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COVID-19 & MCO: International Tax Concerns

April 30, 2020

Recently, the Organisation for Economic Co-operation and Development (OECD) analysed the international tax treaty rules as a result of the COVID-19 pandemic. The COVID-19 pandemic has created unprecedented impact on economic activities whereby tax issues will inevitably arise, especially in situations where cross-border workers or employees are stranded in a country that is not their country of residence due to the travel restrictions imposed.

This alert highlights the key topics contained in the OECD analysis.

Creation Of Permanent EstablishmentThere is a concern that employees stranded in countries other than the country in which they regularly work and compelled to work from such location during the pandemic may create a permanent establishment (PE) in those countries. The creation of a PE would inevitably trigger new filing requirements and tax obligations.

In that regard, the OECD has responded as follows:

Home office

The exceptional and temporary change of the location where employees exercise their employment because of the pandemic should not create new PEs for the employer.

Even if part of the business is carried on at a location such as the employee’s home office, this does not mean the location is at the disposal of that employer. Intermittent business activities at the home of an employee do not make that home a place at the disposal of the enterprise. For a home office to be a PE for an enterprise, it must be used on a continuous basis to carry on the business of an enterprise.

Individuals compelled to stay home to work remotely and those who are stranded in a particular country typically do so as a result of government directives: OECD describes this as unforeseeable circumstances and not due to an enterprise’s requirement.

However, if this becomes the new norm over time, then the home office may create a PE for the business either because such activity has a sufficient degree of permanency or continuity or because the enterprise has access or control over the home office.

Agency PE

The temporary conclusion of contracts in the home of employees or agents due to the pandemic should not create any PE for the businesses.

While the activities of an individual temporarily working from home for a non-resident employer could give rise to a dependent agent PE, this only arises if the employee habitually concludes contracts on behalf of the enterprise. Such activities cannot be treated as habitual if the person works from home for a short period due to government directives which extraordinarily impact one’s routine. Further, the habitual exercise of authority to conclude contracts means that the presence which an enterprise maintains in a country should be more than merely transitory or temporary if the enterprise is to be regarded as maintaining a PE.

Construction site PE

A construction site PE would not be regarded as ceasing to exist when the work is temporarily interrupted. The duration of the temporary interruption should be considered in the life of a site and therefore, will affect the determination of whether a construction site constitutes a PE.

However, the OECD has cautioned that the threshold for tax registration under some domestic law may be lower than those applicable under a tax treaty. This may attract corporate income tax registration requirements. In this regard, tax administrations are encouraged to provide guidance on the application of the domestic law and other guidance to minimise or eliminate unduly burdensome tax compliance requirements.

As an example, the Irish tax authority disregards the presence of an individual in Ireland and where relevant, in another jurisdiction, for corporate income tax purposes for a company in relation to which the individual is an employee, director, service provider or agent if the presence was a result of travel restrictions related to the pandemic.

Company Residence Status & Place Of Effective Management

The relocation or inability to travel affecting key decision-makers such as chief executive officers or other senior executives should not give rise to a potential change in the “place of effective management” of a company. A temporary change in location for senior personnel due to the pandemic is an extraordinary and temporary situation and should not trigger a change in residency.

Generally, where there is a change in the place of effective management resulting in a company being considered a resident in two countries simultaneously, this may trigger the issue of double residency. The tie-breaker rules in tax treaties ensure that the entity is resident in only one of the states.

Pursuant to the 2017 OECD Model treaty, competent authorities deal with the dual residency issue on a case-by-case basis by mutual agreement. The following factors are to be taken into consideration:

 Where the meetings of the company’s board of directors or equivalent body are usually held;

 Where the chief executive officer and other senior executives usually carry on their activities;

 Where the senior day-to-day management of the company is carried on; or

 Where the person’s headquarters are located etc.

For treaties which contain the pre-2017 OECD Model treaty’s tie-breaker rule, the only criterion to determine the residence of a dual-residence entity is the place of effective management. The place of effective management is the place where key management and commercial decisions for the conduct of the entity’s business as a whole are made. In this regard, the OECD has highlighted that all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management and not only those that relates to an exceptional and temporary period such as the COVID-19 pandemic.

Cross Border Workers

The OECD has stated that it is working with countries to mitigate the unplanned tax implications and potential new burdens that may impact cross border workers. Many governments have announced wage subsidies to employers to retain workers on the payroll during the pandemic despite the restrictions to the exercise of employment. According to the OECD, these payments most closely resemble termination payments, whereby they should be attributable to the place where the employee would otherwise have worked. Where the source country has a taxing right, the residence country must relieve double taxation either by exempting the income or by taxing it and giving credit for the source country tax.

Thus, where a government has stepped in to subsidise the keeping of an employee on a company’s payroll during the pandemic, the income received should be attributable to the place where the employment is used to be exercised before the COVID-19 crisis. If employees work in one state but commute there from another state where they are resident, the former would be the state they used to work.

The term “employment is exercised” means the place where the employee is physically present when performing the activities for which the employment income is paid. However, there are conditions attached to the place of the exercise test. The source state may exercise a taxing right only if:

 The employee is there for more than 183 days;

 The employer is a resident of the source state; or

 The employer has in the source state a PE that bears the remuneration.

Tax Residence Status Of Individuals

In allocating the taxing rights over employment income, an individual can be resident in only one country at a time i.e., his “treaty residence.” Where a person is a resident in two countries, then the tie-breaker rules as explained above are applied. There is a hierarchy of tests, starting with the question in which state does the person have a permanent home available to them. The determination of a permanent home will consider elements such as place of habitual abode and nationality. While nationality could be straightforward, “habitual abode” refers to the frequency, duration, and regularity of stays that are part of the settled routine of an individual’s life and are therefore more than transient.


The guidance issued by the OECD provides clarification on some of the pressing tax concerns arising from the COVID-19 pandemic. The OECD has commented that many countries like the United Kingdom and Australia have already issued useful guidance and administrative relief on the impact of the pandemic on matters such as the determination of individual residence status. In Malaysia, it is yet to be seen if the Inland Revenue Board will issue any guidelines or make administrative concessions along the lines suggested by the OECD.


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