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The COVID-19 pandemic has forced governments to take exceptional measures such as implementing mandatory lockdowns and restricting travel. This unprecedented situation is raising significant tax issues, especially where there are cross-border elements in the equation. Individuals have been forced to stay for long in a country where they do not ordinarily reside, thereby triggering residency rules in that country. Many cross-border workers are unable to physically perform their duties in their country of employment and may have to stay at home and telework.

These issues have an impact on the right to tax between countries, which is currently governed by double tax avoidance agreements (DTAAs) that delineate taxing rights. Thus, at the request of concerned countries, the Organization of Economic Cooperation and Development (OECD) Secretariat has released its analysis and guidance (OECD Guidance) on these issues on 3 April 2020.

Permanent Establishments

Since employees have been forced to work out of their homes, businesses are concerned about the creation of permanent establishments (PE) of their enterprise in such locations or countries. This can trigger new filing requirements and tax obligations.

OECD View: The OECD has reiterated the principle that a location must have: (i) a certain degree of permanence; and (ii) be at the disposal of an enterprise, in order for it to qualify as a PE.

The OECD Guidance identifies three main scenarios and explains why no change in PE should be caused for them in these times:


A home office must be used on a continuous basis by that enterprise and the enterprise should generally require the individual to use that location to carry on its business.


In case of a dependent agent PE, the dependent agent i.e. employee must have habitually concluded contracts on behalf of the enterprise and its presence in that jurisdiction must not be merely transitory.


Construction sites constitute a PE under the OECD model only if they last more than 12 months and under the UN model only if they last more than 6 months. Hence a temporary discontinuation of activity due to the crisis will not cause the erstwhile PE to cease to exist or a for a new PE to arise.

Place of Effective Management

The place of effective management (POEM) of a company determines its residence. POEM stems from the location in which senior executives of the company manage the affairs of the company or where key management and commercial decisions for the conduct of business are made.

OECD View: The OECD believes that change of location should not cause a change in the POEM or residency of a company.

However, the OECD Guidance is cognizant that change in POEM may trigger residence status of a company in two countries simultaneously. In such scenarios, which in any case are rare, the tie breaker rule in DTAAs will provide an answer. Otherwise, if competent authorities deal with such scenarios on a case-by-case basis, some of the factors they are expected to consider are: (i) where the meetings of the company’s board of directors are usually held; (ii) where senior executives usually carry on their activities; (iii) where the senior day-to-day management of the company is carried on; (iv) where the company’s headquarters are located, etc. Thus, the OECD Guidance points out that the relevant facts and circumstances for determination of POEM are those that pertain to the ‘usual’ and ‘ordinary’ POEM of the company.

Cross-Border Workers

Cross-border workers are those who are resident in one state (residence country) but commute from there to another state where they work (source country). The source country may exercise a taxing right only if: (i) the employee is present in the source country for more than 183 days; or (ii) the employer is a resident / has a PE in the source country which bears the remuneration. In these cases, the residence country generally relieves double taxation either by exempting the income or by giving a tax credit.

OECD View: If the source country were to lose its taxing right, additional compliance burden would arise for employers and employees. Employers may have withholding obligations which would now no longer be underpinned by a substantive taxing right, while the employee would have enhanced liability in the residence country. The OECD Guidance highlights the exceptional nature of such a scenario which calls for a similar exceptional level of coordination between countries to mitigate the compliance and administrative costs for employees and employers.

Residence Status of Individuals

An individual may be stranded in a country which is not his/her usual country of residence and attain residency in the host country. Conversely, the individual may have returned to his/her previous home country, which is different from their current home country, where the individual attains or regains residence status.

OECD View: The OECD Guidance is clear that the first scenario should not trigger any change in residence status. However, in the absence of guidelines that carve out an exception for the extraordinary situation caused by the pandemic, if the individual were to become a resident of the host country, then tie breakers tests under DTAAs would mostly award treaty residence to the home country. 

In the second scenario however, the test of ‘habitual abode’ (one of the key factors in the tie breaker test) would tip the balance towards the previous home country, given that “habitual abode” relates 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. Thus, the OECD Guidance recommends that competent authorities should consider a more normal period of time when assessing person’s resident status.


The OECD Guidance may be of authoritative value while interpreting DTAAs. When it comes to interpretation of domestic laws, although the OECD Guidance is not binding on Indian tax authorities, it is of strong persuasive value and will likely influence the stance eventually taken by Indian tax authorities.

It is also possible that India will release its own guidance in relation to the key issues discussed above. The OECD Guidance makes a note of guidance provided by Ireland, UK and Australia which are, in many respects, in line with OECD’s view. India will, presumably and hopefully, not take a stance which is at odds with that of most other countries, especially with the background of a global health and humanitarian crisis.

We may take note of a Delhi High Court decision in CIT v Suresh Nanda ((2015) 375 ITR 172 (Delhi) which had examined a situation where an individual had gained residency status in India due to the unauthorized impounding of his passport which had led to him being stranded in India for over 182 days in a financial year. The High Court had reversed the determination of residency made by the tax authorities because the individual’s presence in India was not by his own choice or volition. Given that travel restrictions as a result to COVID-19 outbreak have caused similar situations for many individuals, it would indeed be welcome if tax authorities are guided by the reasoning in this decision while determining tax residency for the previous and current fiscal years.

A key takeaway for individuals and corporates is that they should be mindful of maintaining a proper record of the facts and circumstances of the relevant presence, particularly in the case of involuntary stay in the country, or outside the country. This would be useful for production to the revenue department if evidence that such presence resulted from COVID-19 related travel restrictions is requested.

-       Bijal Ajinkya (Partner) and Ipshita Bhuwania (Associate)

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