On March 11 2020, the World Health Organization (WHO) declared COVID-19 as a pandemic. Most of the world has had to quarantine, millions have lost their jobs and others – the lucky ones – have been forced to start working from home.
For instance, the need to daily go to a certain workplace will most probably be outdated sooner than later and certain jobs will no longer require any physical presence at all, especially in the case of service companies. With remote-working, the employees could even work from a country other than the one where their employer is located.
For tax purposes, this new way of working represents several unforeseen and challenging scenarios. Among these scenarios, the possibility of an employee working from another country could imply undesired tax consequences for both the companies (employers) and the employees.
From the employer’s perspective, a scenario in which one of its employees works from another country could be deemed to be a permanent establishment (PE) in this other country.
Indeed, in the case of Chile, on February 24 2020, the Chilean Tax Modernisation Bill was enacted, introducing several modifications, such as a legal definition of PE.
In this sense, a permanent establishment would be deemed to exist where:
A place is utilised to perform permanently or habitually all or part of a business or activity of an entity without residence or domicile in Chile; and
A foreign individual or entity performs its activity in Chile through a representative who habitually closes agreements related to the business of the entity without residence or domicile, or has a key role in the closing of the agreements, or negotiates key parts of the agreements which are not further modified. This excludes auxiliary and preparatory activities.
Considering this definition, if an employee of a foreign entity was locked down in Chile due to the pandemic and continues to work from here, it could potentially have a PE in Chile.
Note that PEs in Chile shall comply with several tax obligations, among others, to file annual tax returns on their worldwide source income. Another relevant issue would be then how to attribute income to such PE. The same situation could be identified the other way around, thus, workers from Chilean entities being locked down in third countries could create the risk of being considered a PE.
On the other hand, in the case of the employees, their salaries could be subject to taxation by both the country where they are located and by the country where their employer is located.
These risks could be countered, but not eliminated, by the existence of a double taxation treaty or the utilisation of tax credits. Nonetheless, they would certainly be in a less favourable position than other employees that did not render services from another country.
Even though the control of these situations represents a challenge for tax authorities, we cannot deny that there is a matter that needs to be further discussed. It seems that the old concept of ‘residence vs source’ is being put under scrutiny due to these new ways to provide services under a highly connected and technological world.
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