Most countries impose tax on their residents as well as non-residents doing business in their country. What happens when there are widespread travel restrictions in place due to COVID-19? Will tax treaties extract you from double-tax issues?
The OECD issued updated “guidance on tax treaties and the impact of the COVID-19 pandemic” on January 21, 2021. This updates earlier OECD comments in April 2020, when we all thought the pandemic would soon disappear. Israel joined the OECD in 2010.
Status of the OECD guidance
The OECD guidance is intended to provide “more certainty” to taxpayers, but each country may adopt its own guidance. The Israel Tax Authority’s website deals with payment of corona grants but apparently contains no tax guidance (govextra.gov.il/taxes-corona).
Some international businesses may be concerned that their employees dislocated to countries other than the country in which they regularly work, and that the COVID-19 crisis will create a “permanent establishment” (PE) for them in those countries, which would trigger new filing requirements and tax obligations.
One type of PE might be a “home office.” But the OECD says that tele-working from home (i.e. the home office), because of an extraordinary event or public-health measures imposed or recommended by government, should not create a PE for the business/employer. This is because such activity lacks a sufficient degree of permanency or continuity, or because the home office is not at the disposal of the enterprise. But the employee may be/become taxable in the country where they now work.
Another type of PE might be the employee himself, if he is deemed to be a “dependent agent” of a foreign company. This may apply if the employee habitually concludes contracts on behalf of the enterprise. But the OECD concludes that the person’s activity in a jurisdiction should not be regarded as “habitual” if they have exceptionally begun working at home in that jurisdiction as a public-health measure imposed or recommended by at least one of the governments involved to prevent the spread of the COVID-19 virus. Thus, a dependent-agent PE may be avoided provided the person does not continue those activities after the public-health measures cease to apply.
Therefore, the OECD says it is unlikely that the COVID-19 situation will create any changes to a PE determination. Countries that have issued their own similar guidance include: Australia, Austria, Canada, Greece, Ireland and New Zealand. The USA also did so, but only for up to 60 days starting on or after February 1, 2020, or on or before April 1, 2020.
In general, a construction or installation project of a foreign company becomes a PE if it lasts more than a period stated in each bilateral tax treaty, usually 12 months. Temporary interruptions won’t “stop the clock,” but the OECD says jurisdictions may decide otherwise in the light of the extraordinary circumstances of the COVID-19 pandemic. That might mean uncertainty for building sites and even tech installation projects.
Will companies change residence?
If company executives get stranded in the “wrong” country, could those companies be considered “controlled and managed” or “effectively managed” and hence fiscally resident in that country? The OECD says an entity’s place of residence under a tax treaty is unlikely to be impacted by the fact that the individuals participating in the management and decision-making of an entity cannot travel as a public-health measure imposed or recommended by at least one of the governments involved. Australia, Ireland, New Zealand and the UK agree.
Will an individual’s tax residence change?
The OECD says a dislocation because a person cannot travel back to their home jurisdiction due to a public-health measure of one of the governments of the jurisdictions involved should not by itself impact the person’s residence status for purposes of a tax treaty. A different approach might be appropriate however, if the change in circumstances continues when the COVID-19 restrictions are lifted.
Transfer pricing between related companies should reflect the arm’s-length terms prevailing between comparable unrelated companies. But suppose the profits of comparable companies are down (or up) due to the pandemic? The OECD issued separate guidance on this, and all groups, especially those with low-risk distributors, should re-think their transfer-pricing strategy. More on this in a separate article.
To sum up
The coronavirus crisis is no longer temporary. It is still extraordinary for OECD purposes, but the Israel Tax Authority has yet to concur.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. [email protected]