It is undisputed that the measures taken by governments to enable their citizens to safeguard a certain social distance and thereby to contain the COVID-19 pandemic as much as possible caused a considerable negative impact on economic activities. Most governments took a series of immediate tax measures at a domestic level to mitigate that impact. Traditionally, large-scale economic problems, such as the ones that have resulted from the COVID-19 pandemic, give rise not only to domestic law and tax policy modifications but also to several legal and policy amendments at regional and international levels. The most recent example is the financial crisis of 2008. Following the crisis concerned, among other developments, the implementation of a Europe-wide Financial Transaction Tax was suggested and international exchange of information gained unprecedented importance, which resulted in significant international efforts in that particular area that are still ongoing. This article focuses on the potential impact of COVID-19 on interpretation and application of double tax treaties on income and oncapital. To this end, problems that may occur concerning interpretation and application of such treaties are analyzed, and then the current status of the international tax law projects that were already ongoing before the COVID-19 crisis is briefly examined.

In a double tax treaty context, most of the problems that may occur due to the COVID-19 were analyzed in a document entitled “OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis” published by the OECD Secretariat on April 3, 2020. The residency of natural and legal persons, the creation of a permanent establishment, and the taxation of income earned by cross border workers were examined in the document concerned.

OECD Secretariat noted that a change in the treaty residence position of both natural and legal persons due to the COVID-19 restrictions is unlikely. For natural persons, this observation derives from the fact that it is highly improbable that these individuals would have a “permanent home” available to them in the country where they are temporarily staying during the crisis. In the absence of a permanent home, the country concerned cannot be considered as their residence country. Concerning legal persons, a temporary change in the location of the chief executive officers and other senior executives should not, under normal circumstances, trigger a change in their place of effective management. Despite these observations made by the Secretariat, a shift in the residency due to the pandemic cannot be excluded altogether. The specific circumstances of a given case are likely to play a decisive role in the treaty residence position. This holds especially true for natural persons. 

The creation of a permanent establishment should remain largely unaffected by the COVID-19 crisis. Employees working from their home (home office) during this period are not likely to constitute a fixed place permanent establishment of their employers, principally given the fact that this temporary teleworking period is due to a force majeure and enterprises are providing their employees with offices under normal circumstances. The creation of a fixed place permanent establishment may occur in cases where the home office is being used on a continuous basis for carrying on the business of the enterprise, and the enterprise requires the individual to use his or her home as a workplace. This may especially reveal to be the case if some enterprises decide to opt for teleworking after the pandemic. In the same vein, an individual temporarily working from home is unlikely to constitute a dependent agent permanent establishment of his or her employer, due to, once again, the temporariness of the situation. As a matter of fact, the individual concerned must have an authority to act on behalf of the employer in an habitual manner to form a dependent agent permanent establishment. The temporary nature of the current teleworking period would, therefore, prevent an individual from forming a dependent agent of his or her employer. Hence, the main problem regarding these two types of permanent establishments resides in determining whether the teleworking process can be considered as “of short duration” or as “temporary.” 

COVID-19 may produce a “negative” impact on construction site permanent establishments. During the pandemic, many construction sites had to be, some still are, temporarily interrupted. The duration of such an interruption is to be treated as “other temporary interruptions,” which do not give rise to a suspension of the time threshold in determining the life of a site. Thus, a site that would not have constituted a permanent establishment under normal circumstances, could constitute a permanent establishment due to the mandatory interruption that occurred during the COVID-19 crisis. This particularly holds true in cases where the applicable double tax treaty follows the United Nations Model Convention on this point (which sets a threshold of six months).

The taxation of cross border workers tends to be problematic during the COVID-19 crisis. OECD Secretariat indicated that stimulus packages adopted by governments to keep the workers on the payroll during the crisis should be treated as termination payments and be attributed to the place where the employee would have worked under normal circumstances. For all other issues, the exceptional circumstances call for tight collaboration between countries regarding taxation of cross border workers.

Although it was not possible for the Secretariat to clarify issues relating to transfer pricing, that particular field is also in need of, and prone to, important developments. OECD countries are currently working together on a solution to identify the data that can be used in determining the arm’s length prices relating to 2020. The work is expected to be finalized at the end of the year. Three potential solutions, all with significant setbacks, come to mind: using the data belonging to past years by proceeding with the necessary adjustments, using the 2020 financial data, and using financial data based on other economic crises (most likely the data belonging to the financial crisis of 2008).

COVID-19 pandemic gave rise to some doubt on the progress of the ongoing international tax law projects, such as the work that is being conducted on the digitalization of the economy. As per the statement made by the OECD, the projects concerned continue at their regular pace, without any significant delay.

The analysis of the explanations given by the OECD Secretariat and different countries’ revenue agencies indicates that during the pandemic and the forthcoming years, taxpayers may face considerable uncertainty. The OECD Secretariat’s analysis merely consists of interpreting the existing commentaries in the light of the COVID-19 pandemic in a rather superficial manner. Explanations made by revenue agencies are mere “explanations”, i.e. they are not binding, which are far from being clear. OECD and its member countries may turn this difficult time into an opportunity to develop binding guidelines that are destined to be used during large-scale global and regional crises, such as COVID-19, to avoid a similar outcome in the future.