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COVID-19: Pitfalls and Opportunities for Employers and Employees
Employers globally have been learning to adapt to their employees working remotely at ‘home’, but what happens when ‘home’ is outside of the company’s ‘home’ country? As the reality dawned on employers that remote working was longer than a short-term measure, we’ve seen some multinational groups – particularly those with diverse workforces – stand up and take note. In this update, we summarise what tax and employment considerations Irish employers should be aware of where employees are working or wish to work in a country other than Ireland (often back in their country of origin). We also briefly consider updated ‘benefit in kind’ (BIK) guidance that Irish Revenue have issued in the context of COVID-19 and the scope this currently provides for tax-efficient benefits to be provided to employees.
A Home Away From Home
Since the onset of the pandemic, the attitude of many employees working remotely may have understandably been that their chosen place of work should not be important once they cannot physically be in the office. However, the prospect of employees working abroad raises two tax issues for employers – could it result in an obligation to operate foreign payroll taxes and, of perhaps more concern, could it give rise to a foreign corporation tax issue for the company (ie, could the employees’ presence trigger any ‘permanent establishment’ (PE) issues)? Unfortunately, both questions are not ones that lend themselves to easy answers, above all because they primarily raise issues of non-Irish tax laws that may vary from country to country depending on where the employee is based.
Payroll taxes – does staying below the magic number of 183 days suffice?
Employers sometimes assume that they should not be under any obligation to operate payroll taxes in a foreign jurisdiction once an employee spends no more than 183 days outside of the country. This assumption is based on the ‘employment income’ article in most double tax treaties that, broadly, exempts an individual from personal taxes in the country where duties are carried out on a short-term basis, provided no more than 183 days are spent there (typically in any rolling 12 month period) and certain other conditions are satisfied. However, it’s important for employers to be alive to the fact that, in addition to there being technical conditions to the application of this exemption over and above the simple days test, an employer’s payroll tax obligations do not always necessarily align with the employee’s underlying tax position.
Looking at the ‘reverse’ scenario – of a non-Irish employer with an employee carrying out duties in Ireland on a short-term basis – provides a useful reference point. In an Irish context, there is a strict technical obligation on a foreign employer to operate Irish payroll taxes when an employee exercises duties in Ireland (irrespective of the time spent in Ireland). However, Irish Revenue provide dispensations from this strict technical obligation with different tests applying depending on whether the other country involved is a country with which Ireland has a double tax treaty (with broader dispensations applying in these cases) and the days spent in Ireland. The rules around these dispensations are complex and have been the subject of significant changes in recent years – and whilst the most recent updates to the rules in June of this year represent a welcome simplification, it is still important to note that, in cases where a threshold of 60 ‘workdays’ in Ireland is exceeded, a payroll tax dispensation can be availed of only upon making an application to Irish Revenue. In addition to having to satisfy the Irish Revenue that all of the technical conditions under the relevant double tax treaty have been satisfied, the foreign employer may, in any event, need to register for Irish payroll taxes despite the dispensation (once granted) removing the requirement to operate payroll taxes. Further, the application must be made within 30 days of the employee’s arrival in Ireland, which in some cases may not be practically feasible. A failure to make the application within this time limit, according to the relevant guidance, will result in the obligation to operate payroll taxes applying from the date of arrival – though, thankfully, in the context of Covid-related filing / notification relaxations, Irish Revenue have indicated that they are not currently strictly enforcing the 30 day notification requirement.
Whilst the above Irish Revenue guidance is not directly relevant to Irish employers, it illustrates the complexity of the rules in this area, the pitfalls that employers need to be cognisant of and the danger in assuming that staying below the magic number of 183 is a silver bullet in sidestepping the payroll tax question. Of course, an additional factor is whether a tax authority in the relevant country has issued any Covid-related guidance that might relax certain aspects of their existing payroll tax rules. Clearly, the position may vary depending on the country at issue and engaging advisors early, where relevant, is advisable.
Corporation tax – can a Covid-related establishment have permanence?
The starting point, from a corporation tax perspective, is that pursuant to international double tax treaty principles, a company that’s resident in one country should only be subject to corporation tax in another country if it has a PE in that other country (assuming a tax treaty is in place between the two countries). In broad terms, there are two ways in which a PE can be established – 1) where the company has a ‘fixed place of business’ in the other country in which the business of the enterprise is wholly or partly carried on; and 2) where a dependent agent of the company has, and habitually exercises in the other country, an authority to conclude contracts in the name of the enterprise. Whilst a detailed overview of PE principles is outside the scope of this article, some of the key points to note in the context of individuals working from a ‘home’ base abroad are as follows:
- the concept of a ‘fixed place of business’ is interpreted very broadly and can, in some circumstances, extend to an individual’s home office;
- the analysis as to whether an individual’s presence abroad can give rise to a PE is very much fact dependent dictated largely by the duties being carried out;
- the PE tests assume that the activities would have a certain degree of permanency before a PE would be established.
In early April, shortly after the onset of the pandemic, the OECD published helpful guidance which sought to address a number of the challenges resulting from COVID-19, including in respect of concerns related to the creation of permanent establishments. The essence of this aspect of the guidance was to focus on the ‘degree of permanency’ that a PE must have under both the ‘fixed place of business’ and ‘dependent agent’ limbs, and to suggest that it is unlikely in either case that a PE would be triggered solely on account of Covid-related presence in a country, given the ‘force majeure’ nature of the circumstances. The guidance also noted, in the case of the ‘fixed place of business’ PE, that the “enterprise generally has to require the individual to use that location to carry on the enterprise’s business”.
However, one line in the OECD guidance is noteworthy in prefacing its conclusion that a PE should not be triggered by the phrase “to the extent that it does not become the new norm over time”. In this respect, the guidance, whilst helpful, should be read in the context of the extraordinary times during which it was published, at a time when ‘government directives’ may have left individuals trapped in a country. Whilst the times are still extraordinary, the backdrop has changed materially. Six months on since the beginning of the pandemic in Europe, and in the context of fewer government restrictions, claiming that an employee’s potential presence for half a year and counting in a country is a ‘force majeure’ and lacks the required degree of permanency clearly becomes more strained. Similar to the payroll tax position, the starting point in the analysis is the domestic law position in the relevant country (with the double tax treaty (PE) principles layering above the domestic law analysis, if applicable). Different countries are known for having differing views of PE thresholds, so there is no ‘one size fits all’ fix – other than ensuring that employees who were based in Ireland pre-Covid remain in or return to Ireland.
Mandatory employment laws
In addition to the tax risk, employers should be alert to the fact that employees can benefit from local mandatory employment laws in the country in which they work remotely during the pandemic. Where these mandatory laws are more favourable than Irish law, there is a particular incentive for employees to seek to engage them.
Such mandatory employment laws may include, for example, specific rights to annual leave and minimum pay. Importantly, they may also cover termination rights – which can be particularly onerous in some jurisdictions, for example, where there may be statutory procedures to effect dismissal, termination payments or significant sanctions for non-compliance.
As the period of remote working out of Ireland increases during the pandemic, so does the risk of engaging such mandatory employment laws. Where an employee accrues, for example, French employment rights, even though still employed on a contract with an Irish governing law clause, the employer may have to take both Irish and French legal advice on any proposed dismissal, pay-cut etc, and ensure the process meets the requirements of both systems, if possible.
In cases where the employment contract fails to provide for governing law, difficult issues may arise under Rome I Regulation on the law applicable to contractual obligations (EC) (593/2008) (“Rome I”), for contracts made on or after 17 December 2009. The general position is that the governing law of the employment contract will be the law of the country in which, or from which, the employee habitually carries out his or her work. If the employee does not habitually carry out his or her work in or from one country, then the governing law will be the country where the business through which the employee was engaged is situated. However, despite the general rule, the governing law can be the law of another country where the contract is more closely connected taking into account all the circumstances. It is important to note that the interpretation on governing law will favour the employee, as the weaker party.
The fact that an employee temporarily works in another jurisdiction during the pandemic should not change the fact that Ireland is where he or she habitually carries out work, if the employee is expected to resume working in Ireland. However as the period of working out of Ireland increases and the prospect of a return date becomes less clear in many cases, there is a risk that an employee may be found to be habitually working in another jurisdiction. To reduce the risk, it is advisable that the employer regularly reviews the remote working position and sets clear communications around the expectation to return to work in Ireland on a certain date (which can be subject to review in light of public health law and guidance).
Can an employer require an employee to return to Ireland after remote working out of Ireland due to the pandemic?
The question is whether the instruction is reasonable in all the circumstances. In most cases a request to return to work in Ireland after working remotely outside Ireland should be a reasonable instruction, subject to any public health law and guidance (applicable both in the country of remote working and in Ireland). This may involve a period of restricted movement at home in Ireland in line with public health requirements (during which time an employee should in most cases be expected to be working remotely). However, in some cases, an employee may have certain stress and anxiety issues in travelling back to Ireland by plane or otherwise, which will need to be appropriately considered and could give rise to disability discrimination risks in certain cases.
The general advice from an employment perspective is to continue to review remote working arrangements out of the jurisdiction and update communications regularly as to the expectation to return to work in Ireland. It is important, particularly as the period of remote working outside Ireland increases, to seek local law advice in the relevant country in which the employee continues to work remotely (and particularly, if it is proposed to terminate employment by reason of redundancy or otherwise).
In an environment where personal tax rates in Ireland remain high and with limited scope for tax-efficient remuneration of employees, one of Irish Revenue’s Covid-related amendment to their BIK guidance may be of particular interest to employers or remote-working employees, particularly those in industries where remote working is expected to remain a part of new work patterns in a post-pandemic world.
Revenue have effectively extended their ‘e-working’ guidance to employees working at home due to COVID-19. The result is that a set of tax-beneficial rules that previously only applied where a formal agreement was in place between an employer and employee requiring the employee to perform ‘substantive duties’ and a ‘substantial period’ working at home has now has been extended to all employees working at home ‘to support national public health objectives’ upon a Government recommendation.
The e-working guidance has two aspects – one is a daily allowance (of up to €3.20 per day) that can be provided tax-free to cover additional costs from home working; the second is that the costs of certain office equipment can be provided tax-free (provided private use is incidental). The equipment includes computers, printers, scanners and software, and office furniture (provided it is primarily for business use). The provision of a telephone line / broadband will also not give rise to a BIK charge, provided private use is incidental. The daily allowance is clearly limited and one would expect has a shelf life – in that the e-working guidance one would expect will ultimately cease to apply to many office-based workers in the future. However, the rules on the tax-free provision of equipment such as office desks and ergonomic chairs (which are uncapped) provides a one-off opportunity for employers to remunerate and incentivise employees in a tax-efficient manner that can benefit employees long into the future.