The IRS issued guidance (Rev. Procs. 2020-20
) on April 21, 2020, to address potential tax challenges and uncertainty facing internationally mobile employees impacted by COVID-19 and their employers.
Whether an individual has been infected personally, Rev. Proc. 2020-20 acknowledges that travel has been significantly restricted through quarantine, stay-at-home orders, flight cancellations and disruptions or the cascading implications of governments taking measures to restrict the spread of the virus. Recognizing the potential health considerations in traveling and that individuals may “feel unsafe,” the IRS has provided very wide applicability of the guidance to cross-border taxpayers.
The two revenue procedures specifically address individual federal tax residency, the availability of relief under U.S. double tax treaties, and qualification for income exclusions in alleviating unintended tax consequences for international employees. However, it is uncertain whether these measures will be sufficient in the event of a prolonged U.S. lockdown. Questions also remain on their practicality for some individuals and how they align with tax relief announced by other countries.
Federal tax residency exception
Rev. Proc. 2020-20 contains relief for individuals who are present in the United States during present travel restrictions and who are regarded as non-resident aliens or would be were it not for the impact of COVID-19 on their travel. Federal tax residency is determined by the substantial presence test (SPT), which under Section 7701(b) applies to individuals who are not resident as U.S. citizens or lawful permanent residents (“green card” holders). An individual will be regarded as tax resident if they are present in the United States for 31 days in the current tax year and a total of 183 days or more taking into consideration all current year days of presence, one third of prior year, and one sixth of the year prior to that.
Days spent in the United States for medical reasons may be excluded from counting towards the SPT if an individual intended to leave but was prevented from doing so for medical reasons. This exception does not apply where the medical condition existed prior to travel to the United States and was known to the individual. To claim the exclusion of days, Form 8843, “Statement for Exempt Individuals and Individuals With a Medical Condition” must be filed with a tax return, or be available on request if a return does not need to be filed.
The IRS has extended the medical condition exception for time spent in the United States during this time. An individual can exclude a single period of 60 consecutive days of U.S. presence, known as their “COVID-19 Emergency Period,” from counting towards the SPT, provided they meet all of the following requirements:
- Be regarded as an “Eligible Individual” where:
- They were not tax resident in the United States at the end of the 2019 tax year
- They are not a U.S. green card holder
- They are present in the United States in each of the 60 days excluded
- They do not become a U.S. tax resident due to days of presence in the United States outside their COVID-19 Emergency Period
- Their selected COVID-19 Emergency Period starts in the period from Feb. 1 to April 1, 2020
- They intended to leave the United States during the COVID-19 Emergency Period
Importantly, in extending the medical condition exception to the SPT, COVID-19 will not be regarded as a pre-existing condition irrespective of the country in which the individual’s travel originated. Similarly, the fact the individual intended to leave the United States during the COVID-19 Emergency Period is presumed rather than requiring evidence to substantiate prior travel plans.
The IRS also provides guidance on the steps to claim the COVID-19 Emergency Period, where taxpayers include Form 8843 in their 2020 tax return. Where other exceptions to the SPT apply, such as where an individual maintains a ‘closer connection’ to a foreign country or can claim residency in another country under a double tax treaty, they may still be claimed.
Double tax treaty relief for employment income
The Rev. Proc. 2020-20 also addresses individuals who could exclude their employment income from U.S. taxation under the terms of a double tax treaty but would otherwise be prevented from doing so as a result of an increased number of US days of presence. While U.S. double tax treaties include differing provisions, the U.S. model treaty outlines that a resident of a treaty partner country, who is not a U.S. citizen or green card holder, may exclude employment income from U.S. tax if they meet all the following conditions:
- They are present in the United States for a period or periods not exceeding in the aggregate 183 days for all 12-month periods commencing or ending in the taxable year concerned
- Their remuneration is paid by, or on behalf of, an employer who is not a resident of the United States
- Their remuneration is not borne by a permanent establishment that the employer has in the United States.
The COVID-19 Emergency Period exclusion of 60 days of presence may also be used to reduce those counting towards the treaty days count. Individuals do not need to qualify as an “Eligible Individual” in order to claim this exclusion and must indicate the claim on Form 8843 in their tax return.
Where an individual also claims relief from U.S. tax withholding under a double tax treaty, they must file Form 8233, “Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual,” with the U.S. employer if one has not previously been filed. There is no additional requirement to indicate the exclusion of days on Form 8833, “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b).” If a new form is not provided or tax has been withheld, an individual can include a statement in their tax return that includes the relevant information that would be included to provide relevant COVID-19 Emergency Period details.
Qualifying for Section 911 exemptions
COVID-19 has seen some employees choose to return to the United States rather than remain overseas, which could have an impact on eligibility for certain income exclusions. Section 911 of the Internal Revenue Code allows certain U.S. taxpayers working overseas to mitigate federal taxation on overseas earnings by claiming the Foreign Earned Income Exclusion and/or Foreign Housing Exclusion on Form 2555 in their tax return.
Individuals can exclude up to $105,900 of income from their 2019 federal taxable income ($107,600 in 2020) if they qualify for the exclusion under either:
- The bona fide resident test – they are resident in a foreign country for an uninterrupted period including at least a complete U.S. tax year
- The physical presence test – they are present and working in a foreign country for at least 330 days in a 365 days period (this does not need to be 330 consecutive days)
Taxpayers who may otherwise qualify under these tests but have to leave a foreign country because of adverse circumstances can benefit from the exclusions where the IRS provides a waiver. Rev. Proc. 2020-14 previously outlined countries where a waiver applies.
Rev. Proc. 2020-27 provides a significant extension of the waiver to all countries where individuals have had to leave after the following dates due to COVID-19:
- China (excluding Hong Kong and Macau SARs): on or after Dec. 1, 2019, and by July 31, 2020
- Globally, on or after Feb. 1 2020, and by July 31, 2020
Importantly, an individual must have been present or resident in the foreign country before the starting dates outlined above. For example, an individual who moved to China for a two-year assignment on July 1, 2019, and who returned before Dec. 1, 2019, would not be eligible for the waiver.
While unqualifying criteria are waived for the bona fide resident or physical presence tests, the individual may claim a pro-rata amount of the exclusions for the periods they were present in the foreign country if they can establish a ‘reasonable expectation’ they would have otherwise have been outside the United States.
The effect of the additional COVID-19 relief
The measures outlined in the two revenue procedures provide many taxpayers with greater certainty in determining the effect of COVID-19 on their 2019 and 2020 taxes. While they address the current COVID-19’s impact, uncertainties will continue to linger for some taxpayers.
- Will a 60-day exclusion be enough? Many U.S. cities and states are well into their second month of lockdown and it is unclear how long the restrictions on international travel will last at U.S. borders and overseas. Some individuals may find they are unable or unwilling to travel internationally until much later in the year as the measures to limit the transmission of the virus remain in place. Individuals who traveled to the United States in 2019 or early 2020 and cannot return home may find the 60-day exclusion is insufficient to prevent them becoming tax resident in the United States and subject to worldwide taxation.
- Practicality of compliance in the United States under lockdown: Where individuals are required to file U.S. tax returns or Form 8233, particularly for the first time, they are required to obtain a U.S. Taxpayer Identification Number (TIN) if they are not eligible for a Social Security Number. Ordinarily this may be obtained when filing a tax return in person at an IRS Taxpayer Assistance Center, which are not open where lockdown requirements exist. As such, taxpayers may face difficulty in obtaining a TIN to meet their compliance obligations or face extended delays due to increased IRS processing times.
- Interaction with foreign country measures: Since the onset of COVID-19, an unprecedented wave of new tax regulations internationally have been announced to mitigate the impact on internationally mobile employees. While positive, there is potential that not all new provisions align or that unexpected scenarios may occur. Individuals who have returned from China, for example, may still find income deemed taxable there by the authorities, as well as in the United States, requiring close attention to mitigate double taxation issues.
- Availability of double tax treaty relief: Foreign countries will have domestic interpretations of treaties such that not all individuals may be able to benefit from relief provisions.
- Individuals present in the United States from non-treaty countries: The United States, like other countries, has announced relief that mitigates tax residency but not the calculation of taxable income. Individuals who remain present in the country who are from countries where the United States does not have a double tax treaty, such as Brazil and Singapore, may find their tax burden increased alongside their extended stay in the United States.
The measures will be welcomed by internationally mobile taxpayers in providing some clarity in managing their U.S. taxes. Individuals should review how these might apply to their specific circumstances and monitor future announcements from the IRS for additional developments.
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