On 3 April 2020, the Organization of Economic Cooperation and Development (OECD) Secretariat at the request of concerned countries has published an analysis of the tax treaties to address certain cross-border issues arising intermittently amid COVID-19 crisis (current situation).

The United Kingdom, Australia and Ireland have already clarified their tax residency position pursuant to travel restriction and other government directives because of the current situation.  As other countries are following the lead to review the OECD analysis to announce the clarifications, it is important for global businesses, its senior executives and other employees who have been dislocated during the current situation, to consider the implications under the domestic federal and state tax laws vis-à-vis application of tax treaty in order to determine the tax and compliance exposures in the home and host countries.

Concerns related to the creation of permanent establishments

A relocation of the employees from their usual place of work to their home or in certain cases to a different country has raised a concern for businesses if they have tax exposure on being considered as a permanent establishment (PE) in a country where their employee is currently working from or an agent is closing contracts on their behalf.

The OECD recommends that it is unlikely that the current situation would create any changes in PE determination due to:

  • home office: a temporary and exceptional change of the employees’ location to exercise their employment because of the current situation should not create new PEs for the employer as the home office of an employees:
    • are not available at the disposal of the employer in order to be considered as a fixed place of its business;
    • are not a continuous basis for carrying on business by the employer;
    • are only a place from where an employee had to continue working as a result of government directive (force majeure) unless it is adopted as a norm to conduct employer’s business;
    • agency PE: the activities of a person temporarily working from home for a non-resident employer or enterprise could not be considered as a dependent agent PE unless an employee or person habitually concludes contracts on behalf of such employer.

An employee is unlikely to habitually concludes a contract on behalf of an employer or enterprise if she is only working at home for a short period because of government directives that extraordinarily impacts her normal routine (force majeure) which has no certain degree of permanency and is purely temporary or transitory.

However, where an employer or person habitually concluded contracts on behalf of a non-resident employer or enterprise in her home country before the current situation, then the above may not apply.

  • construction site PE: a temporary interruption of activities on the construction sites by the current situation would not be considered as it ceases to exist.

However, attention is invited to below triggering aspects:

  • corporate income tax and other registrations based on presence threshold pursuant to the application of the domestic law (including state/provincial legislation);
  • state and local tax exposure as these taxes are not covered under the tax treaty; and
  • domestic filing requirements may add burdensome compliance requirements.

Concerns related to the residence status of a company: place of effective management (POEM)

A company is generally a resident of a country where it has its POEM as determined under the country’ domestic tax law.  Pursuant to relocation of the chief executive officers or other senior executives, there is a concern that applying current POEM provisions would result in change of a company’s current residence and consequently affect the country where a company is regarded as a resident for tax treaty purposes.

OECD recommends that a temporary dislocation of chief and other senior executives under the current situation is unlikely to create any changes to a company’s residence under a tax treaty because such change is an extraordinary and temporary due to the current situation and should not trigger a change in residency, especially on the application of the tie breaker rule under tax treaties.  For example, Ireland’s tax authority has issued guidance to disregard the presence of an individual in Ireland (and where relevant, in another jurisdiction) for a company in relation to which the individual is a director, if such presence is shown to result from travel restrictions related to the current situation.  Indian Government has already issued a corporate relief measure to waive the requirement of an Indian resident director (i.e. unable to meet the minimum number of days in India because of the current situation).  But a tax relief measure on a similar aspect is still awaited.

In case of a dual-resident company, the tie-breaker rules require the competent authorities of the countries to consider all relevant facts and circumstances in order to determine a company’s country of residence.  For example, board of directors or equivalent body usually hold their meetings, the chief executive officer and other senior executives usually carry on their activities, the senior day-to-day management of the company is carried on and the location of headquarters of the company, etc.

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Concerns related to cross border workers

OCED considered below two scenarios to address the concern of a person being a resident of a country other than her home country:

 

Scenario 1:

A person is temporarily away from her home and gets stranded in the host country by reason of the current situation and attains domestic law residence there

 OECD recommends that a temporary dislocation may not create residence in the country where a person is temporarily staying because:

–       a person may not be stay for the minimum number of days in order to be a resident of such country. For example, in countries like India and the U.S., a person is required to be present in a country for a minimum 183 days in order to be resident;

–       there may be exceptional / extraordinary circumstances that can exclude a person to be resident under the domestic tax law of a country.  For example, Ireland’s guidance provides for force majeure circumstances including travel restrictions prohibiting a person to leave the country;

–       even if a person is considered a resident of the country where she is temporarily visiting, the application of tie-breaker test under the tax treaty provisions may hold the person to be a non-resident of the country where she is temporarily visiting. For example, the application of the tie-breaker rule is hierarchal.  It applies on the basis of the permanent home, center of vital interest,  place of habitual abode and nationality.  It is likely at if a person does or does not have a permanent home in both the countries, the center of vital interest would clearly suggest the country of residence.
Scenario 2:

A person is working in a country and have acquired residence status there, but she temporarily returns to her “previous home country” because of the current situation.

 Under this scenario, a person may either:

–       never lost her status as resident of her previous home country under its domestic legislation; or

–       she may regain residence status on her return.

OECD recommends that a temporary dislocation may not create a residence in the previous home country because the application of a tax treaty. For example, applying the tie-breaker rule, the center of vital interest would clearly suggest the country of residence.  The OECD’s analysis draws attention to explain ‘habitual abode’ to include the frequency, duration and regularity of stays and must cover for a sufficient length of time to ascertain as part of the settled routine of a person’s life. Simple determination of the period of stay does not determine habitual abode.

 

The governments around the world are issuing stimulus packages, announcing relief measures and attending to easing administrative compliance to contain the economic impact during the current situation.  Post the OECD recommendations, Indian authorities are reviewing the same in order to announce requisite clarification to end the dilemma for the businesses and employees.

The global business and its senior executives and other employees should be careful if the country where they are staying during the current situation exposes them to tax residency rules under the federal, state or local laws of the country and if it could consequently require them to comply with tax and filing requirements.  There should be no haste and a timely analysis would help you to be aware of the possible exposure.

 

For more information, please contact:
Head of US-India Tax Desk