Guidance on impact due to COVID-19 on Tax treaties by OECD Secretariat dated 3rd April, 2020
In this pandemic, where tax payers are in dilemma of tax implications, move by OECD to release such guidance is a welcome step. OECD has adopted a pragmatic approach in dealing various issues which has come out of this pandemic and lead to severe tax implications, if applied abruptly by tax authorities. This guidance will seek to affect law enforcement practice in dealing with various tax treaties and bring out pragmatic solution to taxpayers. Following concerns are dealt with:
I. With respect to creation of Permanent Establishments (“PE”) in this COVID-19
Fixed Place PE
1. Whether work from home by employees dislocated in other country due to COVID-19 can create a Fixed Place PE?
This situation is due to government directives, being a force majeure and not an enterprise’s requirement.
Considering the extraordinary nature of COVID-19 and until it does not become new norm over time, such teleworking from home, (i.e. Home Office by referring para 18 of Commentary on Article 5) will not create PE either
Because such activity lacks certain degree of permanency or continuity
Because, except otherwise than such employee, employer do not have access or control over such home office
Also, currently, they have office which in normal circumstances available for employees.
Dependent Agent PE
2. Whether activities of individual temporarily working for home (“WFH”) for non-resident can create Dependent Agent PE as per Article 5(5)?
An employee’s or agent’s activity in such state is unlikely to be regarded as habitual if they are WFH due to force majeure and/or government’s directive and thus impacting their normal routine.
Referring to para 6 and 33.1 of 2014 commentary and similar para 98 in 2017 Commentary on Article 5, OECD provides that for being a PE, there should be degree of permanency and agent should “habitually” conclude contracts thereby suggesting that the presence should be more than mere transitory if enterprise is to be regarded as maintaining PE.
Construction Site PE
3. Whether such temporary interruption be included in determining life of construction site which constitutes PE as per Article 5?
Referring to para 55 of 2017 commentary on Article 5(3), OECD provides that site should not be regarded as ceased to exist when work is temporarily discontinued.
Therefore, such temporary interruption of COVID-19 will be included in determining period for determining construction site PE.
II. With respect to residency status of company (due to Place of Effective Management)
1. Whether location of CEO’s and other senior executives may lead to change in Place of Effective Management (“POEM”) affecting the determination of country in which company is resident?
OECD provides that it is unlikely that such COVID-19 situation will affect residency status of entity. It provides that such temporary change in location is extra ordinary and temporary and therefore, should not trigger change in residency.
But, OECD dealt with situation where double residency situation get triggered due to change in POEM where tie breaker rule to be applied as follows:
i Tie breaker Rule similar to 2017 Model
Competent authorities will deal on case by case basis through mutual agreement based of facts and circumstances by considering range of factors as mentioned in para 24.1 of the Commentary.
ii Tie breaker Rule similar to Pre-2017 Model
POEM will be the criterion to determine residence of dual resident entity for tax treaty purpose.
Referring to para 149 of 2017 Commentary on Article 29, POEM is “ordinarily” the place where most senior person or group of persons made the key management and commercial decisions necessary for conduct of company’s business.
Therefore, all relevant facts and circumstances need to be examined to determine “usual” or “ordinary” POEM and not only those that pertain to COVID-19 crisis and this may solve the situation.
III. With respect to tax obligations of cross border workers
1. Where will the amount received by employees as a part of stimulus packages to employers by government despite restriction on exercise of employment be attributable?
OECD provides that such amount received by employees resemble termination payments and as per para 2.6 of 2017 Commentary of article 15, the amount should be attributable to place where employee has otherwise worked. (i.e. majorly place where employee used to work before COVID-19)
Due to this, if source country gets right to tax as per treaty, the residence country should relieve double taxation.
2. How to deal with change of place by cross border workers due to special provisions of treaty (conditions of limits of day for triggering taxation in source state)?
OECD suggested countries to coordinate in such exceptional situation to mitigate the compliance and administrative costs of employees and employers due to temporary and involuntary of place where employment is performed.
IV. With respect to dual residency status of individuals
1. How to deal with dual residency which arise to individual who is temporarily away from home (due to holiday or due to work for few weeks) and gets stranded in such host country and attains domestic residence there?
OECD did not suggest any remedial measure. It mentions that such situation being unlikely as domestic laws have rules for staying in the country for certain number of days.
It provides that even if dual residency arise, tie breaker test as applicable in Article 4 of treaty will take care and seems likely that this would provide treaty residence to home country.
2. How to deal with dual residency which arise to individual who is working in another country (“current home country”) and attains residential status there but temporarily return to their previous home country and attain residential status there as well?
OECD suggested here the person’s attachment to previous home country is stronger. While applying tie breaker test, in case where personal and economic relation in current home country is strong and the fact that the person moved to previous home country during such crisis may lead to risk of tipping against previous home country.
But OCED suggests to use “habitual abode” approach as it refers to frequency, duration and regularity of stays that are part of settled routine of individual’s life and therefore more transient.
Also, OECD advises tax administration and competent authorities to use a more normal period of time in this crisis like short term situation while assessing person’s residential status.
OECD Guidance is short term solution to the issues that have arisen temporarily out of this pandemic. This does not cover situations what if the same extends for longer period.
While the guidance covers situation as per provisions of Model Tax Convention (“MTC”), but does not cover situation where treaties may have variations from MTC.
However, individual tax authorities must come out with their own clarification and guidelines on dealing domestic laws in such pandemic situation to avoid unnecessary burden on tax payers.
India has recently issued clarification vide Circular No. 11 of 2020 in respect individual to ignore quarantine period or period from 22nd March till 31st March, 2020 while determining residency status under domestic law (i.e. Income Tax Act, 1961).
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About the Author:
Monark Padmani (C.A., B.Com.)
He is currently working as Assistant Manager – Direct Tax with Pathak H.D. Associates and LLP in Mumbai having experience in dealing Assessments, Litigation (like CIT, ITAT and HC), Search-Seizure Matters and Income Tax Settlement Commission.