Remote working PEs: new OECD guidance offers clearer thresholds

Overview

The OECD has published more detailed guidance on the circumstances in which cross-border home working can create a taxable presence for a business in the form of a "fixed place of business" permanent establishment (PE). This new guidance reflects evolving ways of working and sets out a practical framework which offers clearer thresholds than the previous more general approach, including a 50% working time indicator and a “commercial reason” test, together with examples.

The guidance updates the OECD Model Treaty Commentary but will not only inform the interpretation of tax treaties when allocating taxing rights over business profits but may also influence policy in respect of remote work in the many jurisdictions which base their domestic concept of a permanent establishment on the Model Treaty:

• Businesses with employees working remotely in foreign jurisdictions will need to look at working time patterns and activities undertaken from home and consider whether remote working policies need to be updated in the light of this new guidance.
• Closer scrutiny may need to be given to arrangements where employees are cross-border home working for more than 50 per cent. of their working time as the new guidance elevates the risk of challenge from tax authorities to these arrangements.
• Employers should also consider immigration, regulatory, data protection, health and safety issues as well as the risk that a remote working arrangement might give rise to employment law issues, including local employment law in the foreign jurisdiction (particularly where employers might be considering changes to existing arrangements as a result of the changes outlined above).

Home working – what is the new guidance?

The OECD's previous guidance was brief and offered only limited, high-level guidance looking at whether a home office was "at the disposal of" the employer and whether the employer "required" the individual to use that location to carry on the business e.g. by not providing an alternative office where one was necessary. The emphasis was very much on case-specific analysis.

The update provides a much clearer operational framework for assessing home-office PEs, with defined indicators and exclusions. Broadly, if an individual works from home in another country for less than 50% of their total working time, it generally won’t be a fixed place of business; if they work there for more than 50% of that time, a PE may still only arise if there is a clear commercial reason for being in that country, not merely personal preference or cost savings.

1.  Fixed place of business – 50% working time indicator

The test for determining whether a home office is a "fixed place of business" of the employer remains based on the facts during a given period, not hypothetical or past or future arrangements. 

The home office will only be a fixed place of business if used with sufficient permanence and regularity (a three month work stint in another country, for example, would lack the necessary permanence), and used to carry on business-related activities which are not merely preparatory or auxiliary; intermittent or incidental use would not typically indicate a place of business.

Helpfully, the OECD indicates that the requisite continuity to give rise to a PE will not generally be met if the individual works from home or other non-business premises for less than 50% of their total working time during any rolling twelve month period.  Working time is determined by the individual’s actual conduct; contracts and policies are relevant only insofar as they reflect actual conduct. 

This provides a practical safe harbour and the OECD expressly states that exceptions to this are not expected to be common.

2. Commercial reasons

Even if the 50% threshold is exceeded, a PE is not automatically triggered; one then looks at the overall facts and circumstances, notably whether there is a “commercial reason”  for the activities undertaken by the individual. This test focuses on substantive business facilitation in the home jurisdiction as distinguished from personal convenience and cost reduction. Examples of when a commercial reason is present include where:

• The business would actively choose to have the individual physically present in their home jurisdiction for its activities and, if the home were unavailable for work purposes, would provide alternative premises there. 
• The individual’s local presence facilitates direct engagement with colleagues, customers or suppliers, for example to perform services requiring physical presence at customer premises, to operate across time zones in real-time or to enable in-person interaction as required e.g. to manage relationships, cultivate new customer bases, access local resources or expertise, or collaborate effectively. 
• By contrast, engagement that is only intermittent or incidental (e.g., short, occasional customer visits or minor interactions in the context of the overall relationship) would not be sufficient to establish a commercial reason.  Allowing home    working solely to obtain or retain the individual’s services would also not be a commercial reason, and nor would the desire to reduce costs e.g. by avoiding renting office space.

Neither coincidental presence of customers, suppliers, or colleagues in the home jurisdiction, nor that the home happens to be in a different time zone to the business, would be a commercial reason in themselves without substantive engagement.

Where there is no commercial reason for undertaking the activities from the home/relevant place in the other State, that place would not be a place of business of the enterprise unless other facts and circumstances indicate otherwise. 

3. Special case: individual is the only/primary person conducting the business

Different considerations apply where the individual is the only or the primary person conducting the enterprise’s business. For example, a non resident consultant carrying on most of her consulting enterprise’s activities from a foreign home office for an extended period would have a place of business there (and likely a fixed place PE, subject to other conditions). 

Implications for employers

The updated Commentary allows employers to be more confident in assessing the likelihood of home working creating a PE. However, businesses should align remote working policies with the new Commentary and review jurisdictions where employees work cross border. In particular: 

• Working time patterns should be assessed to understand whether employees cross the 50% indicator for a given location, and employers should think about how records will be kept and how this interacts with any employment law obligations to monitor and record working time. 
• Remote working policies should recognise the PE implications of allowing activities that establish a commercial reason for working from a home abroad, such as substantive customer or supplier engagement, local collaboration, or services requiring physical presence. If necessary, these could be limited.
• Ensure facts and reasons for remote working are documented. The analysis is ultimately fact-specific and so personal preferences, authorisations, activity descriptions, client/supplier interactions and time zone service needs all need to be understood and evidenced.
• Finally, consider whether an agency PE may be created, even if there is no fixed place of business; this risk remains subject to existing standards and should be managed separately.

Whilst the clarity around PE risk is helpful to employers, PE risk is just one of the many considerations that employers must grapple with when allowing remote working – as well as income tax and social security issues, employers should consider immigration, regulatory, data protection, health and safety issues as well as the risk that a remote working arrangement might give rise to employment law issues, including local employment law in the foreign jurisdiction (particularly where employers might be considering changes to existing arrangements as a result of the changes outlined above).