COVID-19 Travel Restrictions: US Tax Relief and Cross-Border Tax Considerations

Background

COVID-19 has left employee workforces separated from their country of assignment.  To continue operations, employers transitioned employees to work-from-home or other virtual work arrangements. Globally, tax authorities are considering how to address unintended corporate and individual tax consequences of displaced individuals physically present within a particular jurisdiction and those who are also performing business activities within such jurisdiction due to travel restrictions and stay-at-home orders.

Employer Considerations

When an employee performs their duties in a different jurisdiction, tax and other considerations are often implicated.[1]  Employers should monitor when their employees are unable to return to their home country and consider the tax consequences to the company when employees perform services outside of the company’s country of organization or tax residence, including:

• Possible income tax, withholding tax, or employment tax liability in the jurisdiction in which the employee is unable to depart.
• Inadvertent creation of a taxable presence or permanent establishment in the jurisdiction in which an employee is unable to depart.
• Changes to corporate tax residency, which impacts corporate tax liability, in jurisdictions that use a central management and control test to determine tax residency.
• Possible modifications to employee tax equalization payments due to changes in the employee’s tax residency.

US Tax Guidance

The US Treasury and the Internal Revenue Service recognized that the global outbreak of the COVID-19 virus significantly limits the ability of individuals to leave the United States[2] and recently issued guidance to address related US tax issues that arise.  In the United States, a myriad of US tax consequences – income tax liability, reporting and withholding obligations – can occur when a nonresident individual is present in the United States for certain periods or an employee of a foreign corporation works on behalf of the company while in the United States. For instance, a nonresident alien who is physically present in the United States for a sufficient period of time could become a US taxpayer by reason of the substantial presence test (“SPT”). To ameliorate unplanned US tax consequences due to travel restrictions caused by the COVID-19 crisis, nonresidents unable to leave the United States are permitted to exclude, for purposes of the SPT, up to 60 consecutive days beginning on or after February 1, 2020 through April 30, 2020 (“60 day relief”).[3]  The same 60 day relief is provided to nonresident alien individuals, foreign corporations and partnerships in which either is a partner for purposes of determining whether an individual’s or employee’s work in the United States constitutes a US trade or business (“USTB”) or a US permanent establishment (“US PE”).[4]

Employers organized outside the United States should maintain records to establish a claim for 60 day relief and monitor or cap the number of days employees are physically working in the United States to manage risk of inadvertently creating a USTB or US PE for the company.[5]

The relief discussed above applies only for purposes of determining US federal income tax liability and reporting requirements.  US state and local tax issues are likely to arise from employees’ modified work locations due to the COVID-19 crisis.  Companies should also closely monitor these additional issues.[6]

[1] For additional discussion of international corporate tax issues that arise from the dislocation of employees please refer to our Legal Update: Key International Tax Issues Associated with Supply Chain Disruptions.

[2] Individuals have become severely restricted in their movements due to government orders across the world, which apply regardless of whether an individual is infected with COVID-19.  For example, individuals who do not have COVID-19 and attempt to travel may face canceled flights (or other transportation limitations), shelter-in-place orders, quarantines, and border closures, or they may feel unsafe traveling due to government recommendations to implement social distancing and limit exposure to public spaces.

[3] Rev. Proc. 2020-20; 2020-20 I.R.B. 1 (Apr. 21, 2020). While certainly welcome, it is presently unclear whether the 60 day period will be extended since many States remain under stay-at-home orders. IRS guidance clarifies that the 60 day relief may be combined with other available exceptions to the SPT, such as the medical emergency exception, which would further exclude days of presence in the United States to the extent that an individual is medically unable to leave the country.  The US Treasury and IRS stated they are monitoring these issues and will continue to post updated relief information.

[4] https://www.irs.gov/newsroom/information-for-nonresident-aliens-and-foreign-businesses-impacted-by-covid-19-travel-disruptions (last accessed Apr. 30, 2020).

[5] Foreign companies should consider the following to support a claim for 60 day relief:

US Documentation: Retain contemporaneous documentation to establish the 60 day (or less) period selected, and (b) maintain documentation that the business activities conducted by the individual temporarily present in the United States would not have been undertaken in the United States but for COVID-19 travel disruptions.

US Protective Filings:  Consider protectively filing US federal income tax returns, even if it is not believed filing for the 2020 tax year is not required because the company was not engaged in a USTB.  Protective filings may preserve deductions, statutes of limitations and treaty-based relief, should the IRS determine a USTB or US PE existed in 2020.

[6] We have previously discussed these issues in our Legal Update: Working with Distance: Tax Developments and Considerations at the State and Local Level Related to COVID-19. Currently, New Jersey, Pennsylvania, Minnesota, Indiana and Mississippi have released guidance on these issues.

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