On January 21, 2021, the OECD issued updated guidance on tax treaties and the impact of the COVID-19 pandemic, revisiting its April 2020 guidance note. Even though more than nine months have elapsed since then, COVID-19-related measures such as travel restrictions and curtailment of business operations are still very much in place and they seem to be here to stay for at least the medium- term. To this end, the OECD felt that it should provide additional insight on three main concerns:
Concerns related to the creation of a Permanent Establishment (PE)
As a result of the travel restrictions imposed due to the pandemic, many employees have been restricted to carry out their work from their homes, sometimes in a different jurisdiction other than that in which they usually work. Concerns have been raised among employers as to whether this would result in the creation of a PE, which would in turn result in their businesses having to adhere to increased tax obligations and tax filing requirements.
The OECD states that since such employees are working from home because of measures imposed or recommended by the public health authorities of at least one of the jurisdictions involved and not due to a requirement coming from the employer, this would not constitute the existence of a PE for the employer.
In cases where such employee is a dependent agent to the enterprise (i.e. the employee is habitually concluding contracts on behalf of an enterprise), it suggests that the agent’s activity is unlikely to be seen as ‘habitual’ if it has begun during the pandemic as a result of the public health measures imposed or recommended, and therefore, such activities should not constitute a dependent agent PE.
Furthermore, the OECD guidance also addresses the temporary interruption of activities on construction sites due to the pandemic. It suggests that the duration of such interruption should be included in determining the life of a site, thus affecting the determination of a PE. However, given that there is no clear definition as to what constitutes a temporary interruption, some jurisdictions may argue that given the extraordinary circumstances, such interruptions should not be included in determining the life of a site.
Concerns related to change of residence
The COVID-19 pandemic has resulted in situations where board members or other senior executives of a company started working from different jurisdictions, due to the travel restrictions imposed. This has raised concerns among companies as to whether this may result in a change in the place of ‘effective management and control’ of the company, and therefore, in a change in its residency for tax treaty purposes. The OECD guidance suggests that, given the temporary and extraordinary nature of the situation, such change is unlikely to be affected.
What clearly stems from the OECD guidance is that, in the OECD’s opinion, temporary changes in circumstances during these extraordinary times should not give rise to tax treaty implications
Furthermore, the OECD guidance also addresses concerns in relation to tax residence of individuals. It suggests that, given the exceptional circumstance of the pandemic, an individual’s temporary presence in a jurisdiction as a result of the restrictions imposed or recommended by the health authorities should not be taken into consideration when tax jurisdictions are assessing a person’s residence status, highlighting that the tiebreaker rules in Article 4 of the OECD Model Convention require consideration of factors that shall be assessed in a more normal period.
Concerns related to income from employment
The 2021 guidance provides three fact patterns to address this concern.
The guidance’s conclusion to the first fact pattern is that wage subsidies provided by governments in the source jurisdiction with the aim of keeping employees on the payroll during the pandemic should be taxed in that source jurisdiction. In such a case, the residence jurisdiction must provide relief from double taxation in line with Article 23 of the OECD Model, either by considering such income to be exempt or by taxing it and giving a credit for the tax paid in the source jurisdiction.
The second fact pattern addresses situations in which employees have been stranded in a jurisdiction in which they do not usually reside, due to the travel restrictions. In such cases, it would be reasonable for a jurisdiction to disregard the additional days spent during these extraordinary circumstances, for the purpose of the 183 days test in Article 15 of the OECD model. However, it highlights that some jurisdictions may still take a different approach and therefore, encourages taxpayers to contact their local tax authorities.
The third fact pattern addresses situations whereby a change in the jurisdiction in which the employment is exercised may result in changes in the allocation of the taxing rights under the treaty rules, resulting in increased compliance and administrative costs both for the employer and the employee.
Conclusion
What clearly stems from the OECD guidance is that, in the OECD’s opinion, temporary changes in circumstances during these extraordinary times should not give rise to tax treaty implications. However, this guidance only represents the views of the OECD secretariat and therefore taxpayers should closely monitor any guidance issued from relevant tax authorities to be able to correctly assess their particular situations.
From a local perspective, it is important to note that in May 2020, the Office of the Commissioner for Revenue had notified that it will be adopting the guidance issued by the OECD in April 2020. However, no further communication has been issued to date following these recent updates.
This guidance will only be relevant until public health measures in relation to COVID-19 are lifted. One hopes these would be sooner rather later.
William Cassar is head of the Tax Compliance Department (william.cassar@fenlex.com) and Letizia Grech Seychell, is senior tax accountant (letizia.grechseychell@fenlex.com) at Fenlex Corporate Services.