COVID 19 – CBDT clarification on Residential Status vide Income Tax Circular No. 11 of 2020 Dated May 8, 2020 and open issues of International Taxation
In India, the status of tax residency of an individual is determined based on his number of days of stay in India during a financial year. Every year, various Non-Resident Individuals (‘NRI’) visit India to manage their family affairs/investment in India. Such individuals plan their stay in India in a manner that they remain non-resident in India for tax purposes.
However, due to COVID-19 pandemic, many countries including India have imposed travel restrictions, which has left many people stranded and grounded in India and vice versa. Due to such restrictions, there are many individuals who had come on visit to India for a particular duration and are now required to prolong their stay in India. With this regard, concerns were raised to the Government that extra stay in India due to COVID-19 may make such individuals as resident in India.
In this regard, Central Board of Direct Taxes (‘CBDT’) has issued Circular 11 of 2020 dated 8 May 2020 wherein it has clarified the following with regard to determining residential status for financial year 2019-20 of an individual who had come on visit to India before 22 March 2020
- If such individual is unable to leave India on or before 31 March 2020, his period of stay in India from 22 March 2020 to 31 March 2020 would not be taken into consideration
- If such person is quarantined due to COVID-19 on or after 1 March 2020 and has departed before 31 March 2020 in an evacuation flight or is unable to leave before 31 March 2020, then his period of stay from beginning of quarantine to 31 March 2020 would not be taken into consideration
- If such individual has departed on an evacuation flight on or before 31 March 2020, his period from 22 March 2020 to date of departure would not be taken into consideration.
The above clarification has brought a big relief for all the NRIs who are stuck in India due to COVID-19 restrictions. However, this clarification does not address certain other International tax issues resulting out of travel restrictions imposed due to COVID-19. Such issues are highlighted below.
Residential status of Foreign Company:
Currently, a company is said to be resident in India if it is an Indian Company or if it’s Place of Effective Management (‘POEM’) is in India.
POEM means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are, in substance made. As per CBDT guidelines, in cases where company are not engaged in active business outside India, POEM of such company may be considered in India if its key commercial or management decisions are taken in India
Therefore, in this regard, if the person taking key decision is stranded in India due to COVID -19, there is a possibility that POEM implications may trigger.
In this regard, Organisation for Economic Cooperation and Development (‘OECD’) has issued guidance stating that it is unlikely that COVID-19 crisis will create any changes to an entity’s residence status under a tax treaty because a temporary change in the location of Chief Executive Officer (‘CEO’) or other senior executives’ affairs is an extraordinary and temporary situation. Nonetheless, even in a case where dual residency triggers, the tie-breaker rule under tax treaties would deal with this challenge.
However, above CBDT clarification is silent in this aspect and therefore taxpayers should be careful about such situation until some specific clarification is this regard is provided by CBDT.
Creation of Permanent Establishment (‘PE’) in India
As is a general rule, foreign companies are taxed in India, if they have a PE in India. In these pandemic times, it merits consideration whether employees who previously travelled to India for various business / non-business reasons and are stranded due to the travel ban, could end up creating a PE for employer / foreign enterprises in India.
Recognising the above, OECD has published guidance addressing tax concerns on creation of PE amid COVID-19 pandemic. As per the said guideline, Fixed place PE should not arise if employees of a foreign company are working from their home in India due to government restrictions. Similarly, OECD guidance also states that the temporary conclusion of contracts in the home country of employees or agents because of the COVID-19 crisis should not create PE for foreign companies.
However, there is no specific clarification issued in this aspect by CBDT.
Key Takeaways:
CBDT clarification has addressed the residential status issues arising out of COVID-19 pandemic for individuals, however same is silent with regard to residential status issues faced by foreign companies’ entity on account of POEM. Further, clarification with respect to creation of PE is also not provided by CBDT.
OECD Guidance is not binding on India, being an observer member. However, it may be considered of persuasive value while interpreting the tax treaty. Hence, one will have to wait and see if and when similar guidance addressing concerns around PE / POEM is provided by the CBDT.
In the meantime, it is recommended that companies must maintain robust documentation capturing the sequence of facts and circumstances of the relevant presence inside or outside of India during COVID-19 crisis to substantiate the bona fide case before the tax authorities if and when they arise in future.
CA Grishma Mody – Email id – grish.mody@gmail.com
Disclaimer: This article is based on the relevant provisions of applicable laws as prevalent in India and as per the information existing at the time of the preparation. This is only a knowledge sharing initiative and views, thoughts, opinion expressed are of my own. In no event I should be held liable for any direct or indirect result from this article.
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