The rapid spread of COVID-19 across the world has had a significant impact not only on our general lifestyle, but also on the global economy. Measures such as restricted travel, strict quarantine rules, and social distancing have become the norm, and, as the COVID-19 crisis transforms into an economic crisis, governments and world organisations have had to take prompt and concrete action to support businesses and individuals.
In an economy previously based on free movement of the workforce, the closure of borders has had a multi-layered impact. It soon became apparent that increased tele-working for otherwise mobile employees was one of the major problematic tax-related scenarios, and this led to questions regarding tax residency and the taxation of related salary income.
OECD guidance
In April 2020, the OECD released guidance referring to, inter alia, the change of residence and its related impact on salary income for mobile employees under two scenarios:
An individual travelling to a country outside of the usual place of work (for holiday or short period of work) and not able to return to the home country due to travel restrictions: in some cases, under the domestic legislation, the individual may become tax resident in the country of presence. However, the guidance explains that under the treaty rules, generally, the individual would not become tax resident of that country.
An individual undertaking employment activities in a host country and due to the COVID-19 situation returns to the home country: if the individual previously lost residence in the home country, even in the unlikely event where residence would be regained during the temporary return (based on the local legislation), the guidance explains that under the treaty rules, the individual would not become resident of that country due to the short period of return.
The OECD recommendation is for countries to consider that individuals should maintain the tax obligations they had during ‘a more normal period of time’. Still, deviations from the above may arise due to lack of tax treaties between the relevant countries, specifics of the applicable treaties, tax residency status which may have been unclear even before the pandemic, and potential applicable domestic rules.
International application
Some countries have already issued guidance with respect to the local application of the above guidelines. The UK, for example, has delivered detailed information in regard to exceptional circumstances that should be considered in the context of the statutory residence test. Ireland has also addressed the subject where an individual may not leave the country due to force majeure situations and how payroll should be operated for multi-state workers in the unusual cases encountered during the pandemic.
So far, no specific guidance has been provided by the Romanian government with respect to such aspects. Therefore, existing legislation/double tax treaties should be observed.
On the other hand, the OECD guidelines do not address all employment tax matters that could arise for an individual during these exceptional times, such as:
Non-resident taxation could still arise in the country of stay, as per domestic legislation.
Individuals working in a host country where they did not yet establish residency, upon temporary return to the home country, could be liable to salary taxation there, potentially leading to double taxation.
Individuals who were supposed to leave their country for an employment/assignment in another country and would normally no longer be subject to taxation in the home country, if the departure date is delayed, could still be liable to salary taxation if they start working from the home country.
Allocation of income for tax purposes, related to work exercised in two or more states could be complex, if the income relates to a longer period, including the pandemic, when the presence in various country did not follow the usual pattern.
In conclusion, while the OECD guidelines do offer clarity on certain matters when analysing the tax obligations in various countries, individuals should still consider various domestic legislations and assess their tax position considering their personal circumstances.
Claudia Sofianu
T: +40 725 809 452
Geanina Ciorâţă
T: +40 725 809 360
