Travel restrictions associated with Сoronavirus will have a significant impact on the venue of the board of directors and, as a result, on whether taxes will be paid.
The pandemic actualized many social and economic problems, revealing difficulties with health care. From the point of view of taxation, new problems and unresolved issues arose, mainly related to state support programs. But let's take a breath and consider a more applied issue - the impact of COVID-19 on tax havens for offshore corporations.
The country of tax registration of a company depends on many factors and circumstances, and it is not always easy to determine. The corporation is a resident of the country in which the board of directors meet. Travel restrictions associated with Coronavirus will have a significant impact on the venue of the board of directors and, as a result, on whether taxes will be paid.
For instance:
Several years ago, some scientists at a X research company invented a very popular drug. They applied for a patent and began clinical research. If it was successful, the company planned to sell the drug license to a large pharmaceutical concern. But the X company tax specialist suggested a different solution.
The company opened a subsidiary in an offshore jurisdiction (let's call it Y) and transferred the rights to the patent to it. A few years later, the drug was registered, and the Y offshore jurisdiction issued a license for its manufacture and sale to a third party.
Now, they receive a license fee of $ 100 million per year. Due to careful planning, the tax rate is zero when Y receives royalties and when it transfers X dividends.
Tax consultants acted extremely carefully when registering with Y. The company has three directors - two senior executives from the X company and a lawyer who is in the jurisdiction and serves as director.
Several times a year, directors fly offshore to check the operation of the subsidiary, discuss further plans and adopt the necessary resolutions. But because of COVID-19, directors cannot travel. So what comes next?
Three directors could hold a meeting through FaceTime or Zoom. But most directors, making decisions on the Y offshore jurisdiction, will be physically located in their country. As a result, the offshore jurisdiction will become a tax resident in the country of the director and will be required to pay taxes.
Still, tax consultants have a new plan. The directors are stepping down and two local specialists are being appointed in their place. Three directors, residents of the offshore jurisdiction, must make decisions independently, even if they are instructed or controlled by the parent company. If everything works out, why not? - The company will continue to be able to evade taxes in the country of the directors.
Last week, the British Revenue and Customs Office published a guide to COVID-19 and issues related to the tax resident status for legal entities. The management’s statement said that the pandemic inflicted a severe blow on the activities of companies, and this, unfortunately, affected business trips, the whereabouts of directors, employees and other persons.
Representatives of the Revenue and Customs Office did not formally make any concessions, but noted that the company would not be considered a UK tax resident “if several meetings of the board of directors take place in the country” or if “within a short period” some decisions are made there.
Maybe some other countries’ IRS should also publish a guide that, until the pandemic recedes, they would differently consider the tax resident status. On the other hand, some countries may take advantage of the pandemic and hold multinationals and offshore jurisdictions accountable for earning billions of dollars annually.
What do you think states should do in this situation?
