Treat coronavirus-related tax concerns as exceptional, says OECD

Will a non-resident stuck in India for over 182 days because of the Covid-19 lockdown be liable to be taxed in India? Will cross-border workers stuck in India for a longer duration impact the tax residency or result in permanent establishment- (PE-) related tax concerns for his overseas employer?

These situations should be treated as ‘exceptional and temporary’ and should not trigger a change in residency or PE status, according to the Organization of Economic Cooperation and Development (OECD) in its guidance note.

The note addressed how countries’ restrictions on mobility due to the pandemic affect common provisions in tax treaties. Indian tax authorities are looking into the guidance by OECD and will issue related circulars and notifications for clarification on these aspects.

The work scenario has changed across the world due to Covid with most employees working from homes while others may have got stuck in foreign countries because of the lockdown. The OECD noted that tax treaties will help determine which jurisdiction can tax an individual or company in such cases.

India announced a 21-day lockdown on March 24 to check the spread of coronavirus in the country.

“The exceptional circumstances of the Covid-19 crisis call for an exceptional level of coordination and co-operation between countries, notably on tax issues, to mitigate the potentially significant compliance and administrative costs for employees and employers,” Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration, said in a note urging countries to work together.

The guidance was issued at the request of countries concerned.

The note addressed concerns related to the creation of PEs, tax residency of a foreign company (place of effective management), and concerns related to cross-border workers and change to the residence status of individuals. The OECD notes that it was 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 crisis, such as working from home, should not create new permanent establishments for the employer,” it said. 

Similarly, it said, the temporary conclusion of contracts in the home of employees or agents because of the crisis should not create permanent establishments for the businesses.

Generally, a PE, or taxable presence in a country, comes into effect when key employees are working in a jurisdiction. However, the OECD noted that it was unlikely in situations where the jurisdiction in question has a tax treaty with the company’s home country because treaties usually say a PE should have a degree of permanence.

“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 change of location should not trigger a change in residency, especially once the tie-breaker rule contained in tax treaties is applied,” the guidance notes. Gouri Puri, partner, Shardul Amarchand Mnagaldas and Co, said the recommendations were welcome amid the extraordinary times and, hence, special measures are needed to avoid tax complexity for cross border workers. 

“For instance, an expat travelling to India may be present in India for prolonged duration on account of lockdown triggering tax residency. Her presence may also give rise to PE concerns for her foreign employer,” said Puri. 

She said the existing tie-breaker rules in tax treaties for tax residence, concepts of resident not ordinarily resident under Indian domestic tax law, and functional test under PE rules would all aid in addressing these tax concerns.

Additionally, where necessary, the government will need to provide for modified application of treaty rules and domestic law to cater to Covid-induced tax implications, said Puri.

Tie-breaker rules are included in tax-treaties to help determine which country has the right to tax an individual as the country of residence in case the individual qualifies as a resident under the domestic laws of both countries.

Rakesh Nangia, chairman of Nangia Andersen Consulting, said the guidance issued by the OECD secretariat would definitely help businesses in this hour of crisis. “Countries such as France and Ireland have started issuing guidance with respect to their domestic tax laws so that businesses are not overburdened with these additional risks at this inopportune time.”

Based on a careful analysis of the international tax treaty rules, the secretariat recognises that the crisis is a period of major changes and an exceptional circumstance and, hence, competent authorities must consider a more normal period of time when assessing a person’s residential status and determining the allocation of taxing rights, he said. 

Nangia said it was, however, important that individuals or companies must maintain a record of facts and circumstances of the relevant presence in the state or outside for production to the Revenue Authorities at a later point of time to corroborate bonafide.