrictions end, a PE may be created. The guidance is unclear whether this PE will be backdated to the first date agents began concluding contracts in the relevant jurisdiction.
PEs can also be created through construction projects. The guidance provides that temporary COVID-19 related disruptions to work will not cause this type of PE to cease to exist. However, it does note that jurisdictions can choose to ‘stop the clock’ (on the timing provisions that dictate when a PE arises from a construction project) where work has been halted due to COVID-19 related public health measures.

The guidance is clear that the all of the above concessions and application of treaties cannot be relied upon to create instances of double non-taxation.
 

Company residence

The OECD does not expect a company’s residence under the ‘place of effective management’ test to be impacted due to the temporary inability of directors / board members to travel. This is the general approach that the jurisdictions referenced in the guidance have adopted. Inland Revenue’s guidance continues to be that “[e]ach case turns on its own facts and circumstances, but in terms of the director control test, what is relevant is where control is ordinarily exercised. … Where directorial control is ordinarily exercised can be viewed over a broader timeframe. Where there are some directors exercising control from New Zealand and others from another country, consideration can be given to where the majority ordinarily exercise control (if the powers of the directors are the same). Similarly, in terms of the centre of management test, a broader consideration of the usual overall management of the company is appropriate. It is also necessary to look at the various levels of management of the company, not just management at the director level.”
 

Individual residence and income from employment

The guidance notes that it is unlikely that COVID-19 travel restrictions will impact an individual’s treaty residence position in most cases (depending on their personal circumstances). Although individuals may not become resident while ‘stranded’ in a country as a result of COVID-19 travel restrictions (due to various domestic COVID-19 concessions or treaty interpretations consistent with the OECD guidance), employees and their employers may encounter tax obligations where the employee is non-resident of a jurisdiction, but has become subject to tax on income from employment due to exercising employment duties in that country. Inland Revenue has released their own guidance on this topic, however, it should be noted that IR’s concession to the 92 day rule has a strict interpretation of when an employee is reasonably able to depart New Zealand. Employers should be wary of this both in New Zealand and abroad, due to the withholding obligations that could fall on an employer.

For more information on this topic, please contact your usual Deloitte advisor.