The Covid-19 pandemic has caused severe disruption in international travel, with many stranded in countries they do not call home. While businesses and individuals adapt to the new, enclosed realities of life, some tax implications of the pandemic are emerging and must also be examined and carefully managed.
We explained in our previous note that HMRC have published views on the exceptional nature of Covid-19 and whether additional days spent in the UK due to restricted travel can be disregarded in the application of the UK’s statutory residence test. This was very welcome and has been followed up at a supra-national and intra-country level by the Organisation for Economic Co-operation and Development (OECD).
On 3 April 2020, the OECD published in a short seven page document its views on how double tax treaty rules should be interpreted, for cross-border workers and individuals whose income and residence status may be affected by the diverse measures taken by governments in response to the pandemic (see sections 4 and 5 of the guidance). The guidance also explains the OECD’s views on the impact of Covid-19 on the tax residence of companies (please see our colleague's note on this). It is accompanied by a brief blog by Pascal St-Amans, the OECD’s very experienced director of the Centre for Tax Policy and Administration.
Reassuringly, the OECD’s analyses arrive at the conclusion that the existing tax positions for cross-border workers and stranded individuals, furloughed or not, should remain largely unchanged:
- an employee’s income should be attributable to the place where the employment used to be and is normally performed; and
- it is unlikely that the Covid-19 lockdown measures would affect the treaty residence position of individuals who are currently stranded.
This has important implications for keeping very practical challenges, such as compliance imperatives and administrative issues (PAYE, credit mechanisms etc) in check.
However, it must be stressed that the OECD’s analyses rely on a number of factual assumptions and the tax implications on those affected by Covid-19 must still be examined in detail on a case-by-case basis.
Perhaps most importantly, the tone of the publication is carefully judged; the overriding message from the OECD guidance is clear: governments should not through an inflexible approach to the usual double tax treaty principles seek to profit from people (or companies) that are trapped through circumstances that they could not control. Rather, countries should be sympathetic and should work together to mitigate the unforeseen tax implications arising from the pandemic.
Because the Covid-19 crisis is a period of major changes and an exceptional circumstance, in the short term tax administrations and competent authorities will have to consider a more normal period of time when assessing a person’s resident status.