OECD: The impact of Coronavirus on tax treaties and transfer pricing

22 Jun 2020

planet earth and flight paths

June 2020

This briefing summarises the OECD’s Tax Talks webcast from 4 May 2020, providing useful guidance on the impact of the Coronavirus pandemic on tax treaties, transfer pricing and the approaches taken by different tax administrations. This will be relevant to many international businesses.

Tax treaties

The Coronavirus pandemic has forced a significant number of people to work remotely or to physically perform their duties outside their country of employment. Cross-border elements of these new circumstances raise concerns on the allocation of taxing rights under tax treaties rules.

The following details summarise guidance on ‘permanent establishment’ (PE) and residence based on the OECD’s model commentary and includes some interesting and relevant points for international businesses.

Permanent establishment

Working from a home office: though the Coronavirus pandemic has led to widespread working from home, this should not create new PEs for an employer. An employee’s home office needs to be “at the disposal” of the employer before it could constitute a PE, which would not be the case in most cases.

Creating an ‘agency PE’: the temporary conclusion of contracts at the home of the employees of agents, because of the Coronavirus crisis, should not create PEs for a business.

Construction site: a construction site PE would not be regarded as ceasing to exist when work is temporarily interrupted.

Company residence

Place of effective management: an extraordinary and temporary change in location of the chief executive officers and other senior executives due to the Coronavirus pandemic should not trigger a change in company residency.

Change in the residence status of individuals

Tie breaker rule: it is unlikely that a person would acquire residence in a country where they are temporarily located because of extraordinary circumstances. Although, even if he or she does acquire residence, if a tax treaty is applicable then the person would not be a resident of that country for purposes of the tax treaty.

Income paid by employers to cross border workers

Article 15: where a government subsidises the retention of employees on the company’s payroll during the Coronavirus pandemic, the income should be attributed to the place where the employment used to be exercised. Other employment income would normally be taxed where the employment is performed. The OECD is working with countries to mitigate the compliance and administrative costs for employees and employers.

Transfer pricing

The OECD has received requests to issue guidance on transfer pricing issues related to Coronavirus, which is creating novel transfer pricing issues for taxpayers and tax administrations. The
inclusive framework is exploring the option of developing guidance on these issues, although there is no updated guidance yet. This is expected by the end of 2020. The OECD has requested input from stakeholders on the issues that should be covered by this additional guidance to be sent to E: [email protected].

International businesses should be taking this opportunity to speak to their tax advisers about their transfer pricing policies and considering adjustments that can be made, depending upon the economic effect of the current Covid-19 situation.

Saffery Champness is offering a health check to such businesses and advises they also review for tax purposes relevant inter-entity agreements and ensure appropriate economic downturn clauses are included to ease the adjustment of transfer pricing policies currently in place.

Country-by-Country reporting

In February 2020, a public consultation document was released. A virtual public consultation meeting held on 12-13 May 2020 focused on the key changes proposed in the consultation document plus:

  • Possible changes to Country-by-Country reporting (CbCR) for the purposes of a high-level transfer pricing risk assessment;
  • The assessment of other BEPS-related risks; and
  • Economic statistical analysis.
  • The OECD has issued a recording of the meeting for those interested.

CbCR is currently only relevant to global groups with worldwide turnover exceeding €750 million, although it does affect quite a few much smaller UK inbounds that are part of such large groups.

The consultation document asked for various comments from stakeholders, on issues such as: reducing the turnover threshold; whether single enterprises with one or more PE should be included; the inclusion of additional income in the turnover threshold, such as gains and extraordinary income; the content of the CbC report; and disclosure, etc.

Note that the €750 million threshold is expected to exclude approximately 85%-90% of MNE groups from the requirement to file a CbC report, while groups that remain within the scope control approximately 90% of corporate revenues.

A second phase could be added later to consider changes that may be needed to support work on Pillar 1 and Pillar 2 (see below) recognising the limits on the appropriate use of CbCR information.

Update on Action 14 mutual agreement procedure

In 2020 there will be ongoing discussions on standard methodology for the mutual agreement procedures, with the possibility of a public consultation this year.

Helping developing countries with BEPS measures

Within the 137 countries adopting the Inclusive Framework on BEPS are 66 developing countries. The OECD has jointly collaborated with the World Bank, UN and the IMF and launched The Platform for Collaboration on Tax (PCT) to assist with the implementation of BEPS. This is supported with a website: www.tax-platform.org.

The platform seeks to deliver publications to assist with implementing BEPS and exploring other international tax issues, including a tool kit for implementing transfer pricing documentation.

Update on work on the digitalised economy

It is recognised that there is increased need for a consensus-based solution on the taxation of the digital economy. This has become more urgent given the increase in the adoption of unilateral domestic digital service taxes, leading to potential trade conflicts in the current economic crisis.

The OECD’s consensus solution is on target to be delivered by the end of the year.

This includes the proposals on Pillar 1 – Unified Approach and Pillar 2 – GloBE Proposal. These proposals currently only affect worldwide groups with a global turnover exceeding €750 million and we have not gone into detail on the proposals here, although they are expected to have significant transfer pricing repercussions for digitalised trades. However, the elements involved in the implementation of them are not agreed and in our view, much work is still to be done by the OECD in this regard to achieve workable solutions.

Although Pillar 1 and Pillar 2 affect the digital economy, it is expected the proposals may have a knock-on effect on other industries.

OECD forum on the work of global tax administrations

Tax administrations globally are putting in place measures to support taxpayers affected by the Coronavirus pandemic.

The OECD has produced a reference document containing examples of measures undertaken by tax administrations globally. Types of measures taken include:

  • Additional time for dealing with tax affairs
  • Extension of deadlines
  • Deferral of payments
  • Remitting penalties and interest
  • Debt payment plans
  • Suspending debt recovery
  • Quicker refunds to taxpayers
  • Temporary changes in audit policy
  • Quicker tax certainty
  • Enhanced services and communication initiatives.

There is a Covid-19-related tax measures database, tracking country tax policy measures in response to the pandemic. The most recent version can be found here: www.oecd.org/tax/tax-policy.

See also: www.oecd.org/coronavirus/en/#policy-responses.

For advice or further information about any of these issues, contact your usual Saffery Champness partner or speak to Dawn Ross: [email protected].