Towards increasing certainty in uncertain times: revising tax treaty guidance

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This article is part of a series in which OECD experts and thought leaders — from around the world and all parts of society — address the COVID-19 crisis, discussing and developing solutions now and for the future.

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The impact of the COVID-19 pandemic has been profound. The rapid spread of the virus has strained local medical infrastructures, led to restrictions on travel and everyday life, and created unprecedented disruptions to the global economy. Throughout the pandemic, many enterprises have faced curtailment of their operations, and have been forced to close offices and other business premises resulting in changes to how their business is conducted (e.g. having employees working from home). In many jurisdictions, international travel was either suspended or severely restricted leaving people stranded in countries where they might not otherwise be. Unprecedented measures imposed or recommended by governments have been in effect in most jurisdictions during most of 2020 due to COVID-19 pandemic and this situation continues in 2021; indeed the second wave, and in some cases third wave, have already led to measures sometimes as restrictive as those imposed in early 2020. These temporary dislocations of people can have tax consequences for those individuals and the businesses for which they work. 

These restrictions arising from government responses to COVID-19 have led to practical challenges for businesses and for workers. For example, depending on where the employee is located during the COVID-19 restrictions, new taxing rights over the employee’s income may arise in other jurisdictions. Those new taxing rights may displace existing taxing rights and require refunds of some tax withheld at source. Governments have taken practical approaches to the impact of COVID-19 restrictions in these circumstances and have issued guidance outlining how the rules will be enforced.

In light of these exceptional circumstances, on 3 April 2020, the OECD Secretariat issued guidance on how international tax treaty rules could be applied in certain situations. Initially it was unclear how long confinement and containment measures would persist and it was expected that many of the situations analysed would only be temporary. Almost a full year has passed since the guidance was issued and some of the measures and the restrictions described remain in place.

This new updated version of the guidance considers some additional fact patterns not addressed in detail in April 2020; examines whether the analysis and the conclusions outlined in April 2020 continue to apply where the circumstances persist for a significant period; and contains references to country practices and guidance during the COVID-19 period.

The guidance outlines the application of the existing rules and the OECD Commentary on the Model Tax Convention. On concerns related to the creation of a permanent establishment (“PE”), for example, it concludes that where, as a public health measure imposed or recommended by at least one of the governments involved, an individual teleworks from home (i.e. in a home office), that would not create a PE for the employer.

The updated guidance also addresses concerns about the tax treaty “tie-breaker” rules for dual residents and about the treatment of income from employment. For example, it explains the tax treaty treatment of an employee who is a resident of Jurisdiction A, became stranded in Jurisdiction B during the COVID-19 pandemic and began to exercise his employment there. Under provisions based on Article 15 of the OECD Model Tax Convention, Jurisdiction B would be permitted to tax the employment income if the employer was also resident in Jurisdiction B or bore the cost of the employee’s remuneration through a PE in that jurisdiction. Otherwise, Jurisdiction B would be entitled to tax the employment income only if the employee spends more than 183 days there.

The guidance is intended to provide more certainty to taxpayers during this exceptional period, and illustrates how some countries have addressed the impact of COVID-19 on the tax situations of individuals and employers.

Read more from Pascal Saint-Amans on the Forum Network

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Tackling COVID-19 Tax

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Pascal Saint-Amans

Director, Centre for Tax Policy and Administration, OECD

Pascal Saint-Amans took on his duties as Director of the Center for Tax Policy and Administration at the OECD on 1 February 2012. Mr. Saint-Amans, a French national, joined the OECD in September 2007 as Head of the International Co-operation and Tax Competition Division in the CTPA. He played a key role in the advancement of the OECD tax transparency agenda in the context of the G20. In October 2009 he was appointed Head of the Global Forum Division, created to service the Global Forum on Transparency and Exchange of Information for Tax Purposes, a programme with the participation of over 100 countries. Mr. Saint-Amans graduated from the National School of Administration (ENA) in 1996, and was an official in the French Ministry for Finance for nearly a decade. He held various positions within the Treasury, including heading the supervision of the EU work on direct taxes and overseeing legislation and policy on wealth tax and mergers and spin offs. He was also the head of tax treaty negotiations and mutual agreement procedures. In this capacity, he participated in the OECD Working Party No. 1 of the Committee on Fiscal Affairs as the delegate for France before being elected Chair of WP1 in 2005. He was also a member of the UN Group of Experts on International Co-operation in Tax Matters, becoming a “rapporteur” in 2006. Before leaving government service, he was Deputy Director in charge of litigation at the Direction Générale des Impôts. Mr. Saint-Amans also served as Financial Director of the Energy Regulation Committee between 1999 and 2002 and was responsible for the introduction of new electricity tariffs. Having earned a degree in history, Mr. Saint-Amans also received a degree from the Institut d’études politiques of Paris.