The Coronavirus and taxPublished on 18 Mar 2020
The coronavirus has hit hard on almost all aspects of life affecting people and their businesses globally. It will also have an effect on various aspects of taxation. On a domestic front, lower personal and business income, including losses, will reduce the income of Governments worldwide from taxation.
As far as international tax is concerned, the restriction on travelling especially may cause issues. The number of days spent in or outside countries often plays a role in whether or not a person is a tax resident in that country. Should people be prohibited from entering or leaving a country they may well fail the ‘days’ test with an effect on their tax residency and status.
A similar issue arises in the case of legal entities such as companies or trusts. Their tax residency is often determined by the so-called ‘place of effective management’ or ‘POEM’ test. The POEM test is not straightforward to apply. One of the important factors to determine is the place where board (or trustee) meetings take place. Directors based in different places of the world will therefore often travel to a specific location, where important issues will be discussed, debated and decisions taken, thereby cementing the POEM in that country.
A further scenario affected is that various so-called tax havens have recently introduced legislation on substance, as a result of pressure exerted by the OECD, UN and individual countries. In terms of these substance requirements, in order for a company to be regarded as tax resident and to escape penalties, there is once again a requirement for a certain amount of physical presence in these countries, depending on the nature of the company’s activity.
It is currently unclear what happens if there are restrictions on travelling and physical board and other meetings are replaced by tele/video conferencing? Will companies still meet the POEM and substances tests? Revenue authorities around the world should surely be understanding of the situation and not penalise taxpayers. The problem, however, is that these are all objective tests and, in the absence of specific new legislation, there is not much scope for them to exercise discretion.
In the case of POEM the relevant rules already allow for tele/ video conferencing and in cases where at least some of the directors are present in the country designated as the POEM country, it might still be possible to pass this test. In cases where there is no presence, though, it might be a real issue to maintain POEM, especially if the coranavirus crisis carries on over a long period.
Charl du Toit is a Partner and Head of our Tax Advisory Division in South Africa and specialises in Corporate International Tax, families and trustees specifically with cross border trust and corporate structures.