Tax treaty implications for various Covid-19 issues

The OECD Secretariat issued a short paper on 3 April analysing various tax treaty issues arising from government imposed travel and ‘lock-down’ requirements as a result of Covid-19. Here is a summary of the Covid-19 tax treaty issues:

Permanent establishment (PE)
• An employee may have temporarily relocated from their usual country of employment to another country and may be working from home. An exceptional and temporary change in a worker’s location of employment (e.g. working at home) is unlikely to give rise to a PE.
• A temporary conclusion of contracts from an employee’s or agent’s home should not be sufficiently “habitual” and therefore not a dependent agency PE.
• A temporary shut down at a construction site which is otherwise a PE, should not mean a PE has ceased.

Corporate residence
• The relocation of senior executives to another country or inability to travel due to Covid-19 may raise a question whether the place of effective management has changed under the tie-breaker clause in a standard treaty. OECD considers it is unlikely that such temporary changes would trigger a change in corporate residency.

Government payroll subsidies
• A government may subsidise an employee’s remuneration, but the employee may have relocated away from where the employment would otherwise have been exercised. A tax treaty would tax the employment income in the country of residence unless the employment is exercised in the other country. The subsidy should be treated as attributable to the place the employee would have otherwise worked before Covid-19 required relocation.

Individual residence
• The issue arises whether a person temporarily in a country is forced to stay there, could cause that person to be tax resident in that country. Even if a country’s domestic rules would treat a person as becoming tax resident in that relocation country, a tax treaty would unlikely tie-break the person’s residency to that country as not having a permanent home available to them (although a long term house rental in the country of relocation and none in the home country, may counter that presumption).
• Where a person, resident in a host country, has temporarily relocated back to their home country and regains residency under home country rules, it is unlikely the tax treaty would tie-break residency to the home country. The “habitual abode” tie breaker test would need to applied using a sufficient length of time rather than focusing on changes that are transient in nature.

See our previous insight Transfer Pricing & Covid19:

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