Fernway DiarySM

Mar 01, 2021

On 21 January 2021, the Organization for Economic Cooperation and Development (OECD) published updated guidance intended to provide more certainty to taxpayers during this exceptional period caused by the COVID-19 pandemic. The original guidance was issued by the OECD on April 3, 2020, as an urgent response to the effect of the COVID-19 pandemic on tax treaties and focused on the effects of temporary changes to the location of employees. Nearly a year later, restrictions and disruption remain, and the guidance has been updated accordingly.

The updated guidance considers the interpretation of tax treaty articles on the creation of permanent establishments, tax residence of companies and individuals, and taxation of income from employment. The guidance revisits and updates earlier guidance published by the OECD Secretariat in April 2020.

Permanent Establishments

Some companies may find themselves faced with new tax and filing obligations as a result of the growing work-from-home situation caused by the coronavirus pandemic. This may be the case if employees are working from home in a country other than that in which they regularly work. However, the guidance indicates that working from a home office as a result of public health measures will not necessarily create a fixed place of business permanent establishment if the arrangement lacks a sufficient degree of permanence or continuity, or the home office is not at the disposal of the business.

Tax Residence of Companies and Individuals

The pandemic may raise concerns about potential changes in the place of effective management of a company due to the relocation, or inability to travel, of board members or senior executives. The guidance considers it unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty. If a company is considered a resident of two countries simultaneously under their domestic laws, the tie-breaker rules within the relevant tax treaty would need to be considered to determine the country of residence for tax treaty purposes.

For individuals, the guidance indicates that their tax residence and treaty residence will likely not be impacted by a temporary dislocation of employees from their normal place of work due to COVID-19. The updated guidance provides explanations with respect to two cases described in the April 2020 guidance: one in which an individual gets stranded in a host jurisdiction due to the COVID-19 pandemic and attains domestic law residence there, and the other in which a person working in a jurisdiction where s/he is a tax resident temporarily returns to his/her “previous home jurisdiction” because of the COVID-19 pandemic. In the former, treaty residence would most likely go to the home jurisdiction. In the latter, the analysis and conclusions are uncertain, but would usually be determined based on the “habitual abode test”, which refers to the frequency, duration and regularity of stays.

Income from Employment

Under this guidance, consideration is given to the 183-day exemption in the employment income article of the OECD Model Tax Convention and the extent to which COVID-related days of presence may be ignored in considering the 183-day limit. The OECD commentary permits the exclusion of days attributable to sickness in cases where the employee would otherwise have qualified for an exemption from tax in the host location. The guidance confirms that where an employee is prevented from traveling because of public health measures it would likely be reasonable to ignore such days. However, it is noted that some countries may take a different view on this topic.

Though jurisdictions may adopt their own guidance to provide tax certainty to taxpayers, this guidance reflects the general approach of jurisdictions and illustrates how some jurisdictions have addressed the impact of the COVID-19 pandemic on certain tax situations. The objective of this updated guidance is to resolve instances of potential double taxation but cannot be relied on to create situations where there are no taxes owed. Furthermore, the guidance is relevant only to circumstances arising during and a result of the COVID-19 pandemic when public health measures are in effect.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com

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