The scenarios generated by COVID-19, which a few years ago were unthinkable, have now become a reality that companies must face as a result of globalisation.
Today, many companies have on their payroll, foreign workers, as well as cases of employees on international assignments who, due to the pandemic, have had to or have wanted to return to their countries of origin, or in some cases have been unable to leave due to border blockades. In both these cases international teleworking has been necessary.
On April 3 2020 the OECD issued a pronouncement containing guidelines on how countries from across the globe should face this new situation, recommending the relaxation of internal policies and tax rules considering the pandemic circumstances that motivated international teleworking, such as mobility restrictions due to force majeure. The OECD updated the guidance on January 21 2021 – ‘Updated guidance on tax treaties and the impact of the COVID-19 pandemic’.
The OECD recognised that the crisis and health circumstances being experienced worldwide were merely temporary, caused by force majeure, and therefore the conditions of permanence and control to constitute permanent establishments would not be met, nor could they have an impact on the place where the labour income of employees are taxed.
It has been some time since the beginning of the pandemic, and with the slow opening of country borders, international teleworking is no longer motivated by a cause of force majeure or having a transitory nature, mutating to a formula of remote work with great potential, which not only benefits the employee but also the employer. It is necessary to analyse the tax and social security effects, in depth, that this new way of working entails.
Thus, and under a criterion of permanence of teleworking, it is relevant to evaluate the risks for Chilean companies to configure a permanent establishment abroad, as well as to analyse the effects of the tax residence of the employees and their tax compliance obligations.
These situations will undoubtedly lead to complex situations and tax residency conflicts between Chile and other jurisdictions, for which it will be necessary to review internal regulations, those of the other countries involved, and finally the rules imposed in the bilateral tax treaties to avoid double taxation (DTAAs) that Chile has signed.
Regarding the permanent establishment risk, it is important to analyse and monitor the roles, activities, and mandates that the employee will carry out abroad on behalf of the company that employs them.
Likewise, it should be considered the ‘habituality’ with which the dependent employee, after the COVID-19 pandemic, execute different activities, such as entering into contracts on behalf of the company, performs certain works for the Chilean entity, and finally analyse whether the home office can be considered to have a certain degree of permanence, and whether it could be considered a fixed establishment or a registered office that is at the disposal of the employing company. All of the circumstances could create risks and/or configure a permanent establishment of the employing company in the foreign jurisdiction.
Regarding the concept of ‘tax residence’, the principle of territoriality should be analysed, a rule that will ultimately determine the place where the employee's labour income should be taxed, and which should be reviewed for each case. In other words, the ‘minimum physical presence required’ becomes relevant, whether at the level of domestic legislation or DTAAs.
Consequently, the taxation that will affect the employee will depend on the modality of international teleworking that is agreed or materialised. In this regard, and given that employment taxes are usually withheld at source, dealing with the change of tax residence of the employee will involve administrative and compliance costs to be borne by the employer and/or the employee.
In addition, in many cases a self-declaration will have to be prepared by the employee, paying his own personal taxes, which will entail risks of partially or totally incomplete or erroneous declarations, caused by the ignorance of the tax obligations.
In conclusion, although the development of COVID-19 has involved a period with considerable labour and commercial changes, a neutrality in tax and social security matters has been maintained.
Nevertheless, a future in which no public health measures or restrictions are applied should be envisioned, which will necessarily imply the need to evaluate the employer's taxation and the employee's residence situation, both by the taxpayers themselves, as well as by the intervening tax authorities.