Travel restrictions: Tax consequences & compliance obligations

Implications for Individuals

• Within the U.S., individuals stranded in a state due to stay-at-home orders may trigger residency rules in a state, giving rise to unforeseen state income tax liabilities and compliance obligations.
• Foreign individuals stuck in the U.S. could inadvertently meet the requirements for U.S. tax residency, triggering unexpected U.S. federal income tax consequences for 2020 or subsequent years.
• Similarly, U.S. residents and citizens trapped overseas could be considered tax residents of another country, again with potential negative tax consequences.

Implications for Businesses

• Within the U.S., businesses that otherwise would not have been considered to have a tax nexus in a particular state might trigger nexus requirement due to employees working remotely.
• Foreign businesses with employees who have been working in the United States because of travel restrictions or medical conditions could be considered a U.S. trade or business or U.S. permanent establishment (depending on whether a treaty is applicable), potentially triggering U.S. income tax filing obligations and perhaps income tax liabilities as well.
• Similar permanent establishment concerns arise overseas, where a U.S. business might be considered to have a permanent establishment in a jurisdiction where it never previously had a taxable presence.
• Transfer pricing analysis for some businesses may depend on individual employees being in a given location for a certain amount of time. Remote work could impact the transfer pricing analysis and thus the profit flows.

Government Responses

A number of countries and U.S. states have issued guidance addressing the above concerns in light of current emergency situations; the OECD has also issued guidance applicable to interpretation of double tax treaties. But each government is taking a different approach to these issues, and some of the relief is triggered on additional compliance obligations. As a result, there is no single answer to the question of what types of income tax and compliance obligations are created as a result of employees working remotely, and each individual situation and each business needs to be analyzed separately.

Mazars Insight

Businesses with employees that are working in a jurisdiction other than their usual place of business (whether cross-border or within the U.S.) should be in touch with their Mazars advisor to determine whether there are any filing obligations that need to be met and any steps that can or should be taken to mitigate risk.

Clients who have been stranded due to COVID-19 travel or medical restrictions should be in touch with their Mazars advisor about their individual circumstances.

Below summarizes some of the relief countries and states have issued to date.

U.S. Federal Relief

On April 21, Treasury and the IRS released guidance on three topics related to the interaction of residency requirements and COVID-19 medical and travel restrictions:

• Under Revenue Procedure 2020-20, individuals who intended to leave the U.S. during what’s defined as the “COVID-19 Emergency Period,” but were unable to do so due to COVID-19 emergency travel disruptions, can exclude up to 60 days of presence in the U.S. for purposes of applying the substantial presence test used to determine residency under section 7701(b). Under the Revenue Procedure, the COVID-19 emergency is considered a medical condition for purposes of Reg. § 301.7701(b)-3(c).

The relief granted by the Revenue Procedure is limited: it only applies to individuals who weren’t U.S. residents at the end of the 2019 tax year, weren’t lawful permanent residents at any point in 2020, and don’t become U.S. residents in 2020 because of days of presence in the U.S. outside of their specified Emergency Period. This Emergency Period is also restricted to a single period of up to 60 consecutive days starting on or after February 1, 2020 and on or before April 1, 2020 during which the individual is physically present in the U.S. on each day.

Eligible individuals who are required to file Form 1040-NR for 2020 can claim the COVID-19 exception by attaching Form 8843 to their Form 1040-NR. The Revenue Procedure also provides rules for how to claim an exemption from withholding on income from dependent personal services.

Mazars Insight

It is possible, but uncertain, whether the 60 day limit on the relief specified in the Revenue Procedure may be extended if lockdowns continue.

• In Revenue Procedure 2020-27, Treasury provided a waiver of the time requirements of section 911(d)(1) for 2019 and 2020, applicable to individuals who reasonably expected to meet the eligibility requirements of that section but failed to do so for reasons related to COVID-19 travel bans. This waiver will allow individuals to meet the bona fide residence test or the physical presence test if they need to leave a foreign country due to the COVID-19 Emergency.

For 2019 and 2020, Treasury has determined that the COVID-19 Emergency is an adverse condition that precluded the normal conduct of business:

– In the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China) as of December 1, 2019; and

– Globally as of February 1, 2020

The period covered by Revenue Procedure 2020-27 ends on July 15, 2020, unless an extension is announced by the Treasury and IRS.

For example, an individual who left China on or after December 1, 2019, or another foreign country on or after February 1, 2020, but on or before July 15, 2020, will be treated as a qualified individual with respect to the period during which that individual was present, in, or was a bona fide resident of, that foreign country, provided the individual establishes a reasonable expectation that he or she would have met the requirements of section 911(d)(1) but for the COVID-19 Emergency.

• In a series of FAQs, the IRS said that businesses and nonresident aliens can choose an uninterrupted period of up to 60 days during the COVID-19 Emergency Period (which begins on or after February 1 and on or before April 1, 2020) during which activities conducted in the United States won’t be taken into account in determining whether their activities have given rise to a U.S. trade or business (or a permanent establishment (“PE”), if a treaty applies). The rule only applies to the extent that these activities were performed by individuals temporarily present in the U.S. and would not have been performed in the U.S. but for COVID-19 travel disruptions.

OECD Guidance

The OECD has published guidance as to the interpretation of treaty PE standards for situations caused by the pandemic. This guidance provides that exceptional and temporary changes in the location where employees exercise their employment, such as working from home, shouldn’t create new PEs for the employer. The same principle applies to the temporary conclusion of contracts in the homes of employees or agents because of the COVID-19 crisis.

The OECD guidance also says that it is unlikely that the changes in where employees are working due to the COVID-19 situation will create changes to an entity’s residence status under a tax treaty. As a general matter, the guidelines say that it’s unlikely that the COVID-19 situation will affect individuals’ treaty residence positions.

Other Countries

The OECD guidelines are not self-implementing, not all countries have issued guidance on point, and the ones that have, have not taken consistent positions.  For example, the UK has issued guidance on suspending residency rules for individuals, Belgium and France have issued residency guidelines specifically applicable to cross-border workers from their two countries, and Ireland has issued guidelines specific to meeting residency rules for corporation tax purposes. The Australian Tax Office has broadly said that COVID-19’s effects will not result in a change in a business’s PE status if it didn’t have a PE in Australia before the coronavirus, there are no changes in the business’s circumstances, and the unplanned presence of employees in Australia is a direct result of COVID-19.

State Guidance

A few states have issued guidance related to nexus and residency requirements arising from remote work. Some specific examples of state guidance follow:

New Jersey has published guidance stating that it would temporarily waive the impact of the threshold which treats the presence of employees working from their homes in New Jersey as sufficient nexus for out-of-state corporations, if the employees are working from home solely as a result of closures due to the coronavirus outbreak and/or the employer’s social distancing policy.

Massachusetts has said that compensation received for personal services performed by a non-resident who, immediately prior to the Massachusetts COVID-19 state of emergency, was an employee engaged in performing such services in Massachusetts, and who during such emergency is performing such services from a location outside Massachusetts due solely to the state of emergency, will continue to be treated as Massachusetts source income subject to Massachusetts personal income tax and income tax withholding. Employers are not obligated to withhold Massachusetts income tax to the extent the employer remains required to withhold income tax with respect to the employee in such other state.

Maryland released Tax Alert 04-14-20B in which it said that while residents of Virginia, Washington D.C., West Virginia, and Pennsylvania who earn wages, salaries, tips, and commission income for services performed in Maryland are exempt from Maryland state income tax, and therefore, withholding, because Maryland has a reciprocal agreement with these states, no such agreement exists with Delaware and so compensation paid to a Maryland nonresident who is teleworking in Maryland is Maryland-sourced income and subject to withholding.

Maryland’s Comptroller’s Office does not intend to change or alter the facts and circumstances it has consistently used to determine nexus or income sourcing. However, it said it would consider the temporary nature of a business’s interim workplace model and employee deployment in light of the current health emergency in making a nexus determination, whether the business correctly sourced income, and whether the business properly withheld and reported employee state withholding.

Mazars Insight

The above is just a sampling of recently-issued state guidance. It is hoped that more states will issue guidance relevant to remote working and residency thresholds resulting from the COVID-19 emergency. However, as in the cross-border context, this guidance is unlikely to be consistent across all states.

Please contact your Mazars USA LLP professional for additional information.

Published on April 30, 2020

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.