Records across jurisdictions must to prevent tax disputes

New Delhi: Businesses will have to maintain records of their activities in other jurisdictions, along with the travel history of their employees, in order to prevent disputes related to taxable presence or permanent establishment (PE) that may arise as a result of the 21-day lockdown in India, said experts. The Organisation for Economic Cooperation and Development (OECD) Secretariat has recommended that the lockdown should not change the determination of PE, since the situation is 'exceptional' and 'temporary period of major change'. However, Indian tax authorities will have to issue specific directions to clear the air. “It is imperative that companies and individuals maintain records of the business activities carried out in other jurisdictions in order to substantiate such transient presence to the revenue authorities,” said Naveen Aggarwal, partner at KPMG India.
Keeping record of facts and circumstances “of the relevant presence in the state or outside for production to the revenue authorities at a later point of time to corroborate bonafide”, would be a critical requirement for companies and individuals, said Rakesh Nangia, chairman of Nangia Andersen Consulting. “To provide certainty to taxpayers, the Central Board of Direct Taxes (CBDT) may also consider issuing suitable guidance on the applicability of domestic tax law provisions on these issues,” said Aggarwal. The OECD guidelines on Covid-19 crisis say that exceptional and temporary change of the base location - where employees, CEOs and other senior executives of a company exercise their employment due to travel restrictions or government directives such as working from home – should not create a PE of the company, for lack of sufficient degree of permanency or continuity.

The guidelines termed Covid-19 'special circumstances' but said the situation was unlikely to change a company’s “place of effective management” to trigger residency in foreign jurisdiction. The Paris-based body said that if any country in which such workers are temporarily working chooses to tax the employment income, their home country should look to provide relief from double taxation to mitigate the compliance and administrative costs for the employer and employees involved. “The exceptional circumstances of the Covid-19 crisis call for an exceptional level of coordination and cooperation between countries, notably on tax issues to mitigate the potentially significant compliance and administrative costs for employees and employers,” said Pascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration.

Although the guidelines are not binding on India, being an observer member, experts said that the guidelines will aid Indian businesses having presence in OECD countries and vice versa, as well as employees that are working from home as a force majeure due to government directives, shielding them from the burden of additional taxation. “This would definitely help businesses in this hour of crisis,” said Nangia. Countries such as Ireland, UK and Australia have begun issuing guidance with respect to their domestic tax laws. For instance, Ireland’s revenue department has directed to disregard the presence of an individual employee or service provider in Ireland – and where relevant, in another jurisdiction – for corporate income tax purposes.

Further, employment income of temporary or stranded workers should not be taxed in India for the period of involuntary dislocation, under the short-stay exemption available under the tax treaties up to 183 days of presence in India. Industry chambers and taxation specialists backed the view, saying that India should follow other developed nations to alleviate undue compliance burden. “Period of stay in India after March 15, 2020, at the option of Indian citizen or Person of Indian origin, should be excluded for the purpose of calculation of residency in India under Section 6 for assessment year 2020-21,” said SP Sharma, chief economist at PHD Chamber of Commerce and Industry.