OECD provides updated guidance concerning the impact of COVID-19 on tax treaties

The Organisation for Economic Co-operation and Development (OECD) has updated its existing guidance issued by the Secretariat in April 2020 in relation to the impact of COVID-19 on tax treaties. Amidst widespread implementation of public health measures disrupting travel and business, the OECD has released guidance to provide more clarity for taxpayers in these unforeseen circumstances. The guidance is strictly relevant to COVID induced situations (where public health measures are in effect) and highlights how multiple jurisdictions have acted to avoid double taxation and tax issues for individuals/employers.

The OECD have released commentary on specific areas which are listed below:

• The creation of Permanent Establishments (PE).
• Changes in residence for entities and individuals and the application of tie-breaker rules to dual residents.
• Income from employment

This article aims to highlight the most salient points of the OECD’s instructions. 

1. Permanent Establishment concerns

Employers have expressed concerns regarding employees displaced due to the pandemic that may give rise to a PE, triggering further tax obligations.  Broadly, the OECD suggests employees temporarily displaced and concluding contracts or even simply working from home should not warrant a PE. However, the guidance stresses that the situation must only be temporary and because of COVID-19. Furthermore, it also affirmed that construction site PE’s would not be regarded as ceasing to exist in situations where work is interrupted by public health measures.

2. Change of residence concerns

Firstly, the OECD guidance addresses the issue of a company’s “place of effective management changing” and thus, its tax residence being affected. Evidently, the potential for the issue to arise is quashed as the OECD asserts it is unlikely that a temporary COVID induced location change should trigger a change in treaty residence. This is backed up by the fact that tax treaties with tie-breaker rules to determine a company’s residence should also naturally factor in COVID impacts and not change a residency purely based on impacts from the pandemic.

Individual residency concerns are also covered with the main contention being that authorities will have to consider a period where public health measures imposed or recommended by the government do not apply when assessing a person’s residence status.

3. Income from employment concerns 

Summarily, the key issue presented from the pandemic in terms of employment income is the determination of which country it is taxable in. Understandably, there is confusion in this area with employees displaced worldwide due to travel restrictions. The general approach taken by most jurisdictions is to disregard time spent in countries if an employee is prevented from leaving due to restrictions.

Indeed, tax issues arising from the COVID-19 pandemic can be complex, requiring the guidance of a tax professional.

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