Representation to Ministry of Finance on excluding stay of employees of foreign companies in India for purpose of determining PE exposure
Blog: NASSCOM Official Blog
As you are aware, permanent establishment exposure for a business arises by virtue of presence of employees exceeding a prescribed number of days in a country other than the home country.
In order to fight the outbreak of Covid-19, countries across the world have taken unprecedented measures such as restriction on travel, imposing lockdown and implementing strict quarantine requirement. Due to this, businesses are facing unforeseen disruptions and forced changes in the working pattern of their employees who may be operating out of a country other than their country of residence. This has raised several income tax related issues and can have an impact on the right to tax between the countries.
In this regard, the Organisation of Economic Cooperation and Development (OECD) has released a guidance note on the impact of COVID-19 crisis stating that “these situations should be treated as ‘exceptional and temporary’ and should not trigger a change in residency or PE status”.[1] Further, these exceptional circumstances call for an exceptional level of coordination and co-operation between countries, notably on tax issues, to mitigate the potentially significant compliance and administrative costs for employees and employers. It has been specifically provided in the guidance note that it is unlikely that the COVID-19 situation will create any changes to PE determination or shift of Place Of Effective Management (POEM).
In cases where threshold presence required by domestic law to register for tax purposes may be lower than those applicable under a tax treaty, tax administrations have been encouraged to provide guidance on the application of the domestic law threshold requirements, domestic filing and other guidance to minimise or eliminate unduly burdensome compliance requirements for taxpayers in the context of COVID-19 crisis.
Following this, many countries like United Kingdom, Singapore, Ireland have made amendments to domestic tax laws to ensure that such forced stay by employees in the foreign countries does not get counted for determining residency or PE exposure.[2]
NASSCOM made a representation to Ministry of Finance requesting for issue of notifications excluding stay of employees of foreign companies in India for purpose of determining PE exposure in India. As the burden of proof of establishing the tax exposure, if any, shall fall on the taxpayer, it would be useful if tax authorities can provide detailed guidance on the kind of documentation to be maintained to establish bonafide situations, in cases where PE in any form or shift of POEM to India is alleged at a later point in time.
[1] Refer OECD Secretariat Analysis of Tax Treaties and the Impact of the COVID-19 Crisis. See: https://read.oecd-ilibrary.org/view/?ref=127_127237-vsdagpp2t3&title=OECD-Secretariat-analysis-of-tax-treaties-and-the-impact-of-the-COVID-19-Crisis
[2] For Ireland, See: https://www.revenue.ie/en/corporate/communications/covid19/compliance-with-certain-reporting-and-filing-obligations.aspx
For Singapore, see: https://www.iras.gov.sg/irashome/COVID-19-Support-Measures-and-Tax-Guidance/Tax-Guidance/For-Companies/
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