The Organisation of Economic Co-operation and Development has introduced new guidelines for determining whether a remote employee’s home office amounts to a permanent establishment that attracts tax for a foreign employer.
The guidelines formulate a two-part test for use in determining whether a permanent establishment exists. The tests consist of a temporal threshold and an inquiry into the commercial reason for the employer’s presence where the home office is situated.
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According to the guidelines, a permanent establishment exists when a remote employee works from a home office in a country for at least 50 per cent of their working time over any rolling 12-month period. In addition, there must be a commercial reason for the employee’s presence in that country, such as regular interaction with local clients or suppliers, or activities that materially facilitate the employer’s business in that jurisdiction.
Arrangements attributable solely to employee preferences, talent retention or internal cost effectiveness (such as reducing office space), don’t constitute commercial reasons that give rise to a permanent establishment.
As well, the guidelines emphasize the absence of a commercial reason isn’t necessarily determinative of the issue — even where no commercial reasons exists for using a remote foreign location, the analysis must still consider other relevant factors.
In addition, the guidelines don’t modify the ‘dependent agent’ rules, which state that a permanent establishment exists regardless of the home-office analysis if an employee habitually negotiates or concludes contracts in the foreign country.
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It’s important to remember, however, that the guidelines apply only to international situations — such as a foreign employer with a remote home office in Canada or a Canadian employer with a remote home office abroad — and not to inter-provincial ones.
“All the provinces have their own rules, and these guidelines do not change existing jurisprudence at all,” says David Rotfleisch, a tax lawyer at Rotfleisch & Samulovitch P.C. “But the OECD guidelines could be of assistance is there is some similarity of wording between the guidelines and the domestic rules that would aid a court in its interpretation of the domestic rule.”
Even in international situations, the guidelines aren’t binding on Canadian courts. But that’s not to say they lack relevance.
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“The OECD guidelines are a valuable aid in the interpretation of Canada’s tax treaties, even if they post-date the treaty,” Rotfleisch says.
For the most part, Canadian employers — especially those with, or that are considering, remote offices abroad — should welcome the new guidelines, which finally provide long-awaited clear boundaries for the implications of employee mobility.
Employers will, however, have greater responsibility for monitoring where employees work, how often they work there and the business purposes of their work.
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