The Coronavirus and tax

Dr Charl du Toit, Partner in the Tax Advisory Division at Stonehage Fleming in South Africa

The coronavirus has hit hard almost all aspects of life affecting people and their businesses worldwide. No doubt 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 in particular may cause issues. The number of days spent in or outside countries often plays a role in whether a person is a tax resident in that country. Should people therefore be prohibited from entering or leaving a country they may well fail the ‘days’ test which in turn will affect 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 but one of the important factors when determining POEM 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 be taken, and thereby cement the POEM in that country.

A further scenario affected is that several of the so-called tax haven countries have recently introduced legislation on substance, as a result of pressure exerted by the OECD, UN and select individual countries. In terms of these substance requirements, in order for a company to be regarded as a 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.

So, what will happen if there is now a restriction on travelling and physical board and other meetings are replaced by tele/videoconferencing? Will companies still meet the POEM and substances tests? Revenue Authorities around the world must surely have an understanding for 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 Revenue Authorities to exercise some discretion.

In the case of POEM the relevant rules already allow for tele/ videoconferencing and in cases where at least some of the directors are present in the country designated as the POEM country, it could still be possible to pass this test. In cases where there is no presence it might be a real issue though to maintain POEM, especially if the coranavirus crisis carries on over a long period.