OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19
On the 3rd of April 2020, the OECD Secretariat issued its analysis on international tax treaty related considerations stemming from the unprecedented restrictive travelling and quarantine measures taken by governments as a result of the COVID-19 pandemic outbreak. In its analysis it also takes note of the fact that Governments have been forced to take domestic relief measures to support employment, businesses and entrepreneurs.
The guidance deals mainly with cross-border elements arising from the inability of people to travel and physically be present either at work, or, at board meetings etcetera. Tax residency of corporations, as well as that of the individuals who are stranded in a country other than the country of their residence, are matters governed by international tax treaty rules that delineate taxing rights between tax countries.
Issue 1: Concerns related to the creation of PEs
Some businesses are concerned that their employees are stranded working in countries other than the country where they regularly work and, that the “home office” may create a PE in that other country causing a shift of the taxing rights between those two countries.
The position of the OECD is that it is unlikely that the COVID-19 situation will create any changes to a PE determination in view of the exceptional and temporary change of location of exercising employment. By the same token, the temporary conclusion of contracts in the home of employees or agents should not create PEs for the businesses.
A construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted.
In view of the fact that the threshold presence required by domestic law to register for tax purposes may be lower than those applicable under a tax treaty, tax administrations are encouraged to provide guidance on the application of the domestic law threshold requirements, domestic filings and other guidance in order to minimize or eliminate unduly burdensome compliance requirements for tax payers.
Issue 2: Concerns related to the residence status of a company (place of effective management)
Concerns may arise regarding a potential change in the “place of effective management” of a company in view of the inability of its senior executives to travel. This may lead to a change of residency for a company under relevant domestic laws, and, affect the country where the company is regarded as a resident for tax treaty purposes.
The position of the OECD is that the temporary circumstances should not result in a change of a company’s residence status under a tax treaty, especially once the tie breaker rule contained in tax treaties is applied. This would ensure that the entity is resident in only one of the states.
If the treaty contains a provision like the 2017 OECD Model tie-breaker rule, competent authorities will deal with the dual residency issue on a case-by-case basis by mutual agreement. In cases where the treaty contains the pre-2017 OECD Model tie-breaker rule, the place of effective management will be the only criterion used to determine the residence of a dual-resident entity for tax treaty purposes.
Therefore, all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis.
Issue 3: Concerns related to cross border workers
The concern arises in cases where a government has subsidized the salary of an employee during the COVID-19 crisis. The income that the employee receives from the employer should be attributable, based on the OECD Commentary on Article 15, to the place where the employment used to be exercised. In the case of employees that work in one state but commute there from another state where they are resident (cross border worker), this would be the state they used to work in.
The position of the OECD Secretariat is that as in the case of termination payments (paragraph 2.6 of the commentary on Article 15 of the OECD Model Convention), these payments should be attributable to the country where the employee would otherwise have worked. In most circumstances, this will be the place the person used to work before the COVID-19 crisis. Where the source country has a taxing right, the residence country must relieve double taxation under Article 23 of the OECD Model, either by exempting the income or by taxing it and giving a credit for the source country tax.
Issue 4: Concerns related to a change to the residence status of individuals
A concern is also raised on the impact of COVID-19 on the domestic and tax treaty determination of an individual’s residence status.
In both scenarios, the tie breaker rule in Article 4 of the OECD Model would apply where a tax treaty is available pursuant to which, an individual will be considered to be a resident of the country he/she was in before the COVID-19 crisis.
The Secretariat has pointed out that, because the COVID-19 crisis is a period of major changes and an exceptional circumstance, in the short term, tax administrations and competent authorities will have to consider a more normal period of time when assessing a person’s resident status.
Please contact Elena Christodoulou at email@example.com for any further information on this matter and/or for receiving an advice on whether and to what extend this may affect your personal or business tax status.