10 Jun 2021

Early engagement with ATO encouraged on Australian “permanent establishment” tax issues related to COVID-19

By Amber Agustin, Peter Feros and Cameron Forbes

Australian permanent establishment issues triggered by temporary international employee displacement are strongly on the ATO's radar and will continue to be monitored very closely now and into the future.

As the ongoing impact and disruption from COVID-19 continues well into 2021, the ATO and the Organisation for Economic Co-operation and Development (OECD) have updated their previous guidance in respect of certain "permanent establishment" (PE) issues in the context of COVID-19 in respect of:

  • temporary international employee displacement: while the updated ATO and OECD guidance does not materially deviate from the previous 2020 guidance, the updated ATO guidance:
    • sets 31 December 2021 as the sunset date before which the ATO will not apply compliance resources in respect of this issue for a non-resident employer if the relevant arrangement falls within a specific set of criteria; and
    • invites early engagement with the ATO by non-resident employers if they anticipate they will have arrangements in place with employees to work in Australia beyond 31 December 2021; and
  • ongoing disruption of construction projects: similar to the previous guidance, the updated ATO guidance does not deal with this particular issue. However, the updated OECD guidance indicates that there may be circumstances where it is appropriate for jurisdictions to exclude certain periods of time which have been impacted by COVID-19 from the calculation of time thresholds for construction sites for PE purposes (which is a significant change from the previous OECD guidance which was issued in April 2020).

Consequently, employers should consider taking the action below to manage Australian income tax issues which may arise as a consequence of temporary international employee displacement due to COVID-19.

Updated ATO Guidance: temporary international displacement of employees

The ATO's updated guidance on Australian PE issues related to COVID-19 related employee displacement, along with an update to Taxation Ruling 2002/5 (on the meaning of the phrase "a place at or through which [a] person carries on any business" in the definition of PE in section 6(1) of the Income Tax Assessment Act 1936 (Cth)) to provide an example on the issue of "temporal permanence" in the context of the COVID-19 pandemic. However, our comments below are focused on the updated ATO Guidance.

Overall, the ATO is not deviating from its previous position that the effects of COVID-19 generally do not result in a foreign company having a PE in Australia if certain criteria are satisfied. While not expressly stated, the updated ATO Guidance (similar to the previous guidance) appears to be limited to the scenario where the foreign-resident company is a tax-resident of a country which has a double taxation agreement in place with Australia.

Significantly however, the updated ATO Guidance now says that until 31 December 2021 the ATO will not apply compliance resources to determine if the foreign-resident company has a PE in Australia if:

  • the foreign-resident company did not otherwise have a PE in Australia before the effects of COVID-19;
  • the temporary presence of employees of the foreign-resident company in Australia continues to solely be as a result of COVID-19 related travel restrictions;
  • the employees temporarily in Australia will relocate overseas as soon as practicable following the relaxation of international travel restrictions; and
  • the foreign resident employer has not recognised those employees as creating a PE or generating Australian source income in Australia for the purpose of the tax laws of another jurisdiction.

Further, 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 apply for an early engagement to discuss the taxation consequences of any ongoing arrangements in place from 1 January 2022in respect of employees working in Australia.

While making contact with the ATO for early engagement is always an avenue available to taxpayers to the extent they have uncertainty in respect of their Australian income tax position, the fact that the updated ATO Guidance expressly encourages taxpayer to seek early engagement with the ATO indicates that Australian PE issues triggered by temporary international employee displacement are strongly on the radar of the ATO and will continue to be monitored very closely by the ATO both now and into the future.

Updated OECD Guidance: temporary international displacement of employees

The OECD issued updated guidance earlier this year on PE issues related to a change of work practices due to COVID-19. It refers to the previous ATO guidance to highlight the position of the ATO in Australia (together with guidance issued in other jurisdictions) and concludes that:

  • individuals teleworking from home as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved to prevent the spread of the COVID-19 virus would not generally create a "fixed" place of business for the purposes of a PE for the business / employer; and
  • an agent's activities in a jurisdictions should not generally be regarded as "habitual" if they have exceptionally begun working at home in that jurisdiction as a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved to prevent the spread of the COVID-19 virus. The agent therefore would not constitute a "dependant agent" PE provided the person does not continue those activities after the public health measures cease to apply.

Updated OECD Guidance: disruption of construction projects

Under the updated OECD Guidance, a "construction site PE" would not be regarded as ceasing to exist when work in the site is "temporarily" interrupted. However, jurisdictions may consider, in light of the extraordinary circumstances of the COVID-19 pandemic and based on the facts and circumstances, that certain time periods should be excluded from the calculation of time thresholds for construction sites where operations are prevented as a public health measure imposed or recommended by the government where the site is located.

This is a significant update to the previous 2020 OECD guidance, which curiously indicated that the OECD’s position at that time was that the COVID-19 pandemic will not give rise to any concessional treatment when determining whether a construction project gives rise to a PE. However, that previous guidance was issued on 3 April 2020 and therefore before the full disruption of COVID-19 in 2020 and beyond could be known.

The general nature of the position set out in the updated OECD Guidance – together with the lack of ATO guidance on this issue – highlights the need for foreign residents with a construction project in Australia to seek Australian income tax advice and / or guidance from the ATO to the extent they have any uncertainty about whether the disruptions caused by COVID-19 could trigger Australian PE issues for them.

Where to from here for employers dealing with COVID-19 related temporary international employee displacement

Given the general nature of the aforementioned ATO and OECD updated guidance (and the absence of any detailed ATO guidance in respect of ongoing disruption of construction projects), if an employer has any uncertainty about whether any:

  • arrangements it has in place in respect of temporary international employee displacement due to COVID-19; or
  • disruptions to an construction project in Australia caused by COVID-19,

could trigger “permanent establishment” issues then they should seek Australian and / or foreign income tax advice as applicable.

Furthermore, they could consider approaching the ATO for guidance (whether it be in the form of a ‘letter of comfort’ or something more formal). In the context of the Updated ATO Guidance, earlier engagement with the ATO may be a more prudent approach than engaging later in time.

Additionally, the action items we flagged last year remain relevant for employers managing issues from an Australian income tax perspective which may arise as a consequence of temporary international employee displacement due to COVID-19.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.