Cross Border Tax Issues due to COVID-19 Coronavirus Outbreak

COVID-19 Coronavirus Outbreak has presented challenges that nobody could have envisaged three months ago. The rapid and continuous spread of COVID 19 presents significant challenges to people and businesses across the globe. The most difficult problems that businesses need to consider are their legal liabilities and obligations namely contractual obligations, employer-employee relationships, government levies, pending disputes, regular compliance obligations, and international tax issues.  

In the view of COVID-19 Coronavirus Outbreak in India, the Government of India has announced slew of measures on statutory and regulatory compliance in the areas of Limitation Period, Direct Tax, Indirect Tax, Corporate Affairs, and Bankruptcy Code. The Coronavirus Outbreak also forced the Indian government to take some strong measures such as mandatory lockdown, restrictions on domestic and international flights.  

Due to such limitations, many cross-border workers are unable to physically perform their duties at their usual work sites which will impact on the right to tax between the countries. In long run, this may raise certain international tax disputes such as: 

1. Many multinational companies are regularly providing technical or professional services to their customers across India which requires many foreign employees to frequently visit India. Due to COVID 19 Coronavirus Outbreak, such employees might have to stay for a longer period than actually required which may lead to the permanent establishment of such multinational company in India. The companies with permanent establishment will have to meet the compliances, obligations and taxability in India. Example - The multinational company registered in Germany whose foreign employees might have to stay for a period of more than 6 months in India. Therefore, such a multinational company will become a permanent establishment in India and will have to comply with more statutory and regulatory obligations in India.

2. Multinational companies which are providing technical or professional services to their customers across India may require their employees to provide the services from the employer’s country instead of travelling to India. The income earned from such project is directly attributable in India. Under this scenario, the question may arise whether income generated from such projects are taxable in India or the employer’s country. In recent rulings, the Indian courts have held that multinational companies may be considered to have a permanent establishment without the physical presence of their employees in India and they would be required to do compliances, obligations and taxability in India. Example – Employees of a multinational company registered in Germany may perform Indian project in Germany through digital or video capabilities. It will still be considered a permanent establishment in India.

3. In some cases where multinational companies are providing technical or professional services to their customers across India may require their employees to do work from home which might be in a country other than that of the employer or Indian customer. The home of such foreign employees is available for disposal to provide services to their customers located in India. Now the question will be whether the home of the foreign employee shall be considered as a permanent establishment of multinational company or will it become the permanent establishment in India. In addition, this may lead to more compliances, obligations and taxability in the third country apart from employer or customer country. Example - The multinational company is registered in Germany but their employee resides in Turkey and performs their job from Turkey for a customer in India through digital means. This makes for a complex tax structure that requires re-evaluation of obligations and compliances of the multinational company.

4. The foreign employees of a multinational company which provides technical or professional services to their customers across India may have to take decisions in order to conclude or lead the project on the behalf of the multinational company in India or their home country. Such foreign employees may be considered as the dependent agent of the multinational company and become a permanent establishment in India or home country of the foreign employee. In such case, the company will have to meet the compliances, obligations and taxability in the country of foreign employees. Example - The multinational company is registered in Germany but their employee may take decisions in India or Turkey in order to conclude the contract during crises then India or Turkey may become the permanent establishment for the multinational company.

5. Many multinational companies provide construction services to their customers across India. The activities such as installation, assembly project, supervisory activities, and construction sites are being temporarily interrupted due to COVID 19 Coronavirus Outbreak. The extension of the time period of construction site makes a multinational company have a permanent establishment in India which will require multinational companies to do more compliances, obligations and taxability in India. Example - The multinational company is registered in Germany but the construction site may extend for 6 months. The company will consequently become a permanent establishment in India.

6. Many multinational companies are regularly providing technical or professional services to their customers across India. Due to lockdown in many countries and restrictions on international flights might lead to a situation where place of effective management and country in which company is registered may be different. The senior executives or management of such multinational company may be required to take decisions in India which makes the place of effective management in India. In case any company having place of effective management in India shall be treated as a resident company in India. In such a situation, a multinational company will be required to do compliances in country of registration as well as in the country of place of effective management. Example - The management or senior executives of the multinational company staying in India due to travel restrictions might be required to take management decisions in India. The company will have to take the registration in both countries.

7. Due to COVID 19 Coronavirus Outbreak employees of multinational companies may have to stay in India for a period more than actually required. On the extension of the period, such employee will have to pay income tax and submit the income tax return in India instead of their home country. Example - The employee of the multinational company stayed in India for a period of more than 6 months will be taxable in India.  

The relief measures announced by the government are a welcome move and would certainly help to address some of the issues faced by the organization. However, it is advisable for multinational companies to evaluate their tax structure and take relevant steps to avoid any international tax disputes in future. Considering the current scenario, it is also important that the Government of India announce the clarifications or notifications to avoid international tax issues on multinational companies.  

In case of any clarification or doubt, you may contact at office@indialawoffices.com