April 23, 2020 IRS provides relief for potential tax consequences caused by COVID-19 travel restrictions The IRS has issued two revenue procedures and frequently asked questions (FAQs) that provide guidance to certain individuals and companies affected by the international travel restrictions imposed under the COVID-19 emergency. The FAQs provide relief for certain business activities conducted in the United States that could otherwise create a taxable presence or permanent establishment (PE) in the United States. Revenue Procedure 2020-20 provides relief to certain nonresident individuals who, but for the COVID-19 travel restrictions, would not have been in the United States long enough in 2020 to be considered resident aliens under the substantial-presence test of IRC Section 7701(b)(3). Revenue Procedure 2020-27 provides that a US citizen or resident who left China on or after December 1, 2019, or another foreign country on or after February 1, 2020, will be treated as a qualified individual with respect to the period during which the individual was present in, or was a bona fide resident of, that foreign country if the individual establishes a reasonable expectation that he/she would have met the requirements of IRC Section 911(d)(1) absent the COVID-19 emergency. FAQs The FAQs provide relief for certain US business activities conducted by a nonresident alien or foreign corporation when the activities were only conducted in the United States due to the COVID-19 emergency. The FAQs state that the activities will not be taken into account for a period of up to 60 consecutive calendar days beginning on or after February 1, 2020, and on or before April 1, 2020 (COVID-19 Emergency Period) for purposes of determining whether the individual or entity is engaged in a US trade or business or has a US permanent establishment. The activities must have been performed by one or more individuals temporarily present in the United States who would otherwise not have performed them in the United States but for COVID-19-related travel disruptions. The FAQs provide that "an individual temporarily present in the United States" means an individual who is present in the United States during the COVID-19 Emergency Period and who is a nonresident alien, or a US citizen or lawful permanent resident who had a tax home as defined in IRC Section 911(d)(3) outside the United States in 2019 and reasonably expects to have a tax home outside the United States in 2020. Affected individuals should retain contemporaneous documentation on the period chosen as the COVID-19 Emergency Period. Revenue Procedure 2020-20 Revenue Procedure 2020-20 notes that many foreign travelers who intended to leave the United States as the COVID-19 emergency arose were unable to leave due to severe travel restrictions. Under IRC Section 7701(b), defining resident and nonresident alien individuals for purposes of the Code, an alien individual who is not a lawful permanent resident but meets the substantial-presence test for a calendar year is generally treated as a US resident for the year at issue. The substantial-presence test looks at whether the individual was present in the United States for at least 31 days during the tested calendar year and the sum of (1) the number of days in the United States during the tested calendar year, (2) 1/3 of the number of days of presence in the preceding calendar year, and (3) 1/6 of the number of days of presence in the year before the preceding calendar year (i.e., two years ago), totals at least 183. In making this computation, an alien individual may exclude certain days of presence in the United States, including if the person qualifies for a Medical Condition Exception, which the revenue procedure defines as an exception for days that the individual had intended to leave the United States but was unable to do so because a medical condition arose while the individual was in the United States that prevented the individual from departing. Similarly, under US income tax treaties, days that an alien individual spends in the United States due to an illness that prevents the person from timely leaving, are not counted in determining the availability of treaty benefits with respect to income from dependent personal services performed in the United States. Revenue Procedure 2020-20 defines certain terms for purposes of the guidance:
Applying the COVID-19 Medical Condition Travel Exception. Under the guidance, an eligible individual who planned to leave the United States during the individual's COVID-19 Emergency Period but was prevented from doing so due to COVID-19 Emergency Travel Disruptions may exclude up to 60 days during the individual's COVID-19 Emergency Period for purposes of applying the substantial-presence test. For purposes of Revenue Procedure 2020-20, an eligible individual is presumed to have intended to leave the United States on any day during the individual's COVID-19 Emergency Period, unless the individual has applied or taken steps to apply to become a permanent US resident. To claim the Medical Condition Exception, an individual generally must file Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, by the due date for filing Form 1040-NR, with extensions. Individuals who are not required to file a Form 1040-NR are not required to file a Form 8843 but should retain all relevant records to support their reliance on Revenue Procedure 2020-20 and be prepared to produce the records and a Form 8843 if the IRS requests the documents. The revenue procedure provides detailed instructions for completing the Form 8843 to claim the COVID-19 Medical Condition Travel Exception. Eligible individuals who are required to file Form 8843 with their Form 1040-NR but neglect to do so may be eligible for procedural relief provided under Treas. Reg. Section 301.7701(b)-8(d)(2) or 301.7701(b)-8(e). Claiming a treaty benefit for services income. An individual who wants to claim an exemption from withholding on income from dependent personal services under a US income tax treaty in accordance with Revenue Procedure 2020-20 should provide his employer or other withholding agent with a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, to certify that the income is exempt. Line 14 of Form 8233 should state "COVID-19 MEDICAL CONDITION TRAVEL EXCEPTION" and specify the individual's COVID-19 Emergency Period. Revenue Procedure 2020-27 Revenue Procedure 2020-27 provides a waiver to any US citizen or resident living abroad who reasonably expected to meet the eligibility requirements under IRC Section 911(d)(1) during 2019 or 2020 but failed to do so because the person departed China on or after December 1, 2019, or another foreign country on or after February 1, 2020, but on or before July 15, 2020. IRC Section 911(a) allows a "qualified individual" to elect to exclude from gross income the individual's foreign earned income and a housing cost amount. A "qualified individual" under IRC Section 911(d)(1) is a US citizen who has been a bona fide resident of a foreign country or countries for an uninterrupted period of time that includes an entire tax year or a US resident or citizen who during any period of 12 consecutive months is abroad for at least 330 full days. An individual is a qualified individual under IRC Section 911(d)(4) for the period in which the person was a bona fide resident of or was present in a foreign country if the individual left the country during a period for which the Treasury Secretary, after consulting with the Secretary of State, determines that individuals were required to leave because of war, civil unrest, or similar conditions. For 2019 and 2020, the COVID-19 emergency constitutes an adverse condition that precluded the normal conduct of business for purposes of IRC Section 911(d)(4). Accordingly, Revenue Procedure 2020-27 provides relief for US citizens and residents by treating US citizens and residents as satisfying the time period requirements of IRC Section 911 if:
The relief expires as of July 15, 2020, unless it is extended. Implications FAQs The creation of a US trade or business or a PE may result in tax obligations in the United States that a foreign person might not otherwise have. The FAQs provide some relief in that they allow foreign persons to carry on a certain degree of US business activity, within a prescribed period, and not inadvertently create a US trade or business or, for treaty residents, a PE. Affected persons should retain contemporaneous documentation to establish the chosen COVID-19 Emergency Period and that the relevant activities would not have been otherwise performed in the United States. They may also consider filing protective returns, even if they believe they were not engaged in a US trade or business in 2020, to preserve benefits and protections such as statutes of limitations, deductions, and the ability to claim treaty-based relief. Revenue Procedure 2020-20 Becoming a US tax resident can have a significant cost for a nonresident alien, especially where a nonresident alien inadvertently becomes a US resident due to increased days of physical presence in the United States because of the COVID-19 emergency. For individuals who count their days to determine residency under the substantial-presence test, Revenue Procedure 2020-20 affords the ability to exclude 60 consecutive days, starting during the period of February 1, 2020 to April 1, 2020 (the individual's COVID-19 Emergency Period) and claim the COVID-19 Medical Condition Travel Exception. The individual must have been a nonresident for 2019 to take advantage of this procedure; in some circumstances, additional thought should now occur on the implications of an individual filing as a resident or nonresident in 2019, where both options are available. Some taxpayers will need to affirmatively file Form 8843 in order to gain the COVID-19 Medical Condition Travel Exception from the substantial-presence test during the individual's COVID-19 Emergency Period. The Form 8843 filed for this purpose will not require a physician's statement, which is very helpful. Other taxpayers who do not meet the substantial presence test for 2020 may not be required to file a US nonresident income tax return, Form 1040-NR, and consequently Form 8843. However, these taxpayers should keep records of the exclusion of their days because the 2020 days could be relevant for calculating the number of days under the substantial presence test, which requires a day count over a three-year period. In addition, some individuals who have developed a medical condition can still qualify for relief from the substantial presence test's day count rules and submit Form 8843 to exclude days when the individual is too sick to leave the United States, with a physician's note. This provision may afford greater day count relief for individuals who have become sick, compared to the revenue procedure's 60-day individual COVID-19 Emergency Period. The standard relief offered by relevant US income tax treaties and the "closer connection" exception, where an individual meets the substantial presence test, but is in the United States for less than 183 days in the current tax year and has a tax home in another country, still applies. Note that the closer connection days unfortunately still include the individual's COVID-19 Emergency Period days, as the COVID-19 Emergency Period days only exclude days for purposes of the substantial-presence test. As such, for those who rely on the closer connection exception, vigilance on day count is still needed. Issues related to claiming the closer connection exception are likely to be some of the most complex for taxpayers and their advisors. Since an individual can still meet the substantial-presence test based on other days that they spend in the United States outside of the individual's COVID-19 Emergency Period, day count remains important for taxpayers, and this revenue procedure should not be viewed as total relief for year 2020, but narrow relief related to a window of days, the individual's COVID-19 Emergency Period. Revenue Procedure 2020-27 Due to the COVID-19 emergency, individuals who may have otherwise met the timing requirements for being a qualified individual in 2019 or 2020 might not satisfy such requirements for the relevant tax year because they had to leave the foreign countries where they were working. As a result, they would not be able to claim exclusions for foreign earned income and housing costs for the number of days in 2019 or 2020 that they were bona residents of, or present in, the foreign country before leaving. The relief provided by Revenue Procedure 2020-27 enables these individuals to claim the foreign earned income and housing costs exclusions only for the number of days in 2019 or 2020 that they were actually bona fide residents of, or present in, a foreign country. Note that once the individual has returned to the United States, the individual cannot claim the IRC Section 911 exclusions for income from services performed in the United States or housing costs in the United States paid by their employer during the rest of the relevant tax year. ———————————————
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