Tax liabilities are on the rise due to the widespread of terrible COVID-19 virus. The count of tax-based challenges is multiplying. People have to endure all responsibilities of a tax resident of that country where they have been locked down. The flights are ceased. Quarantine requirements are scrolling up. So are the tax liabilities.

Impact of COVID-19 on Tax Residency In India

• The Tax Law In India

The provisions in the Indian income tax law testify physical presence to come across the tax residency and the exposure for foreign entities.

Many non-residents came down here for managing their family affairs, documentation and investment for many other purposes. Unfortunately, the outbreak of the COVID-19 has seized them here, which resulted in exceeding their prescribed stay period for the financial year 2019-20.Now, that overstay has extended the scope of paying tax accordingly together with imposing other local tax liabilities.

• Income Tax Implications

The condition of tax has become critical because people are not so sure about the period of stay here. They are waiting to see if they are likely to have some income tax implications while keeping the involuntary period of stay into account.

However, there is no provision in this regard in the Indian income tax law. But, there is a case in the history wherein the court judgement considered the involuntary or forced stay to be excluded from the computation of the tax liabilities. That was the case of a non-resident whose passport was wrongly seized for a certain period of time.

The court, at that time, wisely stated that the non-resident has the right to decide whether he wants to be a tax resident of this country or not. It depended on his sole discretion. Since it happened against his will or consent, the court did not press him to pay tax.

• Economic Co-Operation and Development (OECD)

The organization for Economic Co-Operation and Development has issued revised guidelines on the similar tax residency issue for individuals, foreign companies and creation of PE upon analyzing the tax conditions amid pandemic COVID-19.

In respect of the PE exposure, the OECD came with an announcement that the exceptional and temporary shifting to location where employees discharge their duties or temporary conclusion of contracts in the native country should not create PEs for businesses.

The OECD pushed local tax administrations to guide about the application of the domestic law threshold requirements, domestic tax petitions and other directions required for minimizing unduly compliance requirements for tax payers during this viral infection outbreak.

About amendments in the POEM of the company due to relocation, inability to travel of CEOs/ senior executives, the guidelines read that this shifting during viral crisis is an extraordinary and temporary condition. So, there should have the “tie-breaker rule” executed in tax treaties rather than changing residency status. Some jurisdictions have already disregarded such involuntary accommodations.

While throwing more light on it, the guidelines read that the temporary shifting won’t make a person a tax resident of that country even if he attains that status on the basis of the physical presence criterion, as mentioned in the domestic tax rules book.

This crisis has turned down economies, and is consistently likely to push it down in the first quarter of FY20-21. Even if this worse phase will be over, the world won’t be same. Therefore, people have welcomed these amendments because these would be helpful in addressing several practical tax issues.

These guidelines are not a legal threshold. Local tax authorities should also address the likewise conditions that are unforeseen through a set of guidelines. These guidelines are put in place to counter tax adversities for business enterprises, which rose up due to forced working condition.

The tax authorities should now take an intensive look into the guidelines, determining tax liabilities or positions of the foreign businesses in the host countries, as happened in the UK, Ireland and Australia.

What To Do In Future

The competent authorities should bring more clarity and guidance to dismantle the criticality due to involuntary stay, which disregards the law that qualifies emigrant employees as a tax resident.

The government should come with suitable measures so that the balance can be invoked, ensuring no misuse of tax relaxation. This is how prospective litigation can be avoided. The taxpayers should also keep their supporting documents along with them so that they can prove their eligibility for relaxation in the lax for being a victim of involuntary stay.

Source: Bloomberg Tax