OECD Issues Statement on International Double Tax Conventions Relating to the COVID-19 Crisis

On April 3, 2020, the Organisation for Economic Co-operation and Development (OECD) Secretariat issued an “Analysis of Tax Treaties and the Impact of the COVID-19 Crisis.” 

At the request of concerned countries, the OECD Secretariat issued the guidance based on a careful analysis of the international tax treaty rules.  The analysis addresses concerns as a result of the novel coronavirus (COVID-19) pandemic related to the creation of a permanent establishment (PE), the residence status of a company (place of effective management), cross border workers, and a change to the residence status of individuals.

 

Permanent Establishment and Center of Management (Articles 4 & 5)

The OECD guidance indicates that it is unlikely that the COVID-19 situation will create any changes to a PE determination. The exceptional and temporary change of the location where employees exercise their employment because of the COVID-19 crisis, such as working from home, should not create new PEs for the employer. Similarly, accepting the terms of contracts in the homes of employees or agents because of the COVID-19 crisis should not create PEs for the businesses. For example, a construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted. However, the threshold presence required by domestic law (including state or provincial legislation) to register for tax purposes may be lower than those applicable under a tax treaty and may therefore trigger corporate income tax registration requirements.  In addition, not all income taxes are covered by the applicable double tax treaty, (e.g. state income taxes in the United States). Tax administrations are therefore encouraged by the OECD Secretariat to provide guidance on the application of the domestic law threshold requirements, domestic filing and other guidance to minimize or eliminate unduly burdensome compliance requirements for taxpayers in the context of COVID-19.

The COVID-19 crisis also raises 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. The concern is that such occurrences may consequently change a company’s residence under relevant domestic laws and affect the country where a company is regarded as a resident for tax treaty purposes.  However, it is unlikely that the COVID-19 pandemic 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 a change of location should not trigger a change in residency, especially once the tie breaker rule contained in tax treaties is applied.  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 caused by the COVID-19 crisis.

Where a government has stepped in to subsidize maintaining 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 who work in one country but commute there from another country where they are resident (cross border workers), this would be the country they used to work in.

Mobile Employees and Personal Tax Residency (Articles 4 & 15)

Regarding the change to the residence status of individuals, despite the complexity of the rules and their application to a wide range of potentially affected individuals, it is unlikely that the COVID-19 situation will affect the treaty residence position. Consider the following scenarios:

1. 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 by reason of the COVID-19 crisis and attains domestic law residence there.
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. 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.

In the first scenario, it is unlikely that the person would acquire residence status in the country where the person is temporarily living because of extraordinary circumstances. However, there are rules in domestic legislation which deem a person to be a resident if he or she is present in the country for a certain number of days. But even if the person becomes a resident under such rules, if a tax treaty is applicable, the person would not be a resident of that country for purposes of the tax treaty. 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. But even if the person is or becomes a resident under such rules, if a tax treaty is applicable, the person would not become a resident of that country under the tax treaty due to such temporary dislocation.

Several countries have already issued useful guidance and administrative relief on the impact of COVID-19 on the domestic and tax treaty determination of the residence status of an individual.  In addition, Australia, Ireland, the United Kingdom, and the United States have all communicated that their own guidance with respect to the issues outlined in the OECD analysis is forthcoming.