International Taxes and the Immigration Impact of COVID-19

Klasko Immigration Law Partners, LLP
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[co-author: Patrick McCormick]

The unprecedented COVID-19 pandemic and the resulting closures of U.S. Embassy’s abroad have forced employers to consider new and creative working arrangements. Over the last few months, working remotely has become the “norm” and some employers have allowed key foreign national employees to begin critical assignments abroad, in the hopes that U.S. visa appointments would be forthcoming in the near future. While such arrangements may be feasible from an immigration perspective, they may create tax and/or benefit liabilities for unsuspecting employers. This article will address some critical immigration and tax concerns to consider in the COVID-19 era.

Unemployment Insurance & Cares Act Payments:

In order to be eligible to receive unemployment benefits, a foreign national must possess lawful work authorization and be eligible for benefits under applicable state law. In most states, those in H-1B or L-1 status would not be eligible for unemployment insurance, because their visa status renders them “not available for work.” Conversely, anyone with an EAD (including H-4s/L-2’s) would likely be deemed qualified, if otherwise eligible to receive benefits. Indeed, the terms of the principal H and L status only allow such workers to work for one employer. Once subject to layoff or termination, these employees would lose lawful work authorization and would likely not qualify for benefits. In the event of an employment separation, it is critical to consult with immigration counsel, as the impacted employee may be eligible for a sixty-day grace period to find new employment and may also need to consider filing a change of status application in order to maintain status in the U.S. and avoid the need to travel (if even possible) due to COVID-19 restrictions.

The CARES Act prohibits payment of a recovery rebate to anyone who does not include a social security number on their tax return for the taxable year. The Social Security Number requirement (which does not include “non-work” SSNs or ITINs) will include H-1B, L-1, etc. workers who filed a single status tax return (and possibly married filing separately). It will not include those applicants who filed jointly with an H-4/L-2 spouse who had to use an ITIN for the filing. The CARES Act also excludes “any nonresident alien individual” from receipt of recovery rebates. Under the Internal Revenue Code, a “nonresident alien” is any alien who is not a lawful permanent resident or who does not satisfy the “substantial presence test.” The substantial presence test requires one to be physically present in the U.S. on at least:

  1. 31 days during the current year, and
  2. 183 days during the 3-year period that includes the current year and the 2 prior years, counting:
    All the days you were present in the current year and the 2 preceding years, and
    1/3 of the days you were present in the first year before the current year, and
    1/6 of the days you were present in the second year before the current year.

Public Charge Considerations:

Thankfully, receipt of recovery rebate funds or unemployment compensation will not be factored into whether a foreign national is likely to become a “public charge” for immigration purposes. As unemployment compensation is considered to be an “earned benefit” it does not fall within the parameters of benefits subject to the public charge rule. Likewise, since recovery rebates do not fall within the confines of “public benefits,” they are also not subject to the rule. As such, foreign nationals eligible for either benefit may accept them without fear of any immigration impact.

COVID-19 Tax Considerations:

Tax considerations resulting from COVID-19 for multinationals (either U.S.-based taxpayers with foreign activities or foreign taxpayers with U.S. obligations), in some respects, mirror those of exclusively domestic taxpayers, such as whether or not tax return filing deadlines have changed. Other effects are more distinct, including whether relocated workers create permanent establishment concerns. A note of caution: tax guidance related to COVID-19 is evolving, with continuous guidance from the IRS and foreign taxing authorities.

Filing Requirements – On April 6, 2020, the IRS issued 2020-18 (superseding Notice 2020-17) announcing that taxpayers with federal income tax payments or returns originally due April 15, 2020, would receive an automatic postponement until July 15, 2020. For April 15 taxpayers who are required to file international information returns, Notice 2020-18 relief was largely curative, with most information return deadlines (i.e., any filed with a taxpayer’s income tax return) automatically extended as well. Significant 2019 tax filing gaps remained after Notice 2020-18 in the multinational context: nonresidents with June 15 deadlines were given no relief, and some information filing requirements (specifically, Forms 3520 and 3520-A) were unaffected by the notice’s terms.

Notice 2020-18 was augmented significantly by Notice 2020-23 (released April 9, 2020). Per Notice 2020-23, any taxpayer (domestic or foreign) with a tax payment or tax filing obligation due between April 1, 2020, and July 15, 2020, are automatically postponed until July 15, 2020. Relief granted under Notice 2020-23 explicitly includes Form 3520. Taxpayers with installment payments due under Section 965(h) also receive an extension. Given their inclusion within the designated relief timeframe, June 15 filers are provided an extension (whether filing on June 15 based on residence outside the United States or by virtue of nonresident alien classification).

Compliance Effects – Most compliance relief for multinationals comes from application of relief available for all taxpayers. As an example, nonresident individuals required to file U.S. tax returns generally are required to file by June 15. However, nonresidents with income subject to U.S. wage withholding (wages for personal services performed in the United States) must file by April 15. (See 26 C.F.R. Section 1.1441-4(b)(1); Rev. Rul. 92-106)

Nonresidents are subject to the same rules for tax refunds as residents – claims for a refund must be filed by the later of three years from filing of the return or two years from tax payment. (26 U.S.C. Section 6511(a).) While nonresidents are not the only taxpayers who file amended returns to claim refunds, they nonetheless are more likely to amend their returns given the complexity of U.S. tax rules applicable to them and the likelihood that their returns will initially be completed suboptimally due to lack of familiarity with American tax practices.

Notice 2020-23 provides relief to taxpayers whose Section 6511 filing deadlines fall within the April 1-July 15, 2020, covered period (primarily impacting taxpayers’ 2016 tax filings). Section III.C of Notice 2020-23 provides an automatic extension of time until July 15, 2020, for “specified time-sensitive actions” (amendments of tax returns, filing petitions with Tax Court, and associated taxpayer actions).

Importantly, IRS notices have not to date addressed how individuals forced to stay within the United States involuntarily (i.e., through travel restrictions) will be treated for tax residency purposes. Statutorily, an individual may be classified as a U.S. resident for income tax purposes if she spends at least 31 days in the current year in the United States and the sum of days spent in the United States over the last three years exceeds 183. (See 26 U.S.C. Section 7701(b)(3)) Unanticipated extended stays in the United States increase the likelihood of the substantial presence test being met. Exceptions can be used to combat tax residency classification, which may ultimately be the most feasible option to avoid residency given the current COVID-19 crisis.

State tax considerations can arise in similar circumstances (where, for example, an employee of a Pennsylvania company normally working within the state who works remotely from Delaware for the duration of COVID-19). Many states maintain that, where a remote employee establishes a regular place of business within the state (by primarily working from that state), additional tax obligations exist in the state of residence. Will an employee who, for example, worked one day a week from home for years works most of her days from home in 2020 be treated an establishing a regular place of business, or will carve-outs apply? Tax rules associated with remote employees are state-specific, and COVID-19 alterations to those rules will be state-specific as well (adding an additional layer of uncertainty to tax implications).

Permanent Establishment Concerns – A much-discussed consideration in the multinational context is the risk that displaced workers will create a tax nexus in a new jurisdiction. As brief background, nonresident business entities are subject to U.S. tax on fixed or determinable income sourced to the United States (FDAP income) and income effectively connected to the nonresident’s “United States trade or business.” (See 26 U.S.C. Section 871; 26 U.S.C. Section 881) The latter is a more expansive category – incorporating both FDAP income and income items falling outside the FDAP category (capital gains associated with the trade or business, inventory items, and certain foreign-sourced income).

U.S. trade or business assessment focuses on whether a nonresident is engaged in U. S. activities that are regular, continuous, and substantial. (See U.S. v. Balanovski, 236 F.2d 298 (2d Cir. 1956); U.S. v. Northumberland Insurance Company, 521 F.Supp. 70 (DNJ 1981)) Where a nonresident business is based in a country with which the United States maintains a tax treaty, evaluation shifts (typically) to whether business profits are attributable to a U.S. permanent establishment. (See United States Model Income Tax Convention, Arts. 5 and 7)

Permanent establishments normally must have distinct physical aspects. Offices are explicitly included within the permanent establishment concept. (See United States Model Income Tax Convention, Art. 5; OECD Model Treaty Commentary) Permanent establishments can be mere space at the disposal of a nonresident business; however, some geographic location or place is required. Mere availability of physical space in a jurisdiction is normally insufficient for a permanent establishment; however, where physical space is used (directly or indirectly) to generate significant income for a business enterprise, risk of a permanent establishment results from that physical space.

Risk of permanent establishment/trade or business creation from relocated employee’s centers upon use of new office space within the United States. Whether office space is sufficient to constitute a permanent establishment/trade or business is fact-specific, but where this level of connection exists, U.S. tax scope expands significantly. An office will not automatically create overarching tax; a U.S. office of a nonresident business enterprise will not create a permanent establishment where only auxiliary or preparatory activities occur in the United States. Elevation of standards in this context between a “trade or business” and “permanent establishment” are noteworthy, given the permanence requirement associated with the latter.

From an immigration view, U.S. permanent resident employees must also take steps to preserve their “green card” status, if working abroad for a substantial period of time. Prior to accepting such an assignment, a a re-entry permit may need to be secured to ensure maintenance of permanent resident status. In sum, there are critical immigration and tax implications that have been brough to the forefront during COVID-19. Careful planning is essential to ensure that companies can make informed workforce planning decisions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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