OECD discusses: Will COVID-19 change your tax status?

Most countries impose taxes on their residents as well as on non-residents doing business in their country. What Happens When Widespread Travel Restrictions Are In Place Due To COVID-19? Will Tax Treaties Get You Out of Double Taxation Problems?
The OECD released an update to “Guidance on Tax Treaties and the Impact of the COVID-19 Pandemic” on January 21, 2021. This updates previous OECD comments in April 2020, as we all thought the pandemic was going to be over soon. Israel joined the OECD in 2010.

Status of the OECD Guide

The OECD guidelines aim to provide “more certainty” to taxpayers, but each country can adopt its own guidelines. The Israel Tax Administration website discusses the payment of corona subsidies but apparently does not contain any tax guidance (govextra.gov.il/taxes-corona).

Business matters

Some international companies may fear that their employees will be relocated 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 a new deposit. tax requirements and obligations.

One type of PE could be a “home office”. But the OECD says teleworking from home (i.e. home office), due to an extraordinary event or public health measures imposed or recommended by the government, should not create a MOU for the company / employer. Indeed, such an activity lacks a sufficient degree of permanence or continuity, or because the head office is not at the disposal of the company. But the employee can be / become taxable in the country where he is currently working.

Another type of PE could be the employee himself, if he is considered a “dependent agent” of a foreign company. This may apply if the employee usually concludes contracts on behalf of the company. But the OECD concludes that a person’s activity in a jurisdiction should not be considered “usual” if they have exceptionally started working from home in that jurisdiction as a public health measure imposed or recommended by at least one. governments concerned to prevent the spread of the COVID-19 virus. Thus, an agent dependent PE can be avoided provided that the person does not continue these activities after the end of the public health measures.

Therefore, the OECD says the COVID-19 situation is unlikely to change the determination of ES. Countries that have published their own similar guidelines are: Australia, Austria, Canada, Greece, Ireland and New Zealand. The United States has also done this, but only for up to 60 days from February 1, 2020, or no later than April 1, 2020.

Construction sites

In general, a construction or installation project of a foreign company becomes a PE if it lasts more than a period indicated in each bilateral tax treaty, usually 12 months. Temporary disruptions won’t stop the clock, but the OECD says jurisdictions may decide otherwise in light of the extraordinary circumstances of the COVID-19 pandemic. This could mean uncertainty for construction sites and even technology installation projects.

Will companies change their residence?

If company directors find themselves stranded in the “wrong” country, could these companies be considered “controlled and managed” or “effectively managed” and therefore tax resident in that country? The OECD says that an entity’s place of residence under a tax treaty is unlikely to be affected by the fact that those involved 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 concerned. Australia, Ireland, New Zealand and the UK agree.

Will an individual’s tax residency change?

The OECD says that a dislocation because a person cannot return to their home jurisdiction due to a public health measure by one of the governments of the jurisdictions concerned should not in itself have an impact on the person’s residence status for the purposes of a tax treaty. A different approach may be appropriate, however, if the changing circumstances continue when COVID-19 restrictions are lifted.

Transfer pricing

Transfer prices between related companies should reflect the arm’s length conditions prevailing between comparable unrelated companies. But suppose the profits of comparable companies are falling (or rising) as a result of the pandemic? The OECD has issued separate guidance on this, and all groups, especially those with low-risk distributors, should rethink their transfer pricing strategy. More on this in a separate article.

to summarize

The coronavirus crisis is no longer temporary. This is still extraordinary for the purposes of the OECD, but the Israeli tax administration has not yet given its approval.

As always, consult upfront with experienced tax advisers in each country in specific cases.

The author is a Chartered Accountant and Tax Expert at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com

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