On April 21, 2020, the U.S. Treasury Department and the Internal Revenue Service released three forms of guidance directed at non-U.S. individuals and non-U.S. businesses affected by travel disruptions arising from the COVID-19 emergency. This client alert summarizes the recent guidance and provides our initial observations. For our previous alert where we outlined the potential U.S. tax implications of being unable to leave the U.S., see Coronavirus and the Unintended Consequences of Travel Restrictions for Foreign Individuals.
1. Relief for Non-U.S. Individuals
a. Relief Provided
Revenue Procedure 2020-20 allows certain non-U.S. citizens to exclude days of physical presence in the U.S. More specifically, under the "COVID-19 Medical Condition Travel Exception," an "Eligible Individual" who intended to leave the U.S. during such individual's "COVID-19 Emergency Period" but who was unable to do so due to "COVID-19 Emergency Travel Disruptions" may exclude up to 60 consecutive days of physical presence in the U.S. for purposes of: (i) applying the substantial presence test; and (ii) determining whether an individual qualifies for tax treaty benefits for income from personal services performed in the United States.
An Eligible Individual is defined as any individual who:
An individual's COVID-19 Emergency Period is defined as a single period of up to 60 consecutive days that begins on a date that is on or after February 1, 2020, and on or before April 1, 2020, and during which the individual is physically present in the U.S. on each day. The starting date for the COVID-19 Emergency Period is selected by the individual.
As for what constitutes a COVID-19 Emergency Travel Disruption, the Rev. Proc. is clear that an individual does not actually have to be infected with the virus to be eligible for relief, and that relief can also apply to those individuals who actually can travel, but who may feel unsafe doing so as a result of social distancing guidelines and other precautions necessitated by the COVD-19 pandemic.
Additionally, for purposes of the Rev. Proc., an Eligible Individual will be generally presumed to have intended to the leave the U.S. on any day during the individual's COVID-19 Emergency Period, and, likewise, also will be presumed to have been unable to leave the U.S. during the individual's COVID-19 Emergency Period.
To claim the COVID-19 Medical Condition Travel Exception, an Eligible Individual who is required to file U.S. IRS Form 1040-NR must attach IRS Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, to his or her Form 1040-NR. Both forms must be filed on time, including any applicable extensions. Individuals who are not required to file a Form 1040-NR must retain all relevant records to support reliance on the COVID-19 Medical Condition Travel Exception and be prepared to produce those records and complete IRS Form 8843 if requested by the IRS.
The guidance also provides relief to non-U.S. individuals that otherwise would have been eligible for certain income tax treaty benefits that would have given primary taxing jurisdiction to the treaty country over income from personal services performed in the U.S. A similar single 60-day period may be selected by an individual starting on or after February 1, 2020, and on or before April 1, 2020, and may not be counted for the purpose of the 183-day rule for determining the availability of such treaty benefits.
The guidance is well received in light of the real-world issues presented by the COVID-19 crisis. The Rev. Proc. is a welcome approach from Treasury and the IRS, who have historically interpreted the normal medical condition exception narrowly. Additionally, by providing eligible taxpayers with a blanket 60-day exclusion (provided all requirements are met), the new exception represents a simple and administratively efficient solution.
One particularly important item made clear by the guidance is that an Eligible Individual does not have to actually be sick to get the benefit of relief, something that has remained uncertain when applying the broader medical condition exception that exists outside of the specific COVID-19 relief measures. The guidance also makes clear that claiming the COVID-19 Medical Condition does not affect an individual's ability to claim other exceptions to the substantial presence test, such as the "closer connection exception."
Additionally, while the individual gets the benefit of effectively choosing when the 60-day period begins during the February 1-April 1, 2020 period, it is crucial that the individual remain physically present in the U.S. for each day during the period. One thing not explicitly stated, however, is what records will be considered sufficient by the IRS in order to prove that the individual was, in fact, continuously present in the U.S. for the 60 days. As a starting point, individuals intending to rely on the Rev. Proc. may consider utilizing the U.S. Customs and Border Protection I-94 Travel Website, which logs an individual's arrivals and departures into, and out of, the U.S. We caution, however, that in our experience, this website is not always 100% accurate, and, therefore, care should be taken to preserve other methods of proof of U.S. physical presence.
While the relief is most certainly a welcome start, perhaps the main question is whether such relief will be extended beyond the defined 60 day period. While not specified in the guidance, the Treasury Department and the IRS have stated that they continue to monitor these and other issues related to COVID-19, so there is an indication that the IRS will at least consider extending the relief if there is a readily apparent need.
Although the Rev. Proc. contains some broad presumptions that are taxpayer-friendly, non-U.S. citizen individuals should keep in mind that there are restrictions imposed on eligibility, which are perhaps just as broad. For example, U.S. resident status in 2019, whether due to holding a green card or due to U.S. day count, precludes an individual from relief under the Rev. Proc. It is not entirely clear from a policy perspective why, at least in the case of the substantial presence test, U.S. federal tax residency in 2019 automatically precludes relief in 2020. Additionally, getting a U.S. green card at any point in 2020, or even starting the process, can preclude any chance of receiving relief under the Rev. Proc. It is also unclear if an individual who took a position that he or she was not a U.S. federal income tax resident under an income tax treaty "tie-breaker" provision would still be treated as a U.S. federal income tax resident and ineligible for this relief.
Of course, as with any guidance, questions remain, and the effects on individuals and businesses not squarely within the specifications of the Rev. Proc. remain unclear. For instance, the personal services relief only applies to non-U.S. individuals who would be eligible for the provision in most treaties. Given that the U.S. has an income tax treaty with only two Latin American countries, there may be many individuals currently present in Miami who do not have the benefit of relying on any such treaty.
Additionally, the exclusion of days does not apply for any purposes other than those set forth in the Rev. Proc. Thus, non-U.S. citizen individuals should keep in mind what unintended tax effects their extended presence in the U.S. might have, notwithstanding the relief provided under the Rev. Proc. (e.g., the taxation of U.S. source capital gains in the case of certain non-U.S. citizen individuals physically present in the U.S. for 183 days or more during the taxable year if such individual's tax home is in the U.S.).
2. U.S. Individual Taxpayers Working Abroad
a. Relief Provided
Under Revenue Procedure 2020-27, U.S. individual taxpayers who worked abroad and planned to claim the "foreign earned income exclusion" to exclude a portion of their foreign source earned income are also offered relief. Any U.S. individual taxpayer who left his or her foreign country of residence on or after February 1, 2020, but before July 15, 2020, will still be treated as a "qualified individual" for purposes of the foreign earned income exclusion provided such person establishes a reasonable expectation that he or she would have otherwise met the eligibility requirements for claiming the foreign earned income inclusion. Residents of China may be eligible for relief even if they left as early as December 1, 2019.
The foreign earned income exclusion guidance is helpful for those U.S. individual taxpayers who rely on the exclusion or plan to do so for part or all of 2020 for purposes of computing their U.S. federal income tax liability. While the Rev. Proc. confirms that the U.S. individual taxpayer will still be treated as a bona fide resident of the foreign country even if they are stuck in the U.S. as a result of COVD-19 travel disruptions, the income earned while in the U.S. cannot be excluded.
The Rev. Proc. only addresses one element of the foreign earned income exclusion rules, namely, the elements requiring bona fide residency or a certain amount of physical presence in the relevant country over a consecutive 12 month period. A U.S. individual taxpayer must also meet the other requirements of the foreign earned income exclusion, including the requirement that the individual’s tax home is in a foreign country. An individual’s tax home is generally his or her main place of business or employment, where the individual is engaged in business permanently or indefinitely, regardless of the location of his or her home in the traditional sense. Accordingly, analysis will still be required to determine an individual's ultimate eligibility for the foreign earned income inclusion.
3. Certain U.S. Business Activities for Non-U.S. Companies
a. Relief Provided
The IRS provided additional guidance in the form of Frequently Asked Questions ("FAQs") for certain non-U.S. citizen individuals and non-U.S. companies performing business activities in the U.S. A non-U.S. individual and a non-U.S. company may exclude an uninterrupted period of 60 days during which services were provided in the U.S. for purposes of determining whether the non-U.S. individual or non-U.S. company’s activities rise to the level of a U.S. trade business, or a permanent establishment in the case of a treaty country.
The FAQ’s do provide some clarity on how U.S. federal income tax and income tax treaty rules will apply in certain situations in which non-U.S. businesses and non-U.S. individuals working for non-U.S. businesses may find themselves as a result of COVID-19. While a non-U.S. individual's performance of services in the U.S. will not be deemed to be engaged in a U.S. trade or business during the COVID-19 Emergency Period, the FAQs do not address how such income earned should be taxed. In such case, the compensation income may still be subject to the 30% U.S. withholding tax regime absent the $3,000 de minimis exception or the availability of an income tax treaty. Non-U.S. individuals and non-U.S. companies need to bear in mind that FAQs, unlike a Rev. Proc., do not represent official guidance that can be relied upon generally for penalty relief. Accordingly, without further clarification, non-U.S. individuals performing services in the U.S. should discuss with their advisors their personal U.S. federal tax payment and reporting obligations, and non-U.S. companies should discuss with their advisors whether to file a protective U.S. tax return to preserve the ability to offset taxable income with deductible operating expenses.
While this guidance is certainly a step in the right direction in helping certain individuals and businesses deal with the unanticipated U.S. federal tax consequences of the COVID-19 pandemic, additional guidance will likely be necessary to clarify certain interpretational issues as well as address other issues not specifically covered by the guidance. It would also be helpful if the IRS extends the 60-day period. Non-U.S. individuals and non-U.S. companies who are not provided clarity by the guidance and continue to be in the U.S. should begin to consider how they may be affected and to consult with their advisors to address their potential U.S. federal tax payment and reporting obligations.
We will continue to monitor developments in this area as they occur.
This information is intended to inform our clients and other friends about legal developments, including recent decisions of various municipalities, legislative, and administrative bodies. Because of the rapidly changing landscape related to COVID-19, we intend to send out regular updates. The information we provide is not intended as legal advice and viewers/readers should not rely on information contained in these materials to make business or legal decisions. Before making any legal decisions, consult your lawyer. Please do not hesitate to contact us should you need assistance responding to the many issues which have arisen, and will continue to arise, out of this situation.