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Tax Treaties Allow For COVID-19 Telework, OECD Concludes

By Joseph Boris · January 21, 2021, 6:12 PM EST

No permanent establishment is created for businesses when their employees work from home in compliance with public health measures to contain the COVID-19 crisis, the OECD affirmed Thursday in updated guidance on the pandemic's implication for tax treaties.

The Organization for Economic Cooperation and Development's initial guidance on permanent establishments and other matters was issued in early April, just as deaths from COVID-19, the respiratory disease caused by the novel coronavirus, surpassed 1 million worldwide. The toll has since doubled, according to the World Health Organization.

At the time of the initial guidance, the OECD said provisionally that teleworking amid temporary virus containment efforts likely wouldn't create a new permanent establishment, or PE, in the country where the work is done. The existence of a PE determines a company's taxable presence in a jurisdiction, as codified in the tax treaty between that jurisdiction and the business' country of registration.

Nearly a year after it described how those "exceptional circumstances" could be dealt with by applying global tax treaty rules to certain situations, the OECD said longer-term advice was warranted.

"Initially it was unclear how long confinement and containment measures would persist, and it was expected that many of the situations analyzed would only be temporary," Pascal Saint-Amans, director of the OECD's Center for Tax Policy and Administration, wrote in a blog post accompanying the updated guidance.

Almost a year later, some of those measures and restrictions remain in place. Saint-Amans said the revised guidance "considers some additional fact patterns not addressed in detail in April 2020," examines whether the original analysis and conclusions continue to apply where circumstances persist for a significant period, and refers to countries' practices and guidance about COVID-19.

Including PE, the guidance continues to outline the application of existing rules and official commentary on the OECD's Model Tax Convention, which is meant as a template for jurisdictions' bilateral tax treaties. Also addressed are concerns about tax treaty so-called tiebreaker rules for dual residents and about the treatment of employment income.

Saint-Amans cited the example of how a bilateral tax treaty deals with an employee who is a resident of Jurisdiction A but became stranded in Jurisdiction B during the pandemic and began to conduct employment there. Under provisions drawn from the Model Tax Convention's Article 15, Jurisdiction B would be allowed to tax the employment income if the employer was also resident in Jurisdiction B or bore the cost of the worker's remuneration through a PE there. Otherwise, Jurisdiction B would be entitled to tax the employment income only if the employee spent more than 183 days on its territory.

"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," Saint-Amans said.

--Editing by Vincent Sherry. 

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