COVID-19 has resulted in border closures and unprecedented disruption of the global business environment for more than 18 months.
Many companies have had to change the way they operate and employees have been forced to work in places outside of their usual place of work. On July 29, 2021, the Inland Revenue Department (IRD) issued guidelines examining certain tax issues arising from the COVID-19 pandemic (the IRD guidelines). The IRD guide presents the general views of the IRD on tax issues relating to the tax residence of companies and individuals, permanent establishment, employment income of cross-border employees and transfer pricing (TP ).
The IRD’s views and approach to the above tax matters are generally consistent with the ‘Updated guidance on tax treaties and the impact of the COVID-19 pandemic’ (the guidance on tax treaties COVID-19) and the “Guidelines on Transfer Pricing Implications of the COVID-19 Pandemic” (the COVID-19 TP Guidelines) published by the OECD in December 2020 and January 2021, respectively.
It should be noted, however, that the IRD guidelines are not legally binding and only represent the general views of the IRD. Each case will be assessed on its own facts and circumstances. For a detailed discussion of our comments on the IRD guidelines and the OECD Secretariat’s analysis on the impact of COVID-19, please refer to KPMG’s Hong Kong Tax Alerts, Issue 8, August 2021 and issue 6, April 2020 respectively.
The IRD guidelines should be welcomed by many companies as they reassure taxpayers who may have employees temporarily stranded abroad due to these restrictions.
While it is good to see the IRD generally following the views of the OECD, the guidance does not cover situations in which potential tax obligations may arise under national tax law due to a change. in which businesses are forced to operate or are managed or controlled during the pandemic. This is particularly relevant for frontier workers who, usually overseas to provide services or enter into contracts on behalf of their employers, are now forced to work in Hong Kong SAR due to travel restrictions. This is a situation commonly encountered by many businesses during this period and these taxpayers may have treated some or all of their profits as foreign and non-taxable.
Given the Hong Kong SAR’s territorial tax system, the territorial concept fundamentally requires taxpayers to determine where profits come from, and profits that have an offshore source are generally not taxed in Hong Kong.
Taxpayers with a claim for offshore profits may therefore find themselves in a difficult situation and risk that these profits will be disputed and considered to be from Hong Kong SAR because their employees are engaged in profit-generating activities in Hong Kong SAR. during the pandemic. Further clarification from IRD would be welcome in this regard.
Nonetheless, the IRD guide should reassure taxpayers in determining their tax situation during the pandemic – if they can apply a double taxation agreement. If a double taxation treaty cannot be applied, the guidelines are only useful to the extent that they confirm that no concession or relaxation will be accepted by the IRD.
Notwithstanding the guidelines, employers who have employees who are temporarily relocated should continue to closely monitor their situation and government travel regulations to assess whether this is truly a temporary dislocation as a result of COVID-19 or a matter of choice.
In particular, it should be taken into account that these guidelines given by the IRD only apply to the interpretation of tax treaties and to the application of transfer pricing principles. IRD guidelines do not apply to the interpretation of national law or where the dislocation of the employee is by choice, rather than being imposed by restrictions resulting from external factors. Taxpayers should exercise caution and work closely with their tax advisers to carefully assess their tax situation during the pandemic.
Partner, KPMG China
Partner, KPMG China
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