OECD recommendations for taxation of cross border employees during COVID-19

Many governments have taken strict measures to protect people in response to the Covid-19 crisis, including the banning of cross-border travel. As a result of these restrictions, many workers who would usually cross a national border to fulfil professional commitments are having to stay home and work remotely, and some are even ‘stranded’ outside of their usual country of residence.

Triggering tax changes

Special provisions in tax treaties to deal with cross-border employees will have stipulations for how many days someone can work in – and outside – their tax jurisdictions before they trigger a change in status. If a ‘cross border’ worker is no longer able to travel, then their tax status may change.

If the country where the person used to work loses its taxing right following the application of the tax treaty, additional compliance difficulties would arise for employers and employees. Employers may have withholding obligations, which are no longer underpinned by a substantive taxing right. These would therefore have to be suspended or a way found to refund tax to the employee. The employee would also have a new or enhanced liability in their state of residence, which would possibly lead to them returning some income.

Exceptional circumstances call for exceptional levels of coordination between countries to mitigate compliance and administrative costs for employees and employers associated with involuntary and temporary changes to the place where employment is performed. The OECD is working with countries to mitigate the unplanned tax implications and potential new burdens arising due to effects of the Covid-19 crisis.

Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, says, “The exceptional circumstances of the Covid-19 crisis call for an exceptional level of coordination and co-operation between countries, notably on tax issues, to mitigate the potentially significant compliance and administrative costs for employees and employers.”

OECD guidance

The OECD Secretariat has issued guidance on these issues based on analysis of the international tax treaty rules. This guidance deals with concrete situations, consider the two following examples:

• Mr. X is stranded for a period in a country that is not his country of residence due to the travel restrictions and quarantine measures. The challenge here is to determine the place of residence of individuals for tax purposes. In this case, the OECD Secretariat’s general view is that, under the bilateral tax treaty between the two countries, Mr. X’s residence will not change due to such temporary dislocation. The OECD recommends countries of temporary residence to apply their domestic rules accordingly.
• Ms. Z, a cross-border worker, is quarantined in her country of residence and temporarily out of work due to Covid-19. Thanks to the stimulus package adopted in the country of her employer, she continues to receive her salary from her employer. The challenge in this case concerns the taxation of her salary received due to a stimulus package. In this case, the OECD Secretariat’s general view is that her income will continue to be taxed as it was prior to the Covid-19 crisis.

Will residence status change due to remote working?

The guidance also deals with issues affecting the residence of companies for tax purposes, where their management is carried out in another country due to the travel and quarantine restrictions. It examines remote working, for instance, and the implications for companies that have cross-border employees working in their home country and therefore performing their duties there. In these situations, the OECD Secretariat’s general view is that these special circumstances should not affect the residence status of companies under the international tax treaty rules.

More recommendations will be published

The OECD has announced it is urgently working on other concerns raised by businesses, taxpayers and tax administrations, due to Covid-19, on the taxation of cross-border workers working remotely in their home country and individuals affected by countries’ domestic residence rules triggered by the impacts of travel and quarantine restrictions. 

For the full recommendations, see here.