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OECD & COVID-19 – Updated guidance on tax treaties and the impact of the Covid-19 pandemic

The COVID-19 pandemic has forced governments to take unprecedented measures such as restricting travel and implementing strict quarantine requirements.

This unprecedented situation is raising 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.

At the request of concerned countries, the OECD Secretariat has issued a guidance on these issues based on a careful analysis of the international tax treaty rules in April 2020. Last 21th January OECD has published a note that revisits the guidelines issued in April, mostly confirming them.

 

Avv. Chiara Di Sabatino

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1. Introduction

This note revisits the guidance issued by the OECD Secretariat in April 2020 on the impact pf the Covid-19 pandemic on tax treaties.

The COVID-19 pandemic has forced governments to take unprecedented measures such as restricting travel and implementing strict quarantine requirements.

This unprecedented situation is raising many tax issues, especially where there are cross-border elements in the equation.

At the request of concerned countries, the OECD Secretariat has issued a guidance on these issues based on a careful analysis of the international tax treaty rules.

 

2. Concerns related to the creation of permanent establishments

Some businesses may be concerned that their employees dislocated to countries other than the country in which they regularly work, and that working from their homes during the COVID-19 crisis will create a “permanent establishment” for them in those countries, which would trigger new filing requirements and tax obligations.

The exceptional and temporary change of the location where employees exercise their employment because of the Covid-19 pandemic, such as working from home, should not create a PEs for the employer.

Similarly, the temporary conclusion of contracts in the home of employees or agents because of the Coivd-19 pandemic should not create PEs for the businesses.

It is unlikely that the COVID-19 situation will create any changes to a PE determination.

Home office

During the COVID-19 crisis, individuals who stay at home to work remotely are typically doing so as a result of government directives: it is force majeure not an enterprise’s requirement. Therefore, considering the extraordinary nature of the COVID-19 crisis, teleworking from home (i.e. the home office) would not create a PE for the business/employer.

If an individual continues to work from home after the cessation of the public health measures imposed or recommended by the government, the home office may be considered to have certain degree of permanence.

A further examination of the facts and circumstances will be required to determine whether the home office is now at the disposal of the enterprise following this permanent change to the individual’s working arrangements.

Agency PE

The question may also arise whether the activities of an individual temporarily working from home for a non-resident employer could give rise to a dependent agent PE. 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.

A different approach may be appropriate if the employee was habitually concluding contracts on behalf of enterprise in their home jurisdiction before the Covid-19 pandemic.

The agent’s activity in a jurisdiction should not be regarded as “habitual” if they have exceptionally begun working at home  in that jurisdiction as a public health measure and would not constitute a dependent agent PE provided the person does not continue those activities after the public health measures cease to apply.

Construction site PE

It appears that many activities on construction sites are being temporarily interrupted by the COVID-19 crisis. The duration of such an interruption of activities should however be included in determining the life of a site and therefore will affect the determination whether a construction site constitutes a PE. In general, a construction site will constitute a PE if it lasts more than 12 months under the OECD Model.

A construction site PE would not be regarded as ceasing to exist when work in the site is “temporarily” interrupted, but jurisdiction may consider that certain periods where operations are prevented as a public health measure imposed or recommended by the government where the site is located to reduce spread of the Covid-19 virus constitute a type of interruption that should be excluded from the calculation of time thresholds for construction site PEs.

 

3. Concerns related to change of residence

The COVID-19 crisis may raise concerns about a potential change in the “place of effective management” of a company as a result of a relocation, or inability to travel, of chief executive officers or other senior executives.

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.

An entity’s place of residence under the tie-breaker provision included in a tax treaty is unlikely to be impacted by the fact that the individuals participating in the management and decision-making of an entity cannot travel as  a public health measure imposed or recommended by at least one of the governments of the jurisdictions involved.

 

4. Concerns related to cross border workers

Where a government has stepped into subsidies the keeping of an employee on a company’s payroll 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.

Some stimulus packages adopted or proposed by governments are designed to keep workers on the payroll during the COVID-19 crisis despite restrictions to the exercise of their employment.

The payments that employees are receiving in these circumstances most closely resemble termination payments, that should be attributable to the place 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.

 

5. Teleworking from abroad

A change in the place where the employment is exercised may give rise to a change in the allocation of taxing rights under the current treaty rules.

Exceptional circumstances call for an exceptional level of coordination between jurisdictions to mitigate the compliance and administrative costs for employees and employers associated with an involuntary and temporary change of the place where employment is performed.

Where relevant, MAP should be applied efficiently to help resolve issues arising out of the Coidv-19 pandemic.

Changes in the jurisdiction where an employee exercises their employment can impact where their employment income is taxed: new taxing rights over the employee’s income may arise in other jurisdictions and those new taxing rights may displace existing taxing rights.

 

6. Concerns related to a change to the residence status of individuals

Two main situations could be imagined:

  1. A person is temporarily away from their home and gets stranded in the host country by reason of the COVID-19 crisis.
  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 the first scenario, it is unlikely that the person would acquire residence status in the country where the person is temporarily because of extraordinary circumstances. Such a temporary dislocation should therefore have no tax implications.

In the second scenario, it is again unlikely that the person would regain residence status for being temporarily and exceptionally in the previous home country.

A dislocation because a person cannot travel back to their home jurisdiction should not by itself impact the person’s residence status for purposes of the tax treaty. A different approach may be appropriate if the change in circumstances continues when the Covid-19 restrictions are lifted.

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