The Organisation For Economic Co-operation and Development (‘OECD‘) has issued guidelines on the concerns or issues arising arising out of the application of tax treaties due to the impact of the COVID-19 crisis. Many companies find themselves confronted with unforeseen and forced changes in the working pattern of their employees who are unable to perform their duties in their country of employment. The main challenges are like creation of permanent establishments, residential status provisions etc.
Impact Analysis of Covid-19 Crisis on Tax Treaties
A. Creation of Permanent Establishments Issues – Service PE/ Agency PE
– Due to COVID-19 Outbreak, employees/ directors/ CEO/ CFO/ MD are working from home. They might not have been travelled to their host country due to locked down conditions and transportations disruptions
– OECD treating this as exceptional circumstances and stating that it should not impact Service PE/ Agency for foreign companies since it is happening due to Force Majeure/ upon government directives
– Employees are not doing all this under habitual mode. They are working from home due to force majeure and not an enterprise’s requirement
B. Creation of Permanent Establishments Issues – Construction PE
– Due to COVID-19 Outbreak, many sites or activities are being temporarily stopped. However, such interrupted period shall forms part of triggering criteria for determining Construction PE
C. Creation of Residency of Company
– OCED has stated temporary change would not impact residential status of the company. It all depends on Place of Effective Management (‘POEM’)
– COVID-19 should not impact residential status of the companies since it is exceptional one
D. Creation of Residency of Individuals
– The salary and similar benefits generally taxed at the place where employment is exercised
– Many countries has issued clarifications stating the days spent in home country due to COVID-19 would not counted/ taken into consideration while determining residential provisions since it is due to extraordinary situations
– Tie-breaker rules will help to Individuals in determining residency
E. Cross Border Workers
– The OECD is working with countries to mitigate the unplanned tax implications and potential new burdens arising due to effects of the COVID-19 crisis.
In addition to the above, the OECD has recommended to all the nations to implement the above mentioned measures in domestic regulations in order to avoid undue hardships to the taxpayers due to COVID-19. Through that taxpayers will be saved from unnecessary requirements, filing of returns and compliances etc.