Some countries have started reassuring multinationals that they won’t face a new tax system—and potentially unexpected taxes—if coronavirus travel bans upend where companies are based for tax purposes.
Pandemic restrictions have halted most international travel, potentially grounding people in high-level executive roles and stopping them from carrying out key business functions in other countries.
And that could potentially leave companies vulnerable to changes in where they are tax resident, or legally based for tax purposes. Some jurisdictions determine that a company is tax-resident in part where it is centrally managed and controlled, for example, if the company’s directors make strategic decisions there.
Australia, Jersey, Guernsey, the U.K., and Ireland have already indicated they’ll be forgiving to companies that can’t meet residency requirements during the pandemic.
If the Covid-19 shutdowns last for a significant part of the year, that means companies whose directors are unable to access the jurisdiction of the company’s tax residency, or are stuck in another one, could face double-residency problems. Companies in that situation face two potential worries: Not being able to establish residency where they want to, and having a different jurisdiction claim they are resident there.
Becoming a resident in a different jurisdiction means companies will have to follow a new tax system, facing new compliance requirements and even possible changes to how they’re structured. Companies may not want to be in the middle of disputes with one or more governments over where they should be paying tax—and potentially a higher corporate tax bill if their place of tax residency is moved as a result, practitioners warn.
“It could get nasty very quickly,” if a company is caught between two governments arguing over which has the primary right to tax it, said Robert O’Hare, senior tax policy adviser at Squire Patton Boggs in London.
For example, a number of private equity and hedge funds are set up to have financing centers that are tax-resident in places like one of the Channel Islands, O’Hare said. In normal times, directors would fly to the island for important meetings. But with travel now restricted, those same directors may be calling or videoconferencing into meetings from home—and have to make sure the country they are sitting in doesn’t claim the company is tax-resident there instead.
Company worries about falling on the wrong side of residency requirements are compounded by uncertainty over how long the pandemic will last, and whether it will become a recurring problem, said Fabian Sutter, an associate at Loyens and Loeff in Zurich. If it does, corporate residency could become an attractive target for cash-starved governments, he said.
Some tax authorities have begun promising companies they’ll be sympathetic to corporate tax residency problems when they stem from coronavirus-related travel restrictions.
“If these companies instead hold board meetings in Australia or directors attend board meetings from Australia, this will not by itself in the absence of other changes in the company’s circumstances alter the company’s residency status for Australian tax purposes,” a statement on the Australian Taxation Office’s website said.
The U.K.'s tax authority said on Monday that several facts—not just where board meetings are held—will determine the central management and control (CMC) of a company. Even if a company is found to be controlled and managed from the U.K., residency will in a lot of cases be decided by the tax treaty, Her Majesty’s Revenue and Customs, said.
“Each case turns on its own facts and circumstances which makes it difficult for HMRC to provide definitive guidance as to where CMC may abide in cases where businesses are forced to make changes in response to the COVID-19 pandemic,” the tax office said.
The Organization for Economic Cooperation and Development also pointed to tax treaties in April 3 guidance to countries.
If it becomes unclear where an entity is tax resident, it could lead to double residency—two jurisdictions claiming a company is tax-resident there—the Organization for Economic Cooperation and Development said April 3, in guidance describing how double tax treaties should be interpreted in light of coronavirus-related travel issues.
Tax treaty provisions like tie-breaker rules that ensure the entity is only tax-resident in one place should help clarify double-residency questions, the OECD said.
“All relevant facts and circumstances should be examined to determine the ‘usual’ and ‘ordinary’ place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis,” the OECD said.
While tax treaties may be able to help resolve the issue—if a treaty exists between those jurisdictions—that might also mean the company is caught in the middle of a multi-year dispute resolution process, O’Hare said.
For companies worried about running afoul of residency requirements, the most important thing they can do right now is document, O’Hare said.
“The best advice that you can give a company is document as much as you can about what you are doing and why you are doing it"—like the duties and decisions undertaken by directors,” he said.
Documents companies should maintain include detailed minutes, copies of government advice they’re following, and reasons why they’re taking certain decisions in light of the crisis, O’Hare said.
“What we don’t want here is issues of tax residency wagging the commercial realities that companies are finding themselves in"—like trying to survive an economic slowdown, he added. “Worry about what you can control,” he added.
Companies are still looking for more tax authorities to announce some leeway for companies that may have accidentally created a taxable presence or missed meeting residency requirements during the pandemic.
“I’d think there would be just kind of global agreement that we wouldn’t worry about it,” said Barbara Mantegani, a tax attorney and the founder of Mantegani Tax PLLC in Washington.
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