Although the OECD said, early on in the pandemic that it is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty, LISA MANGAN says ‘there still exists a risk that the Irish tax residence position of a company would be weakened where its place of effective management is considered to have moved outside of Ireland, for example, where board directors no longer work in Ireland or the board meetings do not physically occur in Ireland’.
In recent years flexible working arrangements have increasingly been used by companies, particularly in certain sectors, to attract and retain talent. Since March of this year, Covid-19 has fast tracked that trend with the majority of employees in Ireland now working from home, which in some cases includes from a foreign jurisdiction.
Where employees are working remotely in another jurisdiction, there are tax implications which need to be considered. While the tax implications may not prevent working from another jurisdiction, the consequences should be managed and monitored by the employer.
Lisa Mangan: "OECD analysis says that ‚Äėit is unlikely that the COVID-19 situation will create any changes to an entity‚Äôs residence status under a tax treaty‚Äô noting that ‚Äėall relevant facts and circumstances should be examined to determine the ‚Äúusual‚ÄĚ and ‚Äúordinary‚ÄĚ place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis."
This article outlines some of the pertinent corporate income tax implications which could arise.
Whether a permanent establishment (PE) is created will depend on the domestic laws in the relevant jurisdiction and any relevant double tax treaties entered into by that country. A PE can be created in a number of ways including by virtue of a company having a place of management in a foreign jurisdiction or a person habitually concluding contracts on behalf of that enterprise in a foreign jurisdiction. A PE can give rise to a corporate income tax liability in that foreign jurisdiction.
In general, companies should monitor their PE risk to determine if it has a fixed presence in another jurisdiction. Pre- Covid-19 companies with employees working in sales roles in another jurisdiction would have experience in monitoring their PE risk. As a result of Covid-19 a wider number of companies, including some experiencing this issue for the first time, now have employees working from foreign jurisdictions and should be cognisant of the PE risk.
In some cases there are COVID-19 related concessions for employees working in a particular jurisdiction. Irish Revenue confirmed that where an employee of a foreign jurisdiction is working in Ireland, or where an Irish employee is located abroad where it can be clearly shown to be Covid-19 related, they will disregard such presence from a PE perspective. This is in line with the OECD Secretariat Analysis Of Tax Treaties And The Impact Of The Covid- 19 Crisis (April 2020) which provides that ‘it is unlikely that the COVID-19 situation will create any changes to a PE determination. 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.
Similarly, the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 crisis should not create PEs for the businesses.’
However, OECD guidance is not binding legislation and there are certain jurisdictions where domestic concessions have not been announced.
The longer that travel restrictions remain in place, the greater the risk in this area. Companies should focus on establishing clear policies and procedures while tracking and monitoring obligations that could be associated with employees working from outside of Ireland.
Closely linked to the issue of a PE are transfer pricing considerations. Where a company’s employees exercise their duties in a foreign jurisdiction and create a PE, the PE would need to be remunerated at arm’s length for the activities of these employees. Depending on the nature of the business and the activities undertaken by any PE, this could have an impact on the level of profits earned in Ireland. It may be difficult to support existing transfer pricing analysis which allocates significant profits to Ireland where certain key decision makers/employees have moved outside of Ireland. In that case, changes to the pricing of inter-company agreements and transfer pricing documentation may also need to be considered.
Company Tax Residence
The OECD analysis says that ‘it is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty’ noting that ‘all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis.’
However, there exists a risk that the Irish tax residence position of a company would be weakened where its place of effective management is considered to have moved outside of Ireland, for example, where board directors no longer work in Ireland or the board meetings do not physically occur in Ireland.
Companies will need to take steps to ensure that that tax residence is not triggered outside of Ireland, and the place of effective management remains to be Ireland where key management and commercial decisions that are necessary for the conduct of the company’s business are in substance made.
From a practical perspective, planning and documentation of activities will be key. Irish Revenue have stated in their guidance that “the individual and the company should maintain a record of the facts and circumstances of the bona fide relevant presence in the State, or outside the State, for production to Revenue if evidence that such presence resulted from COVID-related travel restrictions is requested.” Participation by board members physically located outside of Ireland with respect to the impact of conference call board meetings should also be considered.
Other tax issues which need to be considered when a company has remote workers operating in a foreign jurisdiction include:
• does the remote worker result in a fixed establishment for VAT purposes?
• what are the payroll and employment tax obligations for employers in the foreign jurisdiction?
• does the remote worker require immigration permission either to work in the foreign jurisdiction?
The Deloitte 2020 Work Flexibility Survey of 1,000 U.S. white-collar professionals revealed that nearly all respondents say they would benefit from work flexibility (94%), with the top advantages being less stress/improved mental health (43%) and better integration of work and personal life (38%). Given how companies have adapted to remote working and how employees have experienced an improvement in work life balance, it is likely that many companies will maintain a longer term work-from-home option for employees. While there are concessions during the Covid-19 pandemic for some of the tax impacts, companies need to consider and manage these arrangements in the medium to long term.
Lisa Mangan is a manager in Corporate Tax, Deloitte Ireland LLP