COVID-19 implications on tax treaties

The COVID-19 restrictions affect many people and businesses and could raise tax issues, especially in cross-border situations where employees are unable to physically perform their duties in their country of employment. These issues may have an impact on double taxation agreements. Recognizing this, the Organisation for Economic Cooperation and Development (OECD) Secretariat has issued guidance on several tax issues arising from the COVID-19 crisis.

In general, a state cannot tax profits of an enterprise of another state unless that enterprise carries on its business through a permanent establishment situated therein. As a result of the current COVID-19 crisis businesses may be concerned that their employees will create a PE for them in another jurisdiction because of a change in working location, which would trigger new filing obligations and tax obligations.  A PE must have a certain degree of permanency and be at the disposal of an enterprise to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. In the guidance the position is taken that an employee who, because of the extraordinary nature of the COVID-19 crisis stays at home to work remotely should not create a PE for the business / employer to the extent that it does not become the new norm over time. This is, either because such activity lacks sufficient degree of permanency or continuity or because the enterprise has no access or control over the home office (and the enterprise in normal circumstances provides an office which is available to its employees).

Linked to this is whether the employee temporarily working from home for a non-resident employer could qualify as a dependent agent PE. Although the activities of an employee may create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise, OCED has stated that its unlikely that the employee who, only temporarily and forced by governmental measures works from home could be considered to ‘habitually’ conclude contracts in his home state on behalf of the enterprise. It stressed a PE should be considered to exist only where the relevant activities have a certain degree of permanency and are not purely temporary or transitory. However if the employee was already habitually concluding contracts on behalf of the enterprise in his home state COVID-19 crisis would not exempt him/her. A building site or construction or installation project of an enterprise in another state will in general constitute a permanent establishment only if it lasts longer than a certain period (under the OECD Model more than 12 months). According to the OECD Secretariat, the duration of a temporary interruption of activities on those sites or projects due to the COVID-19 crisis should be included in determining the time those sites or projects last, and therefore will affect the determination whether a construction site constitutes a PE.

The COVID-19 crisis may raise concern about a potential change in the “place of effective management” of a company (for example because of inability to travel of chief executive officers and other senior executives). According to the guidance, it is however unlikely that the COVID-19 crisis will create any changes to an entity’s residency under a tax treaty, in essence because all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis. The measures to mitigate the economic impact of the COVID-19 crisis may contain stimulus packages adopted by governments (e.g wage subsidies to employers) to keep employees on a company’s payroll. According to the issued guidance by the OECD Secretariat, these payments should in a cross-border situation be attributable to the place where the employment used to be exercised. The guidance further makes clear that a change of place where cross-border workers exercise their employment may also affect the application of the special provisions in some bilateral treaties that deal with the situation of cross-border workers, and that may contain limits on the number of days that a worker may work outside the jurisdiction he or she regularly works. A question not specifically addressed by the OECD Secretariat is whether the COVID-19 crisis may have an impact on the “183-days rule”. Income of an employee working in another state should not be taxable in the source state if (amongst others) the employee is not present in that state for more than 183 days in any twelve-month period. Travel restrictions due to the COVID-19 virus, may potentially have an impact on the 183-days rule and taxing rights between jurisdictions. Finally, the guidance addresses the impact of the COVID-19 crisis on the residence status of individuals. Issues could arise when individuals are, for example, stranded in a host country due to travel restrictions or temporarily return to their previous home country. It is, according to the guidance, however unlikely that in these specific temporarily and extraordinary circumstances, the COVID-19 crisis will affect the treaty residence position of the individuals.

The guidelines issued by the OECD Secretariat are only persuasive in as far as they cover the generalised tax implications of the treaties of any nationalities.  In view thereof, although not a member of the OECD, Zimbabwe may adopt these guidelines given the novelty nature of COVID 19 and lack of laws addressing the COVID 19 situation.

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