COVID-19 has, affected most, if not all, people in the world. Due to worldwide strict quarantine measurements and travel restrictions, people are being banned or discouraged from entering/leaving countries and consequently are required by (local) governments and/or their employers to work from home or even from different countries. As a result, for many, the mode of business operation of companies and the working place of individuals has changed unexpectedly. Concerns have now risen whether these changes will have any tax consequences, in particular, for those companies that have frequent cross-border business/presence as well as for those individuals/expatriates that frequently travel for work.
The Organisation for Economic Co-operation and Development (“OECD”) issued recently a guidance regarding the tax impacts of COVID-19 based on an analysis of international tax treaty rules. This guidance is briefly discussed below.
Concerns related to creation of permanent establishments (“PEs”)
One may be worried that a PE will be created when for example a) an employee of Company A, due to COVID-19, is working in foreign tax Jurisdiction B, being a jurisdiction other than the jurisdiction in which the employee regularly works or b) when an agent of Company A suddenly starts concluding contracts for and on behalf of Company A in Jurisdiction B (instead of Jurisdiction A where Company A resides) due to travel restrictions under COVID-19.
The OECD is of the view that, under both circumstances, in accordance with international tax laws, it is unlikely that a PE will be constituted by Company A in Jurisdiction B since such change of work place of the employee/the agent is temporary, exceptional and is force majeure in nature.
Concerns related to tax residency of a company
The place of management and control of a company may change due to the fact that the directors/management personnel of such company suddenly have to perform their management and control functions at home/from a particular jurisdiction, which is not their usual place of work. Nevertheless, the OECD states that also in such situation that it is unlikely, under the context of double taxation treaties, that the tax residency of the company will change merely due to the COVID-19 situation. The reasons are that the change of the place of carrying out the management and control functions (instead of the usual place), is extraordinary and temporarily.
When determining the place of management and control of a company, one should look at, amongst others, where the related functions (such as board of directors’ meetings, senior day-to-day management) usually and ordinarily take place and where the key management and commercial decisions that are necessary for the conduct of the company’s business as a whole are made in substance.
In addition, even if a company is of dual residence (which is rare), the double tax treaties provide tie-breaker rules such that a company will only be a residence of one state only.
Thus a Hong Kong company that usually holds its board meetings in Hong Kong, for example to make sure that it has enough substance in Hong Kong, should as such not lose its tax substance when its overseas directors are not able to attend physical meetings in Hong Kong itself.
Concerns related to tax residency of an individual
Same as a company, the OECD expressed its view that it is unlikely that the treaty residence position of an individual will be affected by the COVID-19 situations.
For example, an individual may be away from his home country and stay temporarily at a host country say Jurisdiction C for personal/work purposes. Unfortunately, he is ‘trapped’ in Jurisdiction C due to the COVID-19. Consequently, as a result of the domestic laws in Jurisdiction C, there is a chance that he may then become a tax resident of Jurisdiction C due to the numbers of days he says in Jurisdiction C. Nevertheless, when applying the double tax treaty between Jurisdiction C and his home country (if any), the individual should still not have become a tax resident of Jurisdiction C.
This is because in case an individual is considered as a resident in two jurisdictions under the domestic tax laws of the respective jurisdictions, the tie-breaker rules/tests under the double tax treaties will apply, under which certain factors, such as availability of a permanent home, centre of vital interests, place of habitual abode and nationality, will be looked at to determine the tax residency of the individual. By applying the tie-breaker tests and considering all the relevant facts and circumstances, it is unlikely that the tax residency of an individual will be altered merely due to the COVID-19 situations.
From the domestic tax perspectives, some countries, such as the United Kingdom, Australia and Ireland have even provided some specific guidance and relief regarding the tax residency status of an individual due to the COVID-19 circumstances.
Concerns related to cross-border employees
An employee, who is a resident of Jurisdiction D and usually works in Jurisdiction D, may have to stay in Jurisdiction E to work due to COVID-19. This change may result into certain tax issues, such as who has the right to tax on his employment income between the employee’s state of residence, being Jurisdiction D, and the state where the employee performs his employment duties, being Jurisdiction E.
The double tax treaties govern the tax rights of the contracting states in respect of the employment remuneration earned by an individual. The relevant factors include but are not limited to (i) the place where the employment is exercised; (ii) the number of days the employee stays in Jurisdiction E; (iii) whether the employee’s employment remuneration is paid by a party, which is resident in Jurisdiction E; and (iv) the nature of the remuneration (termination payment or not?) earned by the employee.
In case both Jurisdiction D and Jurisdiction E still have the taxing rights on the employment remuneration, double taxation relief/credit may potentially apply so that the individual will not suffer from double taxation.
Having said the above, the change of the employee’s place of work may result into additional compliance requirements/administrative costs by/to employers and employees, such as the tax informing/reporting/filing obligations and tax withholding obligations. The OECD is working with countries to mitigate the unplanned tax implications and new burdens due to COVID-19.
When analysing the tax implications/consequences of a particular event, all the relevant facts and circumstances should be considered, instead of only those that pertain to an exceptional and temporary period due to the COVID-19.
Please note that apart from the international tax aspects discussed above, one also has to be aware of the domestic tax rules, which are usually the starting point for determining the tax position. It is hoped that the tax authorities will provide guidance on the application of the relevant domestic tax rules and eliminate unduly burdensome compliance requirements under the current COVID-19 pandemic.
If you feel you might have become a tax ‘victim’ of COVID 19, please do not hesitate to get in touch with us.