OECD releases guidance on COVID-19 and double tax agreements
The Organisation for Economic Co-operation and Development (OECD) has released guidance on the impact of COVID-19 on the interpretation of various tax issues covered by double tax agreements. The guidance recognises that many people may be stranded in a country that is not their usual place of residence or employment due to government travel restrictions. This could lead to unintended tax consequences. The OECD released the guidance at the request of affected jurisdictions and contains an analysis of some common DTA issues, such as residency and permanent establishments.
Creation and cessation of permanent establishments
Many governments around the world have introduced strict travel restrictions in an effort to minimise the spread of COVID-19. This has given rise to some unique tax issues. In some cases, an employee may be stranded in a jurisdiction that is different to their usual place of employment. Concerns have been raised as to whether a permanent establishment is created in the jurisdiction where the employee is stranded and may be continuing on with their employment duties.
The OECD response is that the exceptional and temporary change of location where employees exercise their employment because of COVID-19, such as working from home, should not create a new permanent establishment for the employer. A permanent establishment requires a degree of permanency and must be at the disposal of the business. These features are not typical in a situation where an employee is forced to work remotely from home because of government directives. Provided that working remotely from home does not become the new norm over time, the temporary arrangement of working in a different location should not create a permanent establishment in that location.
A similar outcome applies in respect of the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 crisis. This should not create permanent establishments for businesses, which requires an employee to habitually conclude contracts on behalf of the business. The guidance concludes that if an employee is forced to work from home for a short period of time due to COVID-19 restrictions, the employee or agent’s activity is unlikely to be habitual. If the employee was already working from home and concluding contracts prior to COVID-19 restrictions, then a different outcome may arise.
A construction site that is a permanent establishment will not be regarded as ceasing to exist when work is temporarily interrupted during the COVID-19 pandemic. However, the duration of any such interruption is to be taken into account for the purposes of determining whether a construction site constitutes a permanent establishment in the first instance.
Change in residence of a company - place of effective management
During the COVID-19 crisis, senior executives of a company may be confined to a certain jurisdiction. The concern is that relocation or the inability to travel may result in the change in the place of effective management of a company, and therefore its tax residence.
The OECD guidance acknowledges that a temporary change in location of senior executives due to COVID-19 is unlikely to result in a change in the tax residency of a company. The “usual” and “ordinary” place of effective management, and not only those that relate to an exceptional and temporary period such as the COVID-19 crisis, should be determined.
Change in residency of individuals
Similarly, as a general rule, the COVID-19 crisis should not affect an individual’s residency under double tax agreements.
The guidance gives two examples of temporary situations that could arise during the pandemic:
- A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and becomes stranded in the host country due to COVID-19. The person becomes tax resident under the host country’s domestic tax laws.
In response to this scenario the guidance states: “…..it seems likely that the tie breaker test would mostly award treaty residence to the home country. This is because it is probably unlikely that the person would have a ‘permanent home’ available to them in the host country. But if they did (and an apartment rented for a sufficiently long period would count), and they had rented out their dwelling in their home country, they would be treated as treaty resident of the host state. Where the person had a permanent home in both states, it seems likely that the other tie-breaker tests (centre of vital interests, place of habitual abode, and nationality) would award residence to the home state. No remedial measure is suggested.”
- A person is working in a country (the “current home country”) and has acquired residence status there, but they temporarily return to their “previous home country” due to COVID-19. They may either never have lost their status as resident of their previous home country under its domestic legislation, or they may regain residence status on their return.
The result under the second scenario may be slightly more problematic. The guidance states: “The same treaty rules apply, but their application produces a more uncertain result because the person’s attachment to the previous home country is stronger. In cases where the personal and economic relations in the two countries are close but the tie breaker rule was in favour of the current home state, the fact that the person moved to the previous home country during the COVID-19 crisis may risk tipping the balance towards the previous home country. This would usually be decided using the test of ‘habitual abode’.”
Cross-border workers and government subsidies
Where a government subsidises a company to retain an employee on the company’s payroll during the COVID-19 crisis (for example, as part of a stimulus package), the income that the employee receives from the employer should be attributable to the place where the employment used to be exercised. Where an employee works in one jurisdiction but commutes there from another jurisdiction where they are resident, this would be the jurisdiction they used to work in.
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