April 10, 2020
OECD Secretariat issues guidance on impact of the COVID-19 crisis on treaty-related issues
Governments around the globe are taking increasingly stringent containment measures to slow the spread of the COVID-19 virus. As a result of these measures, many cross-border workers are unable to physically perform their duties in their country of employment. This unusual situation raises tax issues that could affect how the right to tax is divided between countries, which is governed by international tax treaty rules that delineate taxing rights.
At the request of concerned countries, the OECD Secretariat has issued guidance on these issues based on an analysis of the international tax treaty rules. The guidance deals with issues related to:
(i) Creation of permanent establishments
(ii) Residence status of companies (based on place of effective management)
(iii) Treatment of cross-border workers
(iv) Residence status of workers
In the guidance, the OECD encourages countries to work together to alleviate the unplanned tax implications and potential new burdens arising due to effects of the COVID-19 crisis.
The OECD has published on its materials related to tax measures in response to the COVID-19 crisis. These materials include a from the Forum on Tax Administration summarizing some of the possible responsive actions that tax administrations could take to support taxpayers during the COVID-19 crisis and a on potential tax policy responses that focus on limiting the damage to productive potential and protecting the vulnerable. In addition, the OECD has published a country policy that monitors the global response to COVID-19.
OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis
On 3 April 2020, the OECD published guidance on the tax implications of the dislocation of cross-border workers due to the COVID-19 crisis that provides an analysis of the relevant tax treaty provisions. The analysis in the guidance is based on the OECD Model Tax Convention.
The guidance does not represent the official views of the OECD member countries and therefore countries may take different approaches on the issues. The conclusions in the guidance are based on the assumption that the dislocation of workers is extraordinary and temporary. However, that assumption will need to be re-assessed as the crisis continues to unfold.
Concerns related to the creation of permanent establishments (PEs)
The guidance covers three different situations where concerns are raised regarding PE status because of worker dislocation during the COVID-19 crisis:
The guidance also highlights that the threshold presence required under domestic law to register for tax purposes may be lower than the applicable requirements under a tax treaty, such that corporate income tax registration requirements may be triggered even in the absence of a PE. The OECD therefore encourages tax administrations 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 the COVID-19 crisis. The guidance notes Ireland as an example of a country that has already issued guidance on disregarding the presence of an individual in Ireland for corporate income tax purposes with respect to a company that employs or otherwise receives services from the individual, if such presence is shown to result from travel restrictions related to COVID–19.1
Concerns related to the residence status of a company (based on place of effective management)
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 the inability to travel, of its chief executive officer or other senior executives. This potential change of circumstances may trigger an issue of dual residency in cases where the change in the place of effective management results in a company being considered resident in two countries simultaneously under their respective domestic laws. In such cases, tax treaties provide tie-breaker rules ensuring that the entity is considered to be resident in only one of the states:
Therefore, it is unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty, particularly when the tie-breaker rule contained in tax treaties is applied.
Concerns related to cross-border workers
During the COVID-19 crisis, if a government provides wage subsidies to employers to keep their employees on the payroll despite restrictions in the exercise of their employment, the payments that employees are receiving in these circumstances should be attributable to the place where the employment used to be exercised before the COVID-19 crisis. Where the source country has a taxing right, the residence country must relieve double taxation under Article 23 of the OECD Model, either by exempting the income or by taxing it and giving a credit for the source country tax.
Also, in some bilateral treaties, there are provisions that apply special treatment to the employment income of cross-border workers with specific limits on the number of days that a worker may work outside the jurisdiction where he or she regularly works. The guidance notes that exceptional circumstances call for an exceptional level of coordination between countries to mitigate the compliance and administrative costs for employees and employers associated with involuntary and temporary change of the place where employment is performed.
Concerns related to a change to the residence status of individuals
The guidance discusses two main situations related to a change to the residence status of individuals during the COVID-19 crisis:
Also, it is noted in the guidance that 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 (for example, Australia, Ireland and the United Kingdom).
The guidance provides a useful analysis of some treaty-related issues that arise because of dislocation caused by the COVID-19 crisis. However, the guidance is informational only and does not represent the official views of the OECD member countries. It also should be noted that the analysis reflected in the guidance only covers the OECD Model Tax Convention. Provisions in bilateral double tax treaties may differ from the OECD Model and such differences would need to be considered in analyzing the result in any particular situation.
In addition, the OECD has announced it is urgently working on other concerns raised by businesses, taxpayers and tax administrations due to the COVID-19 crisis. Therefore, more information may be coming from the OECD on other international tax questions that can arise in the current situation.
In countries around the world, various measures are being put in place to address the COVID-19 crisis, which may have tax implications. Countries also are putting in place tax measures aimed at supporting businesses and individuals during the crisis. Businesses should closely monitor these developments and assess the potential impact on their operations.
1. See EY Global Tax Alert, Ireland relaxes tax residence rules in relation to COVID-19, dated 31 March 2020.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Belastingadviseurs LLP, Rotterdam
Ernst & Young Belastingadviseurs LLP, Amsterdam
Ernst & Young LLP (United States), Global Tax Desk Network, New York
Ernst & Young LLP (United States), Washington, DC