The coronavirus outbreak has forced many employees to work from home and made companies and organizations worldwide take unprecedented measures to continue supporting employment. In a cross-border context, working from home might have adverse tax consequences, bringing several taxation issues to the spotlight.
In general, double tax treaties stipulate that cross-border workers are required to pay income tax in the country where the employment is physically exercised. If you are now working from home due to COVID-19, this may result in your salary becoming taxable in your country of residence. This could result in a double taxation issue in case payroll taxes continue to be deducted at the same time in the country where the employment used to be exercised.
Aiming to provide some guidance in these difficult times, the OECD has published recommendations on various international tax issues due to the current COVID-19 crisis. The comments and concerns relate to: (i) the creation of permanent establishments; (ii) the residence status of a company (place of effective management); (iii) cross-border workers, and (iv) the tax residence status of individuals.
Based on the Commentary on Article 15 the OECD Model, the OECD recommendation for cross-border workers is that the salary employees receive from their employer should be attributable to the place where the employment used to be exercised before the crisis.
Belgium has answered this call and has already made agreements with the Netherlands, Germany, France and Luxembourg. As a result, the ‘COVID working days’ will not be considered working days in the home country and should therefore not have any undesired tax consequences.
The question remains how this will be dealt with for other countries in the world. Belgium has around a hundred double tax treaties in place and it is currently not clear if the same approach will be applied for other countries like the UK, US, Spain, Italy, Portugal, the Scandinavian countries and so on.
Where the country of employment has a taxing right, the residence country must grant double taxation relief under Article 23 of the OECD Model, either by exempting the income or by taxing it and giving a credit for the source country tax. In Belgium, the so-called ‘exemption with progression’-principle is normally applied. If the relevant tax treaty in place between the source and residence country does not provide a solution for these cross-border employment issues, the competent authorities in each country may deal with this on a case-by-case basis by mutual agreement under the authority of Article 25(3) of the OECD Model.
The OECD is asking for an exceptional level of coordination between countries to mitigate the compliance and administrative costs for employees and employers associated with the involuntary and temporary change of the place of employment, but it remains to be seen how this will work out in practice and how the Belgian tax authorities will deal with this matter.