OECD Guidance on Tax Treaties and the Impact of the COVID-19 Crisis

The unprecedented situation arising due COVID-19  is giving rise to many tax issues, especially where there are cross-border elements in the equation; for example, cross-border workers, or individuals who are stranded in a country that is not their country of residence. These issues have an impact on the right to tax between countries, which is currently governed by international tax treaty rules that define taxing rights. The OECD has issued guidance on these issues based on a careful analysis of the international tax treaty rules. Key highlights of which are as under:-

Concerns related to the creation of permanent establishments

Fixed Place PE The inbound expatriates who are stuck in the host country ( say India as an example) to work remotely are typically doing so as a result of government directives: it is force majeure not at the direction of the parent entity. Therefore, considering the extraordinary nature of the COVID-19 crisis, teleworking from India for the parent entity would not create a PE due to the fact that such activity lacks a sufficient degree of permanency or continuity or because, except through that one employee, the parent entity has no access or control over the Indian home office of the expatriates.  Agency PE Under Article 5(5) of the OECD Model, the activities of a dependent agent such as an employee will create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise. An employee’s or agent’s activity in a State is unlikely to be regarded as habitual if he or she is only working at home in that State for a short period because of force majeure and/or government directives extraordinarily impacting his or her normal routine. Construction site PE or Supervisory PE In general, a construction site will constitute a PE if it lasts more than 12 months under the OECD Model or more than six months under the UN Model. The OECD Commentary explains that temporarily interruptions should be included in determining the duration of a site. Examples of temporary interruptions given in the Commentary are a shortage of material or labor difficulties. The COVID -19 situation, not to be considered as a temporary in nature and therefore should be excluded.

Concerns related to the residence status of a company (place of effective management)

It is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty. A temporary change in location of the chief executive officers and other senior executives is an extraordinary and temporary situation due to the COVID-19 crisis and such change of location should not trigger a change in residency, especially once the tie-breaker rule contained in tax treaties is applied.

Concerns related to a change to the residence status of individuals

Two main situations could be imagined: Situation 1. A person is temporarily away from their home (perhaps on holiday, perhaps to work for a few weeks) and gets stranded in the host country by reason of the COVID-19 crisis and attains domestic law residence there. Situation 2.  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” because of the COVID-19 situation. In both the scenario, OECD recommends that it is unlikely that the person would regain residence status, though this could also require fulfilling Tie breaker test where a person attains dual residency. The Covid-19 situation should not be factor in deciding the residency.  Next Steps The above are the guidance of OECD and have persuasive in nature. For these guidances to be binding, it is important that Indian tax authorities also bring in necessary changes in its effect or application. A whole dos and don’t would be required on the part of MNC  in terms of documentation of agreement, communication to safeguard a possible tax risk We, at MBG Corporate Services, have an in-depth understanding of cross border tax issues and can offer a range of services to help MNC’s to navigate through this difficult and challenging time. Please connect with us if you would like to discuss the next steps. Last Updated: 27th April 2020 This article is contributed by:  Manoj Pandey Partner, International Taxes