The current COVID-19 environment is undoubtedly triggering a seismic shift in the way employees undertake their work (including working offsite from "home offices"). Depending on the location of the workplace and the nature of the industry, this is likely to continue in some form well into a post COVID-19 world.
Consequently, putting aside the temporary displacement of personnel and the disruption of construction projects we've previously explored, it is likely that one of the next big "permanent establishment" (PE) issues facing many corporate entities in a post-COVID-19 world will be driven by their personnel working, whether wholly or in part, in a different country to where they ordinarily work (as distinct to temporary foreign displacement of employees due to COVID-19).
In this respect, prior to COVID-19, it was not uncommon for employers to have policies and practices in place regarding employee performance of day-to-day employment duties at a specified work premises (ie. whether that be in an office or project site etc.).
However, during COVID-19, a large proportion of workers have been required to perform their employment obligations offsite for the first time such as at home – typically as a result of relevant government "work from home" directives.
As working from home has become ubiquitous and the "new norm" during COVID-19 (which has extended well into 2021), many employers are now reviewing / amending such practices and policies and considering providing a higher degree of flexibility for employees to undertake all or a portion of their employment in a location other than at a specified work premises (ie. including from home) – particularly for personnel in roles who do not require specific equipment, machinery or direct physical supervision (Remote Working Arrangement).
Such Remote Working Arrangements will likely be driven by both the employers and employees in equal measure. For example, for:
- employers: there may be commercial benefits (such as costs savings due to any consequential reduction in the amount of leased premises) as well as other factors such as the desire to offer greater flexibility to staff; and
- employee:- there may be many lifestyle benefits (such as through eliminating travel time by working from home which can free up more personal time) that provide motivation to actively seek Remote Working Arrangements beyond COVID-19.
This could be particularly enticing for employees who have worked in a different country for family reasons during COVID-19 and once the relevant restrictions of COVID-19 come to an end, may seek to continue to work in that different jurisdiction, whether on a full or part time basis (ie. such as a roster system where they may seek to spend a certain number of weeks a month working from home in their "home" jurisdiction and the balance weeks a month at the "office" in the jurisdiction of their employer).
Australian Income Tax Issues – Remote Working Arrangements
Consequently, where employers need to be particularly mindful from an Australian and foreign PE perspective when formulating and implementing Remote Working Arrangement in a post COVID-19 world, is where they are:
In particular, in respect of an Inbound Remote Working Arrangement:
- where a "double taxation agreement" (DTA) is applicable, then the Inbound Remote Working Arrangement could trigger Australian income tax issues for the foreign-resident employer if it causes them to have a “permanent establishment” in Australia; and
- where a DTA is not applicable, then the relevant income or profits of the foreign-resident entity which relate to the relevant employee under the Inbound Remote Working Arrangement would be subject to Australian income tax if they have an Australian source (which would potentially be the case given the relevant employee is working in Australia under the Inbound Remote Working Arrangement).
We have previously examined the ATO guidance in respect of Australian PE issues related to the unplanned presence in Australia of employees of foreign-resident enterprises due to the short-term result of their being temporarily relocated or restricted in their travel because of COVID-19.
In this respect, recent updated guidance issued by the ATO (Updated ATO Guidance) states that until 31 December 2021 the ATO will not apply compliance resources to determine if the foreign-resident enterprise has a PE in Australia in respect of temporary international employee displacement if certain specified and narrow criteria are satisfied.
Furthermore, the Updated ATO Guidance states that, foreign resident employers should consider:
- whether, from 1 January 2022, they have any ongoing arrangements in place with employees working in Australia that could trigger Australian PE issues; and
- contacting the ATO and applying for an early engagement to discuss the taxation consequences of any ongoing arrangements in place from 1 January 2022 in respect of employees working in Australia.
The fact that the Updated ATO Guidance expressly encourages taxpayer to seek early engagement with the ATO indicates that Australian PE issues triggered by International Remote Working Arrangements is an area which is strongly on their radar and will continue to be closely monitored by the ATO for the foreseeable future.
The Organisation for Economic Co-operation and Development (OECD) released updated guidance on 21 January 2021 in respect of PE issues related to a change of work practices due to COVID-19 (Updated OECD Guidance).
Importantly, the Updated OECD Guidance draws a distinction between the "home office" arrangements of workers in a different jurisdiction to their foreign resident employer which is temporary in nature and due to the COVID-19 pandemic and such arrangements which extend beyond the COVID-19 pandemic.
In this respect, the OECD guidance broadly states that whether a "home office" could create a PE (Home Office PE) in circumstances where an individual continues to work from home after the cessation of relevant COVID-19 public health measures will broadly depend on whether the cross-border worker is "required" to work from home by an enterprise – for example:
- where a home office is used on a continuous basis by a cross-border worker for carrying on business activities for an enterprise and it is clear from the facts and circumstances that the enterprise has "required" the individual to use that location (eg. by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office), then this may give rise to a Home Office PE on the basis that it is at the "disposal" of the enterprise; or
- if a cross-border worker performs most of their work from their "home office" situated in their "home" jurisdiction, rather than from the office made available to them in their employer's jurisdiction, then this may not give rise to a Home Office PE on that basis that the "home" is not at the "disposal" of the enterprise because the enterprise did not "require" that the home be used for its business activities;
In practice, it is likely that there will be many instances where there will be a fine line in determining whether an employer has "required" their employees to work offsite (for example, where an employer has relinquished office space and has a roster system in place where employees can "opt" in to either work in the office to the extent there is space available on the relevant dates or work from home).
We think this will be a particular area of concern by the ATO when reviewing any Inbound Remote Working Arrangement. Consequently, the retention of relevant supporting evidence will be a key issue that employers should consider going forward to the extent they have International Remote Working Arrangements in place with employees.
Action items – early engagement with ATO
Thinking ahead to a post COVID-19 world – employers should ensure that they seek Australian income tax advice (and any relevant foreign tax advice) together with any applicable Australian employment law advice if they are considering having employees exercising their employment:
- inside Australia when they would otherwise work for the foreign-resident employer outside Australia (ie. Inbound Remote Working Arrangement); or
- outside Australia when they would otherwise work for the Australian-resident employer in Australia (ie. Outbound Remote Working Arrangement).
Furthermore, the action items we've already set out remain relevant for employers in respect of managing issues from an Australian income tax perspective where they have Inbound Remote Working Arrangements in place which extend beyond COVID-19.
In particular, employers should ensure that they retain relevant evidence to support their position from an Australian income tax perspective, which should assist in responding to any queries from the ATO down the track as applicable.
Further, if an employer has any uncertainty about whether any Inbound Remote Working Arrangements it has in place or will have in place beyond COVID-19 could trigger PE issues then they should consider approaching the ATO for guidance (including in circumstances where they have an Inbound Remote Working Arrangement in place which currently falls within the compliance exception in the Updated ATO Guidance but is likely to continue beyond 31 December 2021).
Importantly, while the focus of this article is Australian PE issues, if employers have International Remote Working Arrangements in place with an employee during COVID-19, then they should also consider any other implications under Australian law such as under Australian payroll tax, employment (including employment taxes) and superannuation law as well as any implications under any relevant foreign law.