COVID Travel Restrictions Could Trigger Tax Troubles
The Novel Coronavirus contagion has affected every facet of our daily lives. Certainly, the devastating economic impact of the disease receives considerable media attention. Less well-known, however, has been its turbulent tax troubles. In our newsletter of 15 May 2020, the impact of the pandemic on transfer pricing was highlighted. We set out below some of the other issues that may arise as a result of the virus, particularly for businesses that have international operations.
Most jurisdictions have fiscal systems that are based on the residency of the individuals and corporate entities that trade therein. Usually the income of residents is taxed more extensively than that of non-residents. Furthermore, many places impose hefty exit taxes when persons cease to be a resident. So, if you have no intention of setting up shop permanently within a country, it is generally good advice to avoid being considered a resident by the tax authorities there in the first place.
For individuals, however, this is more easily said than done because if they are physically present in a country for a prescribed number of days, then they will automatically be conferred the dubious honour of tax residency under that country’s tax rules.
Living in South Africa, for example, for more than 915 days over five years and more than 91 days in each of them, can render you a South African tax resident. Also, if you have become resident in this way, you only cease to be one if you are outside South Africa for a period of 330 or more days continuously.
If, as a result of the COVID-19 travel restrictions, you are trapped in a particular country, you may end up breaching one of these prescribed daily limits and unwittingly triggering adverse tax implications.
The problem is even more acute for companies. Generally, companies are deemed to be resident in the location where they are “managed or controlled” or some variant thereof. Broadly speaking, this refers to the place where the main decisions of the companies’ operations are made. If a CEO is holed up in a hotel room somewhere for the duration of the COVID crisis, barking orders down Zoom, well then, the company is arguably managed or controlled from there and therefore resident in that territory. This can have all kinds of tax compliance and calculation complications for the company concerned.
Besides residency, COVID-19 can also give businesses headaches if it compels them to set up permanent establishments or PE’s in places where they would prefer not to do so. A PE, generally, denotes a fixed place where a business is carried on in a jurisdiction. Double tax treaties between nations usually give a country the right to tax all income attributable to a PE. While there are several ways for a business to create a PE in another country, one of the most common is to have an employee in that country performing work for the business over a prescribed number of days from a fixed location. Six continuous months within a country tend to be the usual standard for PE creation, according to guidelines issued by the Organisation for Economic Co-operation and Development.
This means that employees, stranded in foreign countries during a COVID 19 shutdown, may inadvertently cause a tax problem for their employers, merely by virtue of carrying out their duties virtually on their laptops.
So what can be done?
What has been described above are just some of the tax complications the coronavirus can instigate. If you think it is far-fetched and draconian for tax authorities to take advantage of disease-imposed movement restrictions on foreign nationals in the manners described, consider this: countries throughout the world are suffering dire shortfalls on revenue collection as a result of the COVID 19 crisis. As a consequence, many tax officials may show little compunction in looking to well-heeled individuals and corporates who have accidentally fallen foul of the fiscal laws to fill the gap.
Possible solutions to these issues may involve, inter alia:
- delegating/assigning responsibilities of high-level executives who are unable to exercise their responsibilities in their usual location;
- decoupling a place of a business in a foreign country from the other operations of an enterprise so as not to manifest a PE; or
- seeking waivers from the relevant revenue authorities that explain a business’s particular circumstances.
Regardless of what is to be done, now might be an appropriate time to consult with your tax advisor. You are welcome to contact us electronically in this regard – we are obviously not expecting you to appear before us in person under current conditions!
Contact us to discuss if COVID Travel Restrictions could be relevant for your business.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.