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Understanding the OECD's analysis on the impact of COVID-19

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Lewis Lu and John Timpany of KPMG examine the OECD’s analysis on tax treaties and cross-border tax issues as a result of COVID-19.

The OECD issued an analysis on April 3 2020 examining tax treaties and the impact of the COVID-19 crisis on cross-border workers. A number of key tax issues are addressed including the risk of a company creating a permanent establishment or other taxable presence in a new jurisdiction and changes to the tax residence status of the individual concerned as a result of key staff being forced to work in a different location other than their normal place of work. The OECD analysis sets out the view that COVID-19 measures are generally exceptional and should not normally impact on a company or individual’s tax status under tax treaties in a particular jurisdiction.

Permanent establishments 

The OECD considers it unlikely that employees working from home in a different jurisdiction from that in which they habitually work would create a permanent establishment risk in the new location. As this situation is temporary and exceptional, it would not generally have the requisite degree of permanency to create a fixed place of business.

Where an employee is only working from home as a result of force majeure or government directives, any activities they undertake should not be regarded as habitual. However, the situation may be different where an individual was already habitually concluding contracts in their home country before the outbreak.

The OECD also notes that any temporary break in construction projects as a result of the pandemic should be included in the duration of the project for the purposes of calculating whether there is a permanent establishment. This may mean that some projects originally slated to fall within the relevant de minimis limit in the treaty may now run over the limit and result in a taxable presence being created. 

Corporate tax residence 

The OECD is of the view that the temporary relocation of board members to a different location as a result of COVID-19 should not have an impact on a company’s residence. In practice, this is dependent on which version of the treaty is in use. The most recent, 2017, version of the model convention settles cases of dual residency by mutual agreement between the authorities. A range of factors to be considered include where board meetings are usually held, where senior management usually undertake their duties, location of the company’s headquarters and where day-to-day management is usually carried on. The OECD is of the view that in most cases this should lead to no change of conclusion if senior executives are temporarily located abroad.

The pre-2017 model convention requires jurisdictions to look at the company’s place of effective management. All relevant factors must be considered. The OECD notes that some states interpreted the place of effective management as being ordinarily the place where the senior person or group of persons make management decisions. While the OECD’s stance is clear, it appears there is scope for some jurisdictions to take a different view.

Cross-border workers 

Where an employee lives in one jurisdiction but works in another, any employment-related income remains taxable in the first instance in the location where they used to work. This applies equally in the case of government subsidies during the pandemic where such subsidies most closely resemble termination payments which the OECD commentary attributes to the place where employment took place.

Individual residence

The OECD considers it unlikely that an individual’s residence would be affected by the COVID-19 situation. This is only the case where there is a treaty in place – absent a treaty, a simple “days-present” test may well result in residency and it would be a matter for the host country to determine what relief to grant. The OECD notes that the UK, Ireland and Australia have already done this. 


Overall, the OECD’s analysis is welcomed and provides a pragmatic approach designed to prevent taxpayers facing unforeseen tax difficulties as a result of the crisis. The OECD recommends jurisdictions concluding that taxpayers retain the same tax profile as they had before the outbreak. However, the OECD’s guidance is premised on short, accidental presence and does not cover what happens if the current situation were to extend for more than half a year. 

Nonetheless, it does note some limitations to this approach:

  1. It is only applicable where there is a double tax treaty in place; absent this, domestic law provisions may be less flexible than the standard treaty provisions. Hong Kong, in particular, does not have treaties with a number of significant locations, meaning that the existing low thresholds for carrying on business and the 60 day test for salaries tax may still apply.

  2. Many treaties have variations from the OECD model convention.

  3. Borderline cases may be placed in a more difficult position – while it is unlikely that a large company is going to face difficulties because its chief executive got stuck overseas on a business trip, individuals or companies with a less clear residential status still risk the effects of the virus tipping the balance. While the OECD discourages this, it will ultimately be down to the interpretation of the tax authorities concerned;

  4. The attitude of individual authorities is also going to be critical to how businesses are impacted. Several authorities have already issued guidance on these matters under their domestic laws and it is hoped that others will follow suit.

  5. Not all taxes are covered by treaties, so state and provisional taxes or social security contributions may still require separate analysis.

  6. There may be a genuine impact on the taxability of construction projects as a result of the crisis.

While the guidance should provide a degree of reassurance for taxpayers during the disruption, the Inland Revenue Department is encouraged to follow the lead of overseas authorities in issuing their own guidance on these issues. Particularly, in confirming that Hong Kong would not seek to impose a tax charge, either under domestic law or a tax treaty, if a person has a taxable presence in Hong Kong only as a result of extraordinary measures resulting from COVID-19.

Lewis Lu

T: +86 10 8508 5002


John Timpany

T: +852 2143 8790



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