Introduction
Across the globe, the spread of the Covid19 is having a significant humanitarian impact and increasingly, an economic impact from stock markets to global supply chains. The government has moved rapidly to contain the spread of the virus; global employers are also working to address how to manage employees in affected areas while continuing business operations.
People working in countries other than their usual ones because of the coronavirus pandemic are likely to trigger new taxation requirements for employers under global treaty rules.
The work scenario has changed across the world due to COVID-19 with most employees working from homes while others may have got stuck in foreign countries because of the lockdown which has created many questions for companies as to the existence of their Permanent Establishments.
What are Permanent Establishments?
The most important issue in the treaty based international fiscal law is the concept of Permanent Establishment (PE). All the models of conventions namely:
- United Nations Model ("UN")
- Organization for Economic Co-operation and Development Model ("OECD")
- United States of America Model ("US")
All these three important models use PE as the main instrument to establish taxing jurisdiction over a foreigner's business activities.
Article 5(1) of OECD Model Tax Convention defines a permanent establishment as "a fixed place of business through which the business of an enterprise is wholly or partly carried on". This is what is commonly referred to as 'basic rule of PE'.
Creation of Permanent Establishments
If an individual finds that he or she spends longer time than the intended time in a jurisdiction, e.g. due to travel restrictions resulting from COVID-19 measures, there could be the situation where the individual create a sufficient presence to trigger a taxable presence e.g. a branch or agency under domestic law or a permanent establishment under a double tax treaty.
The threshold presence required to establish a permanent establishment in a jurisdiction under a tax treaty usually refers to a "habitual" presence in a jurisdiction.
Where an individual's presence and business activities carried on in a jurisdiction arise due to exceptional circumstances.
The individual's presence in any other country during the current pandemic situation might be said not to be habitual in character.
It seems that COVID-19 situation will not create any changes to a PE determination as the exceptional and temporary change of the location of employees to exercise their employment because of such pandemic situation.
Situations such as working from home should not be the criteria to create new PEs for the employer/ company.
Similarly, the temporary conclusion of contracts in the home of employees or agents because of the COVID-19 crisis should not create PEs for the businesses.
A construction site PE may not be regarded as ceasing to exist when work is temporarily interrupted.
Fixed Permanent Establishment ("Fixed PE")
A fixed place PE exists if the business of the enterprise is carried out at a fixed place within a jurisdiction, typically for a specified period.
Paragraphs 5, 8 and 9 of the OECD Guidelines, provides that under existing treaty principles it is unlikely that a business will be considered to have a fixed PE in a jurisdiction as a result of the temporary presence of its employees during the COVID-19 crisis.
For a home office to be considered a PE of an enterprise, the home office must be used on a continuous basis for carrying on the business of the enterprise, and the enterprise must require the individual to use that location to carry on the enterprise's business.
As per the latest OCED guidelines on impact of COVID-19 dated April, 2020, work from home that is incident to the COVID-19 crisis is not to the result of the mandatory requirement of the enterprise.
Apex Court in the case of the Formula One World Championship Ltd. v. CIT (International Taxation) [2017] 394 ITR 80/248 Taxman 192/80 taxmann.com 347 (SC) in which the conditions for the constitution of PE were explained at length.
The Apex Court has recently delivered another important ruling in the case of E-funds IT Solutions Inc which relied on ruling in case of Formula One and held that:
The Apex Court held that a Fixed Place PE can be created only if all the tests for the constitution of a Fixed Place PE are satisfied, i.e., there is a 'fixed place' at the 'disposal of the foreign enterprise', with some 'degree of permanence', from which the 'business is carried on'
A typical remote work from home scenario is typically a result of force majeure, i.e., government travel restrictions or work from home directives which are imposed during the COVID-19 pandemic.
Though law seems to be clear, time is essence to show the Court's interpretation under Fixed PE under Covid19.
Agency Permanent Establishment ("Agency PE")
The concept of PE has taken birth in the context of two tax principles i.e. Residence and Source Principle of taxation.
As per the source principle, if a tax resident of a particular country earns income through another person (separate legal entity) in another country, then such person creates an Agency PE in the later country.
The question may also arise whether the activities of an individual temporarily working from home for a non-resident employer during this present pandemic situation could give rise to a dependent Agent PE.
OECD guidelines states that if the individual employee is present in the jurisdiction as a result of the COVID – 19 pandemic, such employee may not likely to be regarded as "habitually" concluding contracts.
In case of Reuters Limited vs. Deputy Commissioner of Income Tax (ITA No 7895/Mum/2011) the concept of Agency PE was discussed in detail wherein it was held that;
A qualified character of an agency is providing authorization to act on behalf of somebody else as to conclude the contracts
OCED guidelines clearly states that paragraph 33.1 of the commentary on Article 5 of the 2014 OECD Model provides that the requirement that an agent must "habitually" exercise an authority to conclude contracts.
It means that the presence which an enterprise maintains in a country should be more than merely transitory if the enterprise is to be regarded as maintaining a PE, and thus a taxable presence, in that country.
Construction Site Permanent Establishment ("Construction PE")
Occurrence of permanent establishment has significant tax consequences for entrepreneur. Profits generated with reference to conducted construction works will be taxed in the country, in which the permanent establishment (construction site) is placed. In the country of residency that income will be exempted from taxation.
It appears that many activities on construction sites are being temporarily interrupted by the COVID-19 crisis.
In general, a construction site will constitute a PE if it lasts more than 12 months under the OECD Model or more than six months under the UN Model.
As per paragraph 55 of the commentary on Article 5(3) of the OECD Model explains, a site should not be regarded as ceasing to exist when work is temporarily discontinued (temporary interruptions should be included in determining the duration of a site).
Usually, the Indian tax authorities do not assume that interruptions of works at site are to be excluded from the project period. They tend to refer to an example given by the OECD in its comment to the OECD Model Tax Commentary ("OECD MTC")
In case of Joint Director of Income Tax vs. Krupp Uhde Gmbh, Mumbai ITA No. 5004 and 5084 of 2003 & 2276 of 2004.
It was held that according to Article 5 of Double Tax Avoidance Rules (DTAA) between India - Germany building or construction, installation of projects, in India and if it continues for more then 6 months than it would be considered as PE as per Article 5(2)(i) of DTAA
However, it is questionable whether this case can be applied to current pandemic situation which was simply unpredictable. It is a natural event, but not seasonal. It is not even predictable with a sufficient probability like bad weather. It is simply not calculable, it is classic force majeure.
It is advisable to take suitable opinion on the subject issue as the implications can be grave. One must take expert legal opinion before acting upon the subject matter to avoid the unforeseen liabilities in the future.
Secondment of Employees
Globalization has led Multinational Companies (MNCs) to increase cross border secondment of technical, managerial and other employees to their subsidiaries located in low cost jurisdictions such as India. The rationale behind seconding such employees is sometimes to help the subsidiaries avail the benefit of skill and expertise of the seconded employees in respective fields and sometimes to exercise control.
Secondment of Employees has become a really significant area, given that some bank staff or company's staff on assignments or secondments may be trapped in their non- native country due to the travel restrictions, while others may have come back earlier than expected, such situation might create a Service Permanent Establishments (Service PE) for the companies.
Forced quarantine may delay the intended secondment of an employee abroad or make a person employed on a foreign contract decide to return to India due to reasons beyond the control. In this case, work for a foreign employer will be performed from India. This may result into a creation of taxability of employee's income in India, and in some cases, creates permanent establishment. It is pertinent to note that each case should of course be analyzed on its own merits.
Australia – Australian Tax Office ("ATO")
The Australian Taxation Office (ATO), in April has released an FAQ answering common tax questions in regards to the Covid19 situation. The FAQ includes information relevant to individuals, employers, interest and penalties, deadlines for payments, and international business. The FAQ clarifies:
For multinational corporations, the unplanned presence of employees in Australia will not result in an Australia permanent establishment if all the following requirements are met:
The foreign incorporated company did not have a permanent establishment in Australia before the impacts of Covid19;
There are no other changes in the company's circumstances;
The unplanned presence of employees in Australia is the short-term result of them being restricted in their travel as a result of the Covid19 situation.
If the company didn't otherwise have a permanent establishment in Australia before the effects of COVID-19 and the presence of employees in Australia is because they are temporarily relocated or restricted in their travel as a consequence of COVID-19, then ATO will not apply compliance resources to determine if company have a permanent establishment in Australia.
Her Majesty's Revenue and Customs ("HMRC") - UK
On 7 April, 2020, HMRC updated its published guidance to discuss the concern on Permanent Establishments in current pandemic era
With regard to Permanent Establishments (PEs), HMRC has a view that the current legislation, treaties and related guidance provides sufficient flexibility with regard to whether a PE has been created in the UK.
HMRC considers that a non-resident company will not have a UK fixed place of business PE after a short period of time as a degree of permanence is required.
The existing HMRC guidance in UK makes it clear that the Courts and tribunals might take a holistic view of the facts and circumstances of each case during this extra ordinary situation
Like HMRC in UK has issued guidelines on PE, other countries might take an initiative and issue necessary guidelines which might clear the clouds of cousins for companies under exceptional and temporary change of the location of employees to exercise their employment because of such pandemic situation which might create new PEs for the employer/ company.
Irish Revenue ("Revenue")
On 26th March, 2020, Irish Revenue has released detail guidelines regarding corporation tax and presence in the state or outside the state resulting from COVID-related travel restrictions.
The Revenue guidance outlines that in cases where an individual is present in Ireland and that presence is shown to result from travel restrictions related to COVID–19, Revenue will be prepared to disregard such presence in Ireland for corporation tax purposes for a company in relation to which the individual is an employee, director, service provider or agent.
In addition, and where relevant, if an individual is present in another jurisdiction as a result of COVID-related travel restrictions, and would otherwise have been present Ireland, Revenue will be prepared to disregard such presence outside of Ireland for corporation tax purposes for a company in relation to which the individual is an employee, director, service provider or agent.
The individual and the company should maintain a record of the facts and circumstances of the bonafide relevant presence in or outside Ireland, for production to Revenue if evidence that such presence resulted from COVID-related travel restrictions is requested.
Singapore Government
As the world faces an extraordinary health and economic crisis, Singapore Government has introduced a series of relief measures, in order to maintain economic stability and resilience of Singapore enterprise.
Temporary unplanned physical presence of foreign companies' employees in Singapore, in the year 2020 (for up to 183 days), due to COVID-19 travel restrictions, will not result in permanent establishment (PE) implications.
But there's also been provided that the foreign company shall have no PE in Singapore in Year of Assessment (YA) 2020 and its economic circumstances shall remain same.
Internal Revenue Services – IRS
The Treasury Department and the Internal Revenue Service on 21.04.2020 issued guidance and FAQs that provides relief to individuals and businesses affected by travel disruptions arising from the COVID-19 emergency.
Considering the current pandemic situation the IRS has issued certain FAQs to clarify the position of PE during COvid19 times wherein it says that:
U.S. business activities conducted by a nonresident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a U.S. trade or business or has a U.S. permanent establishment, but only if those activities would not have been conducted in the United States but for travel disruptions arising from the COVID-19 emergency.
Another master stroke by US government in line with OECD and other countries which may result into silver lining for the Indian and other foreign companies who has their operations in US in terms of the existence of PE.
CONCLUSION
The concept of PE has been defined extensively in various places, but the interpretation of the same continues to be complex and subjective. The distinct nature of each transaction makes the interpretation of the law and the judicial precedents worth noting.
The decision of the Apex Court in the case of Formula One (supra) was far-reaching in many ways, but it was nonetheless given in the context of specific facts, the application of this judgment under current Pandemic situation would be very interesting aspect which may arise in future.
There can be no thumb rule which can be inferred from the OECD guidelines at present to the current crisis. Whether the virus-induced duration of interruption would be included in the deadline in individual cases will depend upon the specific circumstances.
Although the OECD Analysis may be considered persuasive in many jurisdictions (and may be considered persuasive even in the absence of a treaty in some jurisdictions), the ultimate decision as to whether an employee's presence in a jurisdiction creates a PE depends on the jurisdiction, its domestic law, and any relevant treaty.
However, due to Covid-19 times, it may be considered in a different manner altogether as entire world has been affected.
It is emphasized to take an informed decision under proper guidance of a legal expert so that litigation can be avoided.
Originally published April 2020
This content is purely an academic analysis under "Legal intelligence series".
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Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.
