The COVID-19 epidemic has resulted in travel restrictions around the globe, and many individuals find themselves stranded outside of the jurisdiction in which they usually work. While individuals may be able to work remotely, this remote work raises tax considerations for their employers, such as whether the employee is now considered a resident of a different jurisdiction, whether the employee’s presence in different jurisdiction has created a permanent establishment (PE) in that jurisdiction with respect to the employer, and whether a U.S. resident employee who was removed from a non-U.S. jurisdiction is nonetheless able to claim the section foreign earned income exclusion (section 911).
On April 20, the Internal Revenue Service (IRS) issued guidance on these issues in Rev. Proc. 2020-20 and Rev. Proc. 2020-27. The IRS also published FAQs, which grants some tax relief to non-resident aliens and foreign corporations conducting business in the U.S. due to COVID-19 travel restrictions.
FAQs
The IRS published two FAQs that waive application of U.S. tax on the U.S. trade or business (USTB) income of nonresident aliens and foreign corporations which, but for “COVID-19 Emergency Travel Disruptions,” would not usually conduct business in the United States. “COVID-19 Emergency Travel Disruptions” is defined broadly to include “canceled flights and disruptions in other forms of transportation, shelter-in-place orders, quarantines, and border closures, or [feeling that it is] unsafe [to travel] during the COVID-19 Emergency due to recommendations to implement social distancing and limit exposure to public spaces.”
The first FAQ allows a nonresident alien, foreign corporation, or a partnership to choose an uninterrupted period of up to 60 calendar days, commencing during the COVID-19 Emergency Period (defined below), during which activities conducted in the U.S. will not be considered in determining whether the nonresident alien or foreign corporation is engaged in a USTB, provided that such activities were performed by individuals temporarily present in the United States who would not have performed the activities in the United States aside from the COVID-19 travel restrictions.
The second FAQ provides that for a nonresident alien or foreign corporation engaged in a USTB, but that did not have a PE in the United States, any services performed by individuals temporarily present in the United States due to COVID-19 related travel restrictions will not be considered in determining whether the nonresident alien or foreign corporation has a PE for the duration of the individual’s 60-day period of choice during the COVID-19 Emergency Period (defined below).
| Eversheds Sutherland Observation: This guidance was issued in the form of FAQs, unlike the revenue procedures discussed below. FAQs are not subject to section 7805, so they may be changed at any time with retroactive effect. They also do not constitute “substantial authority” for purposes of Treas. Reg. § 1.6662-4. |
Affected nonresident aliens and entities should retain documentary evidence that the activities conducted by individuals temporarily present in the United States during the COVID-19 Emergency Period would not have been undertaken in the United States but for COVID-19 emergency travel disruptions.
The FAQs also provide that, in order to take advantage of certain benefits and protections, nonresident aliens and foreign corporations (including those that are partners in partnerships) may make protective filings of their annual U.S. tax returns, even if they believe they are not required to file for the 2020 tax year.
Rev Proc. 2020-20 – COVID-19 60-Day Emergency Period
Under normal circumstances, nonresident aliens who are present in the United States for a certain length of time, generally 183 days within one calendar year or a total of 183 days over the current year and a fraction of the days in the two preceding years, may become residents of the United States under the substantial presence test. Rev. Proc. 2020-20 allows nonresident aliens who are present in the United States due to COVID-19 related travel restrictions to exclude from application of the substantial presence test, a 60-day period of the person’s choice between February 1, 2020 and April 1, 2020 (termed the COVID-19 Emergency Period). In other words, this 60-day period will not count toward the length of time the individual is present in the United States for purposes of the substantial presence test.
Eversheds Sutherland Observation: The IRS definition of the COVID-19 Emergency Period does not conform to either the nationwide Emergency declared on March 13th, retroactive to January 20th and continuing, or the major disaster declared for each state and territory, all of which are also retroactive to January 20th and continuing.
This guidance, as well as the FAQs discussed above, is generally consistent with guidance issued by the Organisation for Economic Co-operation and Development (OECD). Generally, the OECD guidance provided that an individual’s temporary presence in a jurisdiction related to COVID-19 is unlikely to affect the individual’s place of residency for tax purposes and that an employee’s presence in a jurisdiction due to COVID-19 generally should not result in a PE for his/her employer. For a discussion of the OECD’s guidance on this topic see our prior Legal Alert. |
To qualify for this exception, the individual must provide its employer, or other withholding agent, with Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, by the due date for Form 1040-NR. On line 17a of the form, the individual must write, “COVID-19 MEDICAL CONDITION TRAVEL EXCEPTION,” and include the individual’s 60-day period on line 17b. The individual should also retain a copy of the form and documentation demonstrating that the individual was physically present in the United States during all of the individual’s COVID-19 Emergency Period.
| Eversheds Sutherland Observation: A helpful method of documentation as to the actual days in the United States would be the Form I-94 website where an individual’s travel history with respect to the United States may be found. We understand that the Department of Treasury (Treasury) and IRS may provide further guidance as to the documentation. |
If, however, the claim is for an exemption from withholding on services income subject to a treaty, the Eligible Individual should provide the employer with a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, certifying that the income is exempt. The Form 8233 should include “COVID-19 MEDICAL CONDITION TRAVEL EXCEPTION” and specify the individual’s COVID-19 Emergency Period.
Rev. Proc. 2020-20 also notes that the COVID-19 emergency will not be treated as a pre-existing medical condition under Treas. Reg. § 301.7701(b)-3(c), which provides that an individual will not be considered present in the United States if the person is unable to leave due to a medical condition or problem that arose while the individual was present in the United States. The exception does not apply for pre-existing medical conditions. In other words, an individual who is present in the United States, and becomes sick during that time, may qualify for the exception, and to claim the exception, an individual should file Form 8843.
| Eversheds Sutherland Observation: An individual may claim both the travel exception and the medical condition exception, and the individual’s 60-day period may not entirely overlap with the period for which the medical condition exception is claimed. To claim the medical condition exception outside of the 60-day period, an individual should file Form 8843. Employers should of course review each form to ensure that the form is properly completed and then retain each form consistent with applicable document retention requirements of the employer.
Even with the guidance in Rev. Proc. 2020-20, there are open questions as to the scope of the medical exception. For example, questions remain as to whether the exception may only be claimed by an individual with a medical condition or whether a caretaker for that individual may also claim the exception. Rev. Proc. 2020-20 and the existing treasury regulations are not clear on the intended scope, and interested parties have informed Treasury of this and other issues and requested clarifying guidance.
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Rev. Proc. 2020-27 – Section 911 Exclusion
Section 911(a) of the Code allows US citizens who reside abroad to exclude the individual’s foreign earned income and housing cost amount from his/her gross income if the person can show that he/she has been a bona fide resident of a foreign country for an uninterrupted period that includes an entire taxable year or citizens or residents of the United States who are present in a foreign country for at least 330 days in a 12-month period.
Rev. Proc. 2020-27 provides that if a person had established residence in a foreign jurisdiction, or in other words qualified for section 911, and then left the foreign jurisdiction during a certain period due to the COVID-19 epidemic, that person will nonetheless continue to be eligible under section 911 for a specific period. For the People’s Republic of China, this period is between December 1, 2019, and July 15, 2020. For the rest of the world, this period is between February 1, 2020, and July 15, 2020. However, the July date may be extended by the Treasury Department and the IRS.
| Eversheds Sutherland Observation: An employee who expects to claim the section 911 exclusion may provide the employer a Form 673 so that the employer will not withhold any employment taxes. Rev. Proc. 2020-27 does not address whether any additional documentation (including a new Form 673) should be provided to reflect the changed circumstances. It might be reasonable to request a revised Form 673 to reflect the employee’s changed circumstances and reliance on Rev. Proc. 2020-27. |
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