COVID-19 impact: Potential tax implications due to employees stuck in international jurisdictions

Separately, such stranded employees may run the risk of unintentionally creating a Permanent Establishment (PE’) for their employer in the other countries due to their unintended stay in those countries. This would, in turn, trigger registration and corporate income tax compliance requirements for the employer in the foreign jurisdictions.

The Organisation for Economic Co-operation and Development (OECD) is working with countries to mitigate the unintended tax implications arising due to the effects of the COVID-19 crisis. In order to provide guidance on these unprecedented issues, the OECD Secretariat had issued a paper on the ‘Analysis of Tax Treaties and the Impact of the COVID-19’ (the OECD analysis), addressing concerns relating to the residence of individuals, taxability of employment income of cross-border employees, creation of PE, etc.

The analysis generally observes that exceptional circumstances such as this, should not cause meaningful changes in the tax position under a tax treaty, of employees’ residence and the taxation of employment income.

Further, the temporary change in location, where employment is exercised, should not create a new PE for the employer. This is because the employees are working in the other countries due to force majeure and/ or Government directives for a temporary period, from their home office which is not at the disposal of employer and the activities carried out during this period are not in the nature of regular activities performed from that country.

The most daunting question in the minds of the employees and employer was the manner of determination of the residential status of an individual stranded in India, due to lockdown and suspension of international flights. This forced stay in India could have impacted the residential status of these individuals, but the Central Board of Direct Taxes (CBDT), considering the genuine hardship and the representations received, has announced a relaxation wherein presence in India during the period of lockdown, will be disregarded for evaluating residential status for the financial year 2019-20 (similar clarification is expected for the financial year 2020-21). The benefit is provided only to individuals who are based outside India and who had come on a visit to India before 22 March 2020 and were unable to leave owing to being quarantined or due to the non-availability of flights.

This is a welcome and timely move by the CBDT and in line with the recommendation of OECD. This relaxation is also similar to various countries such as the UK, US, Ireland, etc. which had relaxed residency rules as per their domestic tax laws to address the situation created by the forced stay due to COVID-19 restrictions.

From an employees’ perspective, it is suggested that documentary evidence in relation to the agreed schedule of travel, other evidences like government directions on lockdown and email correspondences supporting reasons for involuntary extended stay are maintained. Employees should also approach their employers to understand and co-operate in complying with any tax requirements.

On the other hand, employers should re-evaluate their employees’ compliance obligations, factor these developments into the overall assignment cost and make suitable budgetary amendments, if necessary. Similar relaxations or clarifications in relation to PE aspects are being eagerly awaited by the industry.