COVID 19 and its impact on mobility, has caused great uncertainty on the determination of tax residency of both businesses and individuals, especially in the counting of days.
Given the restrictions applied in most countries, people who were in countries other than their country of residence during the pandemic are wondering whether they should pay taxes on their worldwide income.
With this in mind, the Organization for Economic Cooperation and Development (“OECD“), published on April 3rd an analysis taking into account the economic, labor, and quarantining measures that countries have had to implement as a result of the COVID-19 pandemic.
The OECD has mainly focused on examining how the pandemic is affecting the tax residence of individuals and companies. Because of such restrictive measures, individuals are unable to travel beyond the borders of the countries where they have been forced into quarantine. The forced stay in these countries adds days to the count that determines tax residence and thus taxation.
The OECD guidelines cover 4 issues, which are set out below:
1. Permanent Establishments:
The fact that employees cannot move to the country in which they should be working, raises concerns among employers that this situation may lead to the creation of Permanent Establishments (“PE“) in countries where workers are confined.
In this regard, the OECD says that the situation caused by the pandemic is unlikely to result in any change in the determination of a PE, given that the change of place of employment is exceptional and temporary, arising from government decisions and not from the company itself. Also, the conclusion of temporary contracts and activities by workers in the country in which they are not resident does not have to create a PE for their company.
The Tax Administrations are encouraged to provide guidance on the requirements of their national legislation to register for tax purposes, on filing periods, etc. in order to be able to eliminate or reduce to a minimum the requirements that may be excessively burdensome for taxpayers.
2. Residence of a Company (place of effective management):
Concerns may arise regarding a possible change in the place of effective management of a company due to the inability of its chief executive or senior executives to travel, which could result in a change in the company’s residence under domestic laws.
The OECD states that temporary circumstances should not result in a change of tax residence of a company and, applying the tie-breaker rule contained in double taxation treaties ensures that the company is resident in one state only.
All the facts and circumstances of each case should be examined to determine which is the usual place of effective management of companies and not those that would correspond to the temporary situation caused by the pandemic.
3.Cross Border Workers: Concerns in this regard arise in cases where a government has subsidized an employee’s salary because of the health crisis. These earnings, according to the OECD, should be attributed to the place where the job used to be performed. In the case of employees that work in one state but commute there from another state where they are residents (cross border workers), this would be the state they used to work in.
The OECD Secretariat states that such payments should be attributed to the country in which the employee would have worked if it weren’t for the pandemic. In most cases, this will be the place where the employee worked prior to COVID-19. Where the home country has a right to tax, the country of residence should relieve double taxation, either by exempting the income or by taxing it and giving credit for the home country tax.
4. Change of Residence of Individuals:
The OECD has presented two scenarios:
- A scenario in which a person is in a country of which he or she is not a resident, either on holiday or for work reasons, and is unable to leave the country because of restrictions imposed by the government of the country and obtains tax residence under its domestic law.
- A person works in a country where he or she has acquired the status of resident (second country) but returns temporarily to the country of which he or she was previously resident (first country) because of COVID-19. The option may be given that they never lost the residence of the first country under its domestic law, or they may regain the status of residents of the second country when they are able to return there.
In both scenarios, the tie-breaker rule in Article 4 of the OECD Model would apply when there is a Convention under which a person is considered to be a resident of the country in which they were before the COVID-19 crisis.
The OECD Secretariat states that since this is an exceptional situation, with changes and uncertainties, the tax authorities of the countries should consider a more adequate period for determining the tax residence of individuals during this pandemic.
The OECD is trying to prevent the COVID-19 crisis and the measures that the governments of the different states have been forced to adopt from leading to unbeneficial consequences in terms of taxation. However, it should be remembered that the OECD does not have the power to bind even its member states and that its positions or recommendations are not binding. In this sense, we will have to be attentive to the situations that are occurring at present, as well as those that will occur in the future, and to the reaction to them of the Tax Administrations of the different countries and, in particular, of the Spanish Tax Administration which, unlike what is happening in other countries around us, has not yet expressed itself in this respect.
At Goy Gentile, we offer our experience in this matter, as well as our team to solve any doubt or make any recommendation.
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