OECD Model Tax Convention and OECD analysis
According to Art. 15 of the OECD Model Tax Convention governing the international taxation of income from employment, income received by the employee from the employer shall in principle be attributed to the place where the employment relationship is exercised. This principle is mirrored in several double tax treaties (DTT), which define the countries' taxation rights as related to the employee's physical presence when performing the activities for which the employment income is paid. Consequently, in the case of cross-border workers working from their home countries, the income that the employees receive would in principle be attributable to their country of residence.
The secretariat of the OECD recognised at an early stage that the COVID 19 pandemic could lead to a shift in the connecting factors of taxation or a relocation of the tax base and that income would temporarily have to be taxed under modified rules. On 3 April 2020 it published an analysis of DTT and the impact of the COVID-19 crisis (cf. section 4 “Concerns related to cross-border workers”). In this guidance, the OECD suggests that during COVID-19, payments should be attributable to the place where the employee would normally have worked (i.e. the place the person used to work before the COVID-19 crisis). The OECD further held that “exceptional circumstances call for an exceptional level of coordination between countries to mitigate the compliance and administrative costs for employees and employers associated with involuntary and temporary change of the place where employment is performed” and that it is working with countries to mitigate the unplanned tax implications and potential new burdens arising due to effects of the COVID-19 crisis. To date, however, the OECD has not yet published any concrete proposals to solve the problems it identified in its analysis.
Switzerland’s State Secretariat for International Finance (SIF) has concluded mutual agreements for cross-border workers who are forced to work from home due to measures taken by both governments with several of its border countries, i.e. Germany, France and Italy. As far as Liechtenstein and Austria are concerned, no mutual agreements have been concluded at the time being.
According to the existing mutual agreements mentioned above, which are for exceptional and provisional application, working days performed in the country of residence due to the COVID-19 pandemic are not counted as working days in the former, but as working days in the country where the activity would have been performed without the COVID-19 measures (fiction of facts). Switzerland thus follows the OECD's recommendation presented in its guideline. For this purpose, clause 1(1) of the COVID 19 Agreement between Switzerland and Germany, for example, feigns that cross-border workers return to their place of residence every workday. This ensures that the two contracting states can exercise their taxation rights during the COVID-19 pandemic in the same way as before. As a result, from a Swiss perspective, workdays spent abroad due to COVID-19 measures remain subject to Swiss salary withholding tax and consequently should be credited against the residual income tax in the state of residence.
At cantonal level, the cantonal tax administrations of the Cantons of Zurich and Basel have ordered that work days which employees resident abroad have spent in their home offices due to the COVID-19 pandemic are subject to Swiss salary withholding tax.
Need to act: Mutual agreement procedure
Not all countries follow the statement of the OECD, which leads to countries having different approaches to the taxation of cross-border workers. For example, the United Kingdom considers that with regard to international business travellers, tax on earned income is in principle due where the obligations are performed and not where they were meant to be performed. If an employee presumably performs his activities in two countries with different approaches and the salary withholding tax is not credited, this may lead to a double taxation. Given the uncertain development of the pandemic, these contradictions may even increase over time.
For reasons of legal certainty, it is therefore desirable for those countries to initiate mutual agreement procedures (MAP) to clarify the tax situation described. Although the conclusion of such agreements usually requires a considerable amount of time, it may, for the time being, be the only possible next step in situations of divergent approaches of two countries to the taxation of cross-border workers.